Over the past few months, reports of a “student loan crisis” have erupted throughout the United States. But is this really a crisis? Or a student loan conspiracy of epic proportions?

The Student Loan Conspiracy?

We first visited the student loan issue back in October 2011. To put it simply, the high cost of college and a difficult job market has “created a generation of heavily indebted students with few means to pay back their loans.”

Now, we have some new information to kick around. According to the Federal Reserve Bank of New York, the average student holds $23,300 in student loan debt. Breaking it down, about 43% of all students have loan balances less than $10,000. The rest owe more than $10,000. Amazingly enough, 27% of eligible payers “have past due balances.”

There are two pieces to this conspiracy. First, why is college so expensive? And second, why do so many people spend so much money pursuing college degrees? We talked a lot about the first question in October. So, we wanted to focus more on the second one this time around.

Why is College so Popular?

America’s intense pursuit of college degrees in a curious phenomenon. Not only are degrees ultra-expensive, but students appear to get poor value for their money. According to Richard Arum’s and Josipa Roksa’s book Academically Adrift: Limited Learning on College Campuses, 36% of U.S. college students show “no significant gains in learning” after four years of college. Even worse, there seems to be a mismatch between the skills acquired in college and the skills required for navigating the real world.

So again, we must ask, how did we get into this situation? Why are high school graduates spending money they don’t have in order to obtain college degrees that do shockingly little to prepare them for the real world?

The answer, in our view, is Griggs v. Duke Power. During the 1950s, Duke Power restricted black people from working in all departments except for the low-paying Labor department. In 1955, they started requiring high school diplomas for certain positions.

After the passage of the Civil Rights Act of 1964, Duke Power ended its race-based hiring policies. Instead, it instituted IQ tests. At the time, black people were less likely to hold high school diplomas. They also performed worse on the IQ tests. Thus, they were selected for Duke Power positions at a far lower rate than white candidates.

I won’t go into the particulars here. But eventually, a man named Willie Griggs filed a class action lawsuit against Duke Power Company. The case made its way through the legal system. In 1971, the Supreme Court ruled against Duke Power. In doing so, it prohibited the use of general IQ tests when screening applicants, regardless of whether there was an actual intent to discriminate. In order to pass muster, IQ tests were required to be a “reasonable measure of job performance.”

“…in 1971 the U.S. Supreme Court issued a ruling (Griggs v. Duke Power) saying that if companies use aptitude testing to screen potential employees, they must be prepared to show that their tests are precisely calibrated to the needs of the job. Otherwise, they will be guilty of employment discrimination if their tests screen out minority workers who might have been able to do the work. Rather than face discrimination suits by the federal government, most employers started using a less precise but legally safe method of screening applicants—college degrees.” ~ George C. Leef, Why on Earth Do We Have a Student Loan Crisis?

Griggs vs. Duke Power had far-reaching impact. It largely ended the practice of aptitude tests. But companies still needed a way to screen job applicants. So, they turned to college degrees, “even for jobs that could easily be learned by anyone with a decent high school education.” As a result, college enrollments (and student loans) exploded.

“In 1940, just 10% of high school graduates went to college. By 1970, that number was at 40%. And by the 1990s, it had risen to 70%. That’s because a college degree has become little more than a ‘signaling game.’ By attending college, students “signal” to potential employers that they’re smart, hard-working, and easily trained. The ability to send that signal to employers, which was once accomplished via aptitude tests, is the sole reason that most students attend college in the first place.” ~ David Meyer, The Student Loan Conspiracy?

Guerrilla Explorer’s Analysis

General aptitude tests aren’t perfect. In fact, they’re heavily flawed. In Griggs vs. Duke Power, it was discovered that those who’d passed aptitude tests and held high school degrees performed their jobs at the same level as those who’d failed the tests and didn’t hold degrees.

So, why don’t employers just create new aptitude tests that are “reasonably related” to individual jobs? The biggest reason is the threat of lawsuits. Even a well-crafted aptitude test could backfire in this respect. It’s far easier to just use college degrees as a screening mechanism and avoid the lawsuit risk altogether.

And that’s unfortunate. Aptitude tests hold significant advantages over college degrees. They’re cheap, quick, and can be tailored to fit individual jobs. College degrees are ultra-expensive, ultra time-consuming, and ultra-unfocused. So unfocused in fact, that the 1971 ruling should have invalidated college education screening as well.

“Recall that the problem in Griggs was that the specified requirements for job applicants were not clearly and directly related to the actual demands of the work. If challenged, could employers who have set the college degree as a requirement show that it has anything at all to do with the ‘business necessity’ of the employer or are ‘job-related’? That is very doubtful. Employers have grown to rely upon a new credential that is imperfect and probably rules out many qualified candidates. If the EEOC and the courts were to scrutinize the college degree requirement, they might well conclude that it has a ‘disparate impact.'” ~ Bryan O’Keefe and Richard Vedder, Griggs v. Duke Power: Implications for College Credentialing

The Student Loan Conspiracy isn’t a deliberate one. But the unintended consequences of Griggs vs. Duke Power have been highly destructive all the same. Many people waste years of their lives and accumulate thousands of dollars in student loan debt just to be eligible for basic jobs.

Companies will always need a way to screen potential employees. We here at Guerrilla Explorer don’t favor aptitude tests or anything else for that matter. We just think companies should be allowed to screen in whatever fashion they choose rather than fearing discrimination lawsuits. Without that lawsuit risk, however, we think many employers would switch to specifically-designed aptitude tests. Perhaps then, the Student Loan Crisis would finally come to an end.

As I write this, protestors are gathered around the United States as part of the Occupy Wall Street movement. While they appear to lack a common platform, one of their primary concerns seems to be the enormous and growing debt load incurred by many students while attending college. Why is that load so enormous in the first place? Is there a Student Loan Conspiracy at work?

What is the Student Loan Conspiracy?

In 2009, the average college graduate had student loans totaling $24,000, up 6% from 2008. For postgraduate students, this figure rises substantially. Coupled with the challenging economic environment and the difficult job market, this has created a generation of heavily indebted students with few means to pay back their loans. Political circles have erupted with discussions of a “student loan crisis.” Heck, even professors are questioning the situation.

“Thirty years ago, college was a wise, modest investment. Now, it’s a lifetime lock-in, an albatross you can’t escape.” ~ Professor Fabio Rojas, Indiana University

All of this might be forgivable if students were getting good value for their money. However, the facts say otherwise. According to Richard Arum’s and Josipa Roksa’s book Academically Adrift: Limited Learning on College Campuses, 45% of U.S. college students show “no significant gains in learning” after two years in college. 36% of students show no such gains after four years of college. That might be because today’s students spend “50% less time studying compared with students a few decades ago.” And the things that are learned aren’t necessarily helpful. There tends to be a gigantic mismatch between the skills acquired in college and the skills that students need and use after college.

How did we get into this situation? Why are high school graduates spending money they don’t have in order to obtain a college degree that in all likelihood, involves little to no self-improvement?

The Origins of the Student Loan Conspiracy?

The origins of the Student Loan Conspiracy can be traced back to 1944. Prior to World War II, higher education was a small, private, and rather expensive industry. Its services were of little value to most individuals and thus, were only utilized by about 10% of high school graduates. This all changed in 1944 when Congress passed the Servicemen’s Readjustment Act. This Act, more commonly known as the G.I. Bill, gave educational subsidies to former veterans. More importantly, it marked the beginning of a “crony capitalism” relationship between college universities and the U.S. government.

With a precedent in place, it was only a matter of time before the U.S. government expanded its intervention in college education. In 1965, President Lyndon Baines Johnson signed the Higher Education Act of 1965 into law. It established several student loan and grant programs intended to make college more affordable. The increase of subsidies were a boon to the education industry and lifted enrollments. Unfortunately, this also had an unintended consequence. As subsidies increased, colleges realized they could raise tuition prices in response. And as they continued to raise prices, the government continued to increase subsidies, leading to an as-of-yet endless spiraling of education costs. As a result, since 1978, “the price of tuition at U.S. colleges has increased over 900 percent, 650 points above inflation.” Unfortunately, I was unable to find figures going back to 1965 but I imagine that the numbers would show a similar trend.

The Second Piece of the Student Loan Conspiracy Puzzle?

But that merely explains the origin of student debt in America. It doesn’t explain why so many people are willing to incur it. After all, its not like higher education is a necessity for most people.

“…the United States has become the most rigidly credentialized society in the world. A B.A. is required for jobs that by no stretch of the imagination need two years of full-time training, let alone four.” ~ James Engell & Anthony Dangerfield, Saving Higher Education in the Age of Money

This second piece of the puzzle can be traced to a 1971 Supreme Court case known as Griggs v. Duke Power. Up until that time, many companies used aptitude tests as a tool to screen potential employees. However, the Supreme Court, led by Chief Justice Warren Burger (pictured above), changed that when it issued its opinion on Griggs.

So, the Supreme Court basically forced companies to stop using aptitude tests for screening purposes. However, that didn’t end the need for screening. Firms still needed a way to whittle down ever-growing pools of applicants. Thus, companies started to make the “possession of a college degree a requirement for applicants – even for jobs that could easily be learned by anyone with a decent high school education.” And just like that, the cheap, quick, and focused aptitude tests were replaced by ultra-expensive, ultra time-consuming, and ultra-unfocused college degrees.

Guerrilla Explorer’s Analysis

In 1940, just 10% of high school graduates went to college. By 1970, that number was at 40%. And by the 1990s, it had risen to 70%. That’s because a college degree has become little more than a “signaling game.” By attending college, students “signal” to potential employers that they’re smart, hard-working, and easily trained. The ability to send that signal to employers, which was once accomplished via aptitude tests, is the sole reason that most students attend college in the first place.

The Student Loan Conspiracy isn’t a deliberate one. I don’t think any of the politicians or judges who created the current situation ever envisioned the full impact of their decisions. But unintended consequences can be harsh. The result is that many students who wish to work at regular jobs have no other choice but to waste four years of their lives at college. They end up studying subjects with little relevance to their futures and accumulating tens of thousands of dollars of debt for the privilege.

If politicians are serious about reducing student loan burdens (and this seems doubtful at best), they might consider removing themselves from the educational process. By re-legalizing aptitude tests, they can give employers a far cheaper and less time-consuming way of screening for employees. And if they remove themselves from the student loan business, colleges will be forced to slow tuition growth. Only then will the Student Loan Conspiracy finally, at long last, come to an end.