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What College Graduates Really Need: A Job

Posted By Rachel Sheffield On May 24, 2012 @ 10:38 am In Education | Comments Disabled

Today, the Senate is once again slated to take up the issue of college loan interest rates. President Obama has made this issue a big deal, touring college campuses to herald the absolute necessity of keeping student loan rates artificially low instead of letting what was supposed to be a temporary reduction expire.

In reality, the debate around student loan interest rates is a distraction from what really troubles new college grads: an anemic economy that is hindering students’ ability to find jobs and reach their earning potential. As AEI scholar Andrew Biggs wrote in the Wall Street Journal [1] earlier this month:

Lower payments on college loans after graduation won’t come close to repairing the long-term economic damage that new graduates will suffer as a result of entering the workforce during a downturn.…

Lisa Kahn of the Yale School of Management found…that a one percentage point increase in the national unemployment rate correlated with wage losses of 6% to 7% per year for new college graduates. Recovery is excruciatingly slow: Even 15 years following graduation, their pay was 2.5% below normal.”

Biggs notes that, assuming “unemployment today is one percentage point higher than it could have been given more effective policies—such as a stimulus that actually stimulated, and spending and entitlement reforms to generate confidence in the economy—today’s new college graduates on average will lose around $40,000 in inflation-adjusted income over the next 15 years. That money wouldn’t simply have helped graduates meet their loan payments; it’s more than enough to repay the average college graduate’s entire $25,000 loan balance.”

Not only does keeping loan rates low do nothing for current [2]borrowers and recent grads—only individuals who apply for federally subsidized Stafford loans this year would be affected by the loan rates—but it would save loan recipients on average just $7 a month [2]. On the other hand, it will cost taxpayers—the majority of whom do not have college degrees—a hefty $6 billion.

George Will puts this in perspective in Wednesday’s Washington Post [3]:

Taxpayers, most of whom are not college graduates (the unemployment rate for high school graduates with no college education: 7.9 percent [4]), will pay $6 billion a year to make it slightly easier for some fortunate students to acquire college degrees (the unemployment rate for college graduates: 4 percent).

As he adds, this will be $6 billion the government will “pretend to ‘pay for’…while borrowing $1 trillion this year.”

Continuing to increase federal subsidies for higher education (which includes subsidizing interest rates) while further burdening taxpayers will not mitigate ever-increasing college costs. In fact, looking to government to pop the higher ed bubble is a highly unlikely solution.

Dramatic reductions in college costs will come through innovations in the market, including the game-changing potential of online learning. Yale, Stanford, and MIT are already moving toward greater accessibility to online courses that are more cost efficient.

It’s a transformation that has the potential to save students far more than the paltry $7 per month that the Obama Administration has promised recent grads.

Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2012/05/24/what-college-graduates-really-need-a-job/

URLs in this post:

[1] Wall Street Journal: http://online.wsj.com/article/SB10001424052702304050304577375572771360252.html?KEYWORDS=andrew+biggs

[2] Not only does keeping loan rates low do nothing for current : http://www.nationalreview.com/corner/296845/pleasedoublemyterm-douglas-holtz-eakin

[3] Washington Post: http://www.washingtonpost.com/opinions/subsidized-college-loans-are-another-bipartisan-boondoogle/2012/05/16/gIQA8sefUU_story.html

[4] 7.9 percent: http://www.bls.gov/news.release/empsit.t04.htm

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