April 12, 2012

The Future Consequences of Our Economic Woes

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Most Americans cope with the tumultuous consequences of the 2008 financial crisis by seething over movies like Too Big to Fail (2011) and Inside Job (2010). While movies do a good job derailing Wall Street and U.S. Government and promoting such backlash as America’s current Occupy Wall Street movement and the “government is taking over” mantras, they neglect to show the solutions America needs to revitalize the economy and move forward.The economic downturn has led to a weakened labor market and shifts in government spending (largely cuts in state funding). As a consequence of these woes, more students have turned to college and confront an increasingly staggering student loan debt.The Consumer Financial Protection Bureau, a federal agency created during the financial crisis, found that student loan debt surpassed $1 trillion late last year and is on the rise. Just to get a sense of what young students are facing, a public four-year university costs on average $21,000 per year and a four-year private university averages $36,000 per year. Two-thirds of the graduating class of 2010 owed an average of $25,000 and more than a quarter of them are already falling behind on their payments.How does this affect our future economy? Most argue that education is a great investment because it allows you to attain those higher-paying jobs and offset student loans in the long run. The issue is that those “higher-paying” jobs are often misleading and remain held hostage by the very people the backlash crowd so fervently opposes. Rather, as more people head to college due to the recession and assume larger loans, they may not all find the lavish careers to offset their high student loan debt. Consequently, graduates in their 20’s find themselves straddled with debt and unable to make their first housing down-payment, get married or qualify for mortgages, further slowing the growth of our economy and society. When I attended a Harvard Business School (HBS) event a few months back, I spoke around this issue of student loan debt. I pitched the need for more programs to alleviate student loan debt and propel our society forward because, with those debt constraints loosened, students will have a greater ability to pursue their professional, and even domestic, goals.  I expected such a pitch to be warmly welcomed by a group of driven and ambitious students that were more than likely currently accumulating their own student debt at HBS. Instead, a round of murmuring disagreement greeted me with the majority of the room arguing that students should repay their own debt as it contributes to a more financially responsible economy.  I found myself confronted by the classic “moral hazard” argument: Students will act less responsibly when managing debt (i.e. student loans) if they know they can share the risk of debt in the future through loan alleviation programs. Though the moral hazard argument normally has its grounds, if done right alleviating student loan debt can work well to hedge against this irresponsibility. A proper student-loan alleviation program should not guarantee a full-repayment of the loan, but facilitate a networking and a marketing space where students can advocate for their strengths, abilities and interests to respectfully earn donations towards alleviating their debt. The model needs to be designed as a reward system — not a risk-sharing system — for those who work hard and wish to achieve high. It is crucial then that we distinguish financial responsibility from financial burden. Financial responsibility for a student is good and it helps a student grow.  Financial burden, however, happens when unnecessary and unprecedented expectations, such as the rising cost of tuition, are placed on students who have the least access to financial support relative to their peers. It is financially responsible to begin a donation-facilitation platform that shares the weight of this burden while also leveling out the playing field for all students, regardless of socioeconomic background. The term “moral” in moral hazard refers to an individual’s disregard for the moral implications of his or her  choice in that he or she will choose a riskier option, when he or she has the incentive to do so, that is more beneficial to him or her but inherently inefficient for society as a whole. However, a correctly targeted student-loan amelioration model does not have to compromise the moral of a student’s action. Instead, the program can be used to incentivize students to become more financially efficient, and therefore less morally hazardous, by eliminating society’s riskier choice. The riskier option is allowing indebted students to enter the labor force with high debt that not only could lead to long-term financial instability, defaults and even bankruptcy, but also depression, low-psychological morale and an inevitable increasing burden on our federal government.

Sara Cullen is a senior in the College of Agriculture and Life Sciences and cofounder of ConnectForEdu. She may be reached at skc52@cornell.edu. Guest Room appears periodically this semester.

Original Author: Sara Cullen

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