Killer Student Loan Debt


It’s no surprise that student loan debt is entering the political arena. Student loans outstanding exceed total credit-card debt, and will exceed $1 trillion for the first time this year. And that total is growing at a rate of $100 billion a year.

The current amount of borrowing and student debt has prompted a national conversation over whether these burdened students brought their misfortunes among themselves through poor decision-making or whether they are victims of a system that has failed to deliver on the promise of higher education as a surefire means to a stable, decently paying job. Others still are questioning the notion that obtaining a college degree is even worth the cost at all.

Tuition is rising – fast.

 

College tuition across the country has been steadily climbing in the past few years. The average cost of tuition and fees for colleges across the country has grown by more than 400 percent between 1985 and 2005, with costs doubling over the last decade. The rise in tuition has greatly outpaced the rate of inflation as well as medical, energy and housing costs, according to a study by Moody’s Analytics (pdf). In one of the starker examples of tuition hikes over the years, author Michael Lewis notes in his new book, “Boomerang,” that “in 1980 a [University of California] student paid $776 a year in tuition; in 2011 he pays $13,218.”

Exactly why tuition has been increasing at such great speed depends on a variety of factors. Four-year universities generally receive income from a number of sources: state and federal appropriations, alumni giving, endowments and, of course, student tuition. As the recession caused state budgets and university endowments to shrink (university endowments on average reached their lowest point since the Depression in 2010, reports BusinessWeek), colleges have had to make up the cost elsewhere. Moreover, high-profile schools often face pressures to attract and retain top talent by expanding their campuses, building state-of-the-art facilities and increasing services, leaving students to help foot the bill where endowments and other funding fall short. In the high-demand world of education, there are no market forces that compel colleges to push down costs.

Colleges also use student tuition to fund financial aid for financially disadvantaged students, which theoretically creates a bit of a vicious cycle: If schools with funding shortages want to attract bright students with financial need, they need to raise tuition higher yet to cover the cost of providing for these students. Recently, however, reports are revealing that many universities are now putting a stronger emphasis on admitting students who can pay for themselves.

While most consumer borrowing has slowed, student loan borrowing continues to grow.

Shrinking funds and limited grants are prompting students nationwide to borrow more and more to get through their education. The aggregate amount of all student loan debt in the country is likely to clear $1 trillion in the coming months. Student loan balances are highest in California and the Northeast, but are rapidly rising in regions like the Southwest. Moody’s Analytics’ July 2011 report found that while aggregate consumer lending balances have gone into decline since 2009, student loan balances continue to grow at a steady rate of more than 10 percent per year. The report also estimates that the pool of borrowers will likely continue to grow at a rate of 2 percent per year.

The economics behind a push for borrowing and obtaining higher education are fairly simple: In tough economic times, the conventional wisdom for those facing unemployment or underemployment is to go back to school, wait until the wave passes, and hopefully graduate with extra skills and credentials that give them an edge in finding employment as recovery begins to pick up. But if long-term economic prospects are dim, as they are proving to be in the current economic downturn, graduates emerge from school with a heavy debt load and few means of paying it off.

So exactly how many students get saddled with debt after graduation, and by how much? Studies from the Project on Student Debt show that 67 percent of students graduating from four-year colleges in 2008 had student loan debt, a 27 percent increase from four years prior. The graduating class of 2011 alone had the highest estimated average student debt at $22,900, according to Mark Kantrowitz of Fastweb.com and FinAid.org – an 8 percent growth from last year and an inflation-adjusted 47 percent increase from just ten years ago.

Not surprisingly, the combination of high student debt and low job prospects has resulted in a spike in federal student loan defaults, with the default rate reaching 8.8 percent in 2010 – the highest rate in more than a decade.

With soaring tuition, borrowing and default, fear of a bubble in higher education spending has proven to be “one of the year’s most fashionable ideas.” The idea that an education bubble could burst in the same manner as the housing market did made headlines earlier this year when businessman Peter Thiel, co-founder of PayPal, established the Thiel Fellowship to offer a select group of young adults $100,000 each not to go to college and start companies instead. In an interview with the National Review, Thiel said:

[The education bubble] is, to my mind, in some ways worse than the housing bubble. There are a few things that make it worse. One is that when people make a mistake in taking on an education loan, they’re legally much more difficult to get out of than housing loans. With housing, typically they’re non-recourse — you can just walk out of the house. With education, they’re recourse, and they typically survive bankruptcy. If you borrowed money and went to a college where the education didn’t create any value, that is potentially a really big mistake …

In response to Thiel’s ideas, Slate’s Annie Lowrey scoffed at the idea that current trends in educational borrowing are similar to the subprime mortgage crisis:

It could be that Thiel is right, that college students, en masse, are overpaying for their educations. But it seems more likely that some college students attending certain types of schools are overpaying. If you want to be an aerospace engineer and have the chops to get into Caltech, the quality of the education, contacts, and fellow students on offer might really be worth $200,000 to you. A diploma from the school practically guarantees a good salary.

That is not true for many other institutions—particularly not for online, for-profit schools, the worst of which egregiously overcharge for worthless degrees … But that marketplace is rapidly changing. The federal government is cracking down. Share prices for such companies have plummeted. Students have gotten savvier. Low-cost, high-quality competitors have entered the market. It might take some time. But tuition should drop too.

But what of the loan bubble, the outstanding pool of nearly $1 trillion in debt students have racked up paying those spiraling tuitions? It is worrisome, but mostly for the individuals on the hook for ballooning payments, not for the whole financial system, as with mortgage-backed debt.

While the debate rages on over whether an educational bubble is really on the brink of bursting, it may be much clearer to see how trends in debt and educational payoff are causing major shifts in the idea of education in American culture. Far from yesterday’s assumption that all education is valuable education, and that paying a premium for a degree from a prestigious university is a safe investment for a secure, well-paying job, today’s resounding advice is much different: choose your field of study carefully, consider affordable options above prestige and don’t make the assumption that a degree from a high-profile institution will grant significant employment advantages.

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About royfmc

BS in Environmental Engineering from Northwestern University's McCormick College of Engineering MBA from DePaul University's Kellstadt's College of Business JD from DePaul University's College of Law
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