Student Debt In The U.S.
By Kimberly Green
29 July, 2013
As college costs spiral upwards, unpaid student debt has reached a record high of $1 trillion, slowing down economic growth and causing many young individuals to lose control of their finances. Many politicians, media outlets, and educators are focusing on cuts to state and federal subsidies as the reason behind these astronomical tuition hikes. But while this may be true in cases, it’s not that simple.
Paradoxically, many studies have found the opposite to be true: as federal and state subsidies increase, colleges and universities actually charge more for tuition, exacerbating the student debt crisis. Here we will trace the problem back two decades, examine funding trends and college costs to pinpoint what exactly is behind tuition increases.
Student Debt: The Last 20 Years
The rise in student debt is by no means a new phenomenon – borrowing has gone up every year since 1993. According to the National Center of Education Statistics, average debt began to creep up in 1993, making small jumps from an average of $10,000 per student until it had doubled to $20,000 twelve years later. Then it began to increase very sharply. By 2013, the average debt per borrower hit $30,000.
The rise in borrowing naturally correlates with increasing college costs. The average yearly tuition and room-and-board in 1990-1991 was $8,485 at a public 4-year institution. By 2010, that had leapt up 83%, reaching an average of $15,605 per year.
Concern over this upwards spiral is all over the news, as unpaid loans take a major toll on the economy. And many are worried this is just the beginning.
Tuition rates are predicted to rise over the next two decades, with costs hitting $41,228 per year for in-state public tuition and $92,869 for private colleges in 2029. This ridiculous level of debt could not be sustained by parents in stable careers, much less by students with poor financial history. So why is this happening?
Cuts to State Spending
Budget cuts brought on by the recent recession have taken their toll on the American education system, pushing more students and lenders to take up the slack. Incremental cuts have caused education allocations to drop since 2008, with thirty-six states decreasing funds by more than 20%. As a nationwide average, states cut their education spending by 28% from 2008 to 2013, according to the Center on Budget and Policy Priorities.
Some states have suffered deeper cut more than others. Washington and Florida now provide the lowest amounts of support for their public universities. Spending per student was just about $6,000 for these two states in 2010, barely over half the amount allotted to students in states like Hawaii, Connecticut or Arkansas that year, according to the Department of Education.
When states cut education budgets, where exactly does this money end up? The National Association of State Budget Officers (NASBO) has identified great leaps in Medicaid spending, growing from 22.2% of state expenditures in 2010 to 23.9 in 2012. During the same time period, education spending dropped from 20.4% to 19.8%. NASBO projects that funding will become even more difficult to allocate toward education in upcoming years, due to long-term healthcare demands and pensions.
State funding for education may eventually climb out of the recession pit, as legislators anticipate upcoming economic growth. The Chronicle of Higher Education describes how California governor Jerry Brown is trying to raise expenditures from 4% to 6% in the upcoming year, but it will probably be quite some time before students feel the effects. Moody’s Investors Service still sees massive cuts to key areas like research on the horizon, so wary colleges probably won’t be loosening their budgets any time soon.
Federal Subsidies for Student Tuition
Surprisingly, increases to government spending have also contributed in some real ways to the rising sticker price of a college education. The vast majority of college students who have filed a FAFSA know there is a range of grants and loans available to cover their bills. And of course, these funds are indispensable for the tens of thousands of students who need them in order to attend school. That said, increased funding availability does lead to an increase in price; the more students are given to help pay for college, the more they are willing to spend, and consequently, the more colleges can charge.
A 2012 report by the College Board makes it very easy to see how dramatic rises in tuition mirror sharp increases in federal student aid. The government awarded just around $17 billion in total federal grants (including Pell, LEAP, military, and several others) in 2001. This amount exploded up to $49 billion by 2011. This makes for a 185% increase within a ten-year span.
A very similar trend occurred with federal loans, which jumped from a yearly total of around $47.8 billion to $105 billion over the same period. While enrollment in college-level degree programs rose during this time, graduation rates fell. And unsurprisingly, the number of for-profit secondary institutions also multiplied.
This is a tricky situation. We all agree that deserving students should be granted more, not less, access to higher education and no one wants schools to have to reduce their enrollments or the quality of the educations they offer due to falling budgets. But if we want to lower the burdens on students, schools and taxpayers, we need to focus on allocating federal student aid and loans in a way that isn’t accelerating rises in tuition costs.
So if both cutting and raising government funding makes the student debt situation worse, what is the solution? The question is not about raising or lowering spending, but rather how the money is spent. Heaping thousands of dollars in subsidized loans on young borrowers to cover exorbitant education costs is not the answer, but neither is cutting support for important academic research. It’s a complex equation, but until it’s figured out young graduates are going to be bearing a heavy financial burden.
A Brief History of Student Debt in the United States
For the past two decades, student debt has risen each year. In the last eight years, the number has tripled, culminating in today’s shockingly all-time high: according to FinAid.org publisher Mark Kantrowitz, the class of 2013 incurred an average of $30,000 in student loan debt.
Although debt has long been a problem for American students, it has only recently spiraled to this unmanageable level. So what’s going on? This article will provide a historical overview of student debt in the United States.
History of Student Loans
The first student loans in the U.S. were offered exclusively to students at Harvard University in 1840; public student loans did not arise until the 20th century. In fact, the U.S. Department of Education (DOE), which was founded in 1867, did not administer federal student loans until the passage of Title IV of the Higher Education Act in 1965 (HEA).
In the two decades prior to the institution of federally-guaranteed student loans, the U.S. experienced a significant increase in college attendance, however, thanks in part to the passage of the GI Bill in 1944. Fulfilling the need for affordable higher education, the GI Bill subsidized or completely covered the cost of college education for nearly half of America’s returning World War II veterans. Since its inception, this program has remained popular over the years; nearly 32% of all male veterans have used it to attend college as of 2009.
One year after the HEA was enacted, the precursor to the National Association of Student Financial Aid Administrators (NASFAA) was established. Today, this organization enlists more than 18,000 professionals at colleges and universities across the country to help students access higher education through financial aid.
In 1972, the HEA was amended to ensure education programs whose students were receiving financial assistance and student loans did not discriminate based on gender. By 1976-77, all undergraduate students became eligible for Pell grants. Together, these two popular programs further increased college attendance rates by providing financial assistance to individuals who previously could not obtain it.
However, not all student financial assistance has been beneficial. Signs of trouble with student borrowing began to appear by the late 1980s. In 1986, parents and students had incurred nearly $10 billion in federal student loans – then considered an outrageous amount. That same year, more than one quarter of student borrowers owed more than $10,000 in student loan debt; adjusting for inflation, this is equivalent to over $21,000 today.
Certainly by the 1990s, student loan debt began to skyrocket. In 1993, the average debt of a bachelor’s degree graduate was approximately $9,000; five years later, it was about $15,000. By 2003, it had jumped to approximately $17,500.
Today, the average outstanding student loan balance per debtor is roughly $30,000, though one recent study by Fidelity Investments put the figure as high as $35,200. Approximately 20% of U.S. households currently owe student loan debt, as do 40% of people younger than 35. This means an increase of nearly 200% of overall student loan debt (public and private) over the last 20 years. As of 2012, total student debt surpassed $1 trillion.
There is no single reason why student loan debt has gotten so out of hand. Increased tuition costs, reduced state spending, borrower behaviors, and even choice of major all play a role.
First, tuition rates skyrocketed in recent years. From 1999-2009, average tuition at public four-year colleges increased 73%, and in many states, tuition has continued to sharply rise. One reason for this is that state governments have spent, on average, 28% less on higher ed since the recession began in 2008.
Logically, as state spending decreases, it has to be made up — and student borrowing has historically helped compensate for the shortfall; in 1987, students only paid about 23% of the cost to fund higher education, but by 2012 their share had increased to over 45%. Since federal loans will not cover the increased costs, many students are turning to private loans.
Another factor is the nation’s more relaxed attitude toward borrowing in recent times. It is important to note that students 20 years ago were stricter in their borrowing and graduated with a median debt burden (monthly loan payment as a percentage of monthly income) of only 3.3%. By 2003, the median debt burden of nearly 90% of borrowers hovered around 8%. Prior to 1992, only those students who demonstrated financial need could participate in the federal student loan program; after 1992, many requirements for borrowing from Uncle Sam were relaxed.
There are several other interesting trends that have come to light in recent years, although they don’t lend themselves to simple conclusions. One is that students in the Northeast and Midwest tend to have much higher debt loads when compared with their fellow students in the West. One theory to explain this is the significantly higher concentration of students attending private colleges in the Northeast and Midwest. However, since many private nonprofit colleges actually have a lower “net price” (cost of attendance after grants and scholarships are awarded) than public schools, borrowers may actually need to take out fewer student loans than those who attend public institutions.
Another trend to watch is that graduates with liberal arts degrees suffer higher debt burdens. According to a recent report in the Wall Street Journal, the median debt load for graduates of design, music, and art schools in 2010-2011 was $21,576, while the median debt load of graduates from liberal arts schools was $19,445. In comparison, median debt load for students who graduated from research universities was $18,100 during the same academic year.
Sadly, graduates with these degrees often have the most difficulty paying back their loans. In a recent study by Georgetown University’s Center on Education and the Workforce, those who graduated with degrees in photography and the fine arts suffered unemployment in the range of 10.1%-11.49%, while others with liberal arts degrees, such as anthropology, English and foreign languages had unemployment rates between 8.1%-12.6%. Likewise, employed individuals with degrees in the liberal arts who have jobs still experience the lowest wages, generally speaking.
The Future of Student Debt
This silver lining in all this is that policymakers, college administrators, borrowers, parents, students, and prospective college enrollees are at least aware of the problem, and many are proposing solutions.
One popular route is to eschew the traditional four-year college in favor of a vocational certificate program. In 2012, manufacturers reported that as many as 600,000 jobs went unfilled because workers lacked vocational skills. In fact, a recent report noted there are 29 million jobs in the U.S. that require vocational skills but not a bachelor’s degree, and most award an annual salary of $35,000 or more.
Some solutions look to change the terms of the loans themselves. In addition to locking in low interest rates on federal student loans, some lawmakers are seeking to add provisions such as debt forgiveness for those who have made payments for a period of time, as well as suspension of interest accrual during times of high unemployment.
Another idea, put forward by Senator Kirsten Gillibrand (D-N.Y.), would allow borrowers with student loan debt to refinance at a lower, fixed interest rate, in the same way people refinance their mortgages. Resulting in a savings of an estimated $14.5 billion for borrowers in the first year alone. Sounds like a no-brainer, right?
Wrong. Many don’t realize that Wall Street (and thus, lots of people with a 401k) invests in student debt to the tune of $291 billion. Additionally, the Department of Education owns another $600 billion in loan debt; experts predict the DOE will generate a profit of $51 billion from these funds in 2013. With so many powerful interests standing to lose by transferring this money back to borrowers, it’s unlikely that a bill like Senator Gillibrand’s – which has no co-sponsors – will pass.
No one has a clear idea of what the future holds for education borrowers, but all agree that solutions are needed to ameliorate the student debt crisis. With ever more experts forecasting a burst of the student debt bubble, perhaps lenders and investors will have some incentive to work proactively with borrowers to make student loan repayment easier. In any event, until we act, our young people will continue to face more and more debt on an annual basis.
Will Student Debt be the Next Bubble?
Experts continue to debate whether student debt in the U.S. will lead to an economic bubble; one which, when it bursts, will mean dire consequences for the whole economy. As tuition rises, students are simply borrowing more and more; many financial experts worry graduates won’t be able to keep up. Most income levels don’t leave graduates prepared to handle large amounts of debt; when students make their monthly loan payments, they end up with less to spend on cars, houses and other consumer goods. So could paying off student debt cause the economy to plummet? Let’s explore the debt situation today and examine the potential for such a disaster.
Current Debt Statistics
The last two decades have been marked by sharp increases in student debt, leading to record highs in 2013. According to a report by Mark Kantrowitz of Edvisors, the average debt per student is now $30,000. Debt has tripled since 1993 and the reason for it is simple: Colleges just keep hiking their tuition. And while tuition spirals upwards, real income for middle-class workers has essentially stagnated over the last three decades. Today’s graduates aren’t making enough to pay their loans and live a comfortable lifestyle. Analysts worry the most heavily indebted won’t have enough money to buy cars, houses, or much else. Worse yet, some may simply stop paying their loans altogether. This could lead to a severe economic downturn similar to the ones following the housing and dot-com bubbles.
What is a Bubble?
Economic bubbles are cycles that lead to a steep expansion followed by a quick contraction. The triggers of an economic bubble are difficult to pinpoint, but experts believe inflation and excessive pricing of specific products and services (such as tuition) play key roles. Financial roller coasters like these are unpredictable, and lead to disasters on the individual, organizational, and industry level. They can mean financial ruin for many participants who have built their businesses and lives on the high prices that come crashing down.
Homeowners caught in the housing bubble during the period of 2006-2012 faced high foreclosure rates as property values plummeted. Participants in the dot-com bubble experienced a similar crisis during 2000-2001, as people became overly-confident in the value of high-priced stocks. Many investors bought in, hoping the high-priced stocks would continue to grow and pay off. They flooded the market, purchasing shares until people realized the numbers didn’t add up and the market crashed – those who bought into the exuberance lost millions.
Bubbles occur when a particular market is flooded with people eager to buy in, causing prices to skyrocket. This happened with the U.S. housing market and Silicon Valley startups before that. And it’s what we are seeing today with college enrollment, which grew by 11% between 1990 and 2000 followed by 37% over from 2000 to 2010, according to the Institute of Educational Sciences.
Some experts see clear similarities to past economic bubbles like the housing crisis that brought the whole U.S. economy to its knees. The Federal Advisory Council has certainly noticed the disturbing similarities between student debt and past bubbles, calling attention to the $1 trillion student debt record the nation has reached. They emphasize that as student debt rises, colleges continue to raise the price tag on tuition, creating a vicious cycle.
However, others are not so convinced we’re facing an economic bubble. Professor Robert Archibald from The College of William and Mary does not see the connection between student debt and a looming bubble. Professor Archibald explains student debt is different from debts of the recent past, since bubbles occur when an overpriced product suddenly drops in value. Instead, Professor Archibald contends the price will never come crashing down; students will simply be burdened with ever-growing debt and tuition costs each year.
Other Consequences of the Crisis
Yet even if prices don’t come crashing down and the bubble never bursts, graduates will face stagnant salaries and potentially long periods of unemployment. It’s difficult to envision an upturn in spending if graduates continue to leave higher education with unmanageable loan payments. Analysts are especially worried about the housing and automobile markets, which won’t see growth in purchases so long as students struggle. As students cut their budgets, rely on rentals, and use public transit, it remains unlikely that automobile and home purchases will rise. In lieu of a crisis, a depression in these key industries could indicate student debt will drag on the economy for years to come.
A true student debt crisis could arise from factors like inflation and the rising price of tuition, to name only two. If things continue along the current course, massive debt will not be a sustainable part of education for new generations of students. Something’s gotta give. The only question is whether student debt will be a hard and fast crisis or a drawn out burden we must shoulder.
Kimberly Green is currently finishing up communications degree and spending free time getting some real world experience by helping out and contributing to OnlineColleges.net.
This article was first published in OnlineColleges.net
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