When the cost of higher education was low, the risk was tolerable. Now that the cost is high, the downside risk of higher education is unacceptably high.
The greatest driver of risk in higher education is the failure to obtain a degree. Only about two-thirds of people who start a four-year degree program will ever complete it. And debt without a degree is the surest predictor of financial distress.
By contrast, borrowers with the largest debt burdens struggle the least to repay their debt, according to research. That’s because borrowers with large debt burdens also tend to have lots of education, which tends to match up with higher earnings power. The highest rates of default on student debt, a decent indicator of financial hardship, are experienced among borrowers with a balance of less than $5,000. Many of these people started a degree but didn’t complete it. Even though the monthly payments are modest on such a small balance, they can be crippling for a household without the earnings that often accompany a postsecondary credential.
Instead of choosing where to enroll based on these sorts of metrics, many students choose their college based on such factors as location, campus amenities, or even less consequential factors such as being a fan of the sports team
While returns to education are positive on average, some institutions consistently generate poor results for their students, and others outperform the average. Unfortunately, we don’t do a very good job helping students make enrollment decisions based on what we know to be true about the past performance of institutions. Today’s students often choose where to enroll in college based on limited information about what to expect in terms of their future financial outcomes.
College Scorecard, a government website, publishes information on the financial outcomes that students experience after attending each U.S. college that participates in the federal aid program. The website includes data on student loan repayment, earnings, net cost, and the rate of graduation. It fails, however, to publish data on financial outcomes on the program level, aka the major. This means that a potential student knows only the average outcomes for all students who attended a given college but cannot see how, for instance, its engineering majors fare. Given this shortcoming, it isn’t surprising that students don’t often make use of this resource.
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Even if the information available to students were perfect, there would still be a role for the government to oversee quality in higher education. That’s because the federal government is the single largest consumer of education, through its spending on aid programs. Currently, the standards for participating in the federal aid program are low. Colleges that offer academic programs of study need only have their students repay their student loans at a certain rate in order to maintain their eligibility for aid dollars. Programs of study that are more career-oriented-such as cosmetology or medical technology-have a slightly higher bar: they must show that their former students are often able to find gainful employment after completing their studies. But this system of oversight falls short of ensuring that students won’t find themselves enrolled in, or even graduating from, a college that doesn’t deliver.
Another source of risk in higher education is the uneven quality of educational institutions
Students also face another class of risk-a risk that can’t be mitigated, even by optimal planning and impeccable oversight. Let’s call it the risk of innovation.
Consider, for example, a worker in the health-care industry who earned a credential based on skills specific to X-ray technology. And suppose, thanks to a medical innovation, that we suddenly learn that X-rays have been completely superseded by a new, less expensive technology. The value of that worker’s credential will plummet in an instant as hospitals and doctors’ offices stop using X-rays. Risks like this one-the risk of innovation-can never be eradicated and may require ex-post intervention, such as the provision of social safety nets.