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The Half-Forgotten Student Debt Crisis

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The debt ceiling debate is poised to return to the center-stage of American domestic politics. The Bipartisan Policy Center anticipates that the U.S. Treasury will hit the current debt ceiling sometime between October 18 and November 5, and House Republicans have already drafted a short-term spending resolution extending federal government spending through to December 15 if (and only if) none of that money is spent on the implementation of the Affordable Care Act. So here we go again, with Tea Party Republicans in Washington once more telling us that federal debt is the problem of the age, and that Obamacare is the greatest threat we face to the freedoms we love.

Oh, that federal debt was the key issue of the day, but it is not.

It is not for two reasons. One is that federal debt is falling, and is now well under control. The latest CBO projection has the federal deficit on track to be the lowest yet recorded under the Obama administration. The other is that other forms of debt -- forms of debt that are more serious for the typical American family and more threatening to the long-term competitive health of the U.S. economy -- are still rising. Private, not public, debt should be our current concern. High on the list of forms of private debt about which we all ought to worry is the debt carried by this generation of American students and their families.

Among the data points we ought to be talking about now are at least the following.

The cost of obtaining a degree in the United States is rising steeply, and rising at a faster rate than any other major cost faced by the typical American family, including that of health care. In the last three decades, the inflation-adjusted median wage in America has remained broadly unchanged (up just 16 percent). The cost of college, by contrast, has soared (up by 250 percent, according to the President in August ). The first year for which we have reliable data on the cost of college is 1964-5, when the average cost of tuition and board at a public university was $6,592 in 2011 dollars. In 2010-11 the equivalent cost was $13,297. The parallel figures for private schools were $13,233 and $31, 395. When we realize that "the cost of a bachelor's degree at a public university went up 46 percent in real dollars from 2000 to 2012," the scale of the problem becomes clear. The median family income is currently $52,000. You only have to do the math. A family with two college-age children faces annual budgets for their education through the college years which are quite literally beyond the family's capacity to pay. In consequence, access to higher education and entry into the world of debt are now going together for more and more American students, with the burden of debt being particularly acute for students of color. More students of color now go to college than ever before, but increasingly those students are concentrated in colleges whose fees are less. In fact, "students and their families spent $21,178, including loans, on average, for total college costs during 2012." That was a lower figure than the $24,097 spent on average in 2010 -- but it was a reduction achieved not by lowering tuition costs but by "students saving by choosing less-expensive schools, living at home or hustling more for scholarship and grant money."

The drivers of that cost increase are partly internal to the higher education system, but they are mainly the consequence of cutbacks in state-support for higher education. A small part of the recent escalation in the cost of college can be linked to rising salary costs within universities themselves -- less to salary costs for faculty, whose salary growth has not deviated widely from that of other American workers, more to the salaries and compensation packages awarded to senior administrators and to a select band of athletic coaches and directors. University endowments also took a hit during the recession, generating less new money for the provision of student grants at the very moment when the same recession was reducing the ability of many parents to subsidize the higher education of their children. But the main cause of rising tuition fees in public universities since 2008 has been external to the universities -- it has been the direct result of cut-backs in state funding for higher education which has been such a feature of the austerity measures favored particularly by the current generation of Republican lawmakers. "In 1998, 13.1 percent of state general-fund spending went to higher education. By 2012, that was down to 10 percent." In 2001 state governments allocated $8,427 per student. By 2012 that amount was down in real terms by almost a third. Public universities relied on state and local funding for 70 percent of their revenues in 2000, but only 57 percent in 2011. It is not that, outside the for-profit sector in higher education, the actual cost of providing that education went up much in the last decade. It did not: this is not health care. Higher education costs are not soaring out of control. What is changing is the politically-charged matter of who should bear the cost -- the general taxpayer or the individual student. There is a policy choice tucked away here behind the overall numbers, and a rather ugly one at that.

The resulting burden of student debt is at an all-time high, leaving this generation of students with a financial burden that will stretch on into their middle age. "Student debt is the only kind of household debt that continued to rise through the Great Recession and has now the second largest balance after mortgage debt." Indeed, the total volume of student debt crossed the $1 trillion mark in 2013, exceeding total credit card debt for the first time and briefly bringing the whole matter to public attention. But the total is less significant than the individual burdens that make it up. Currently "two-thirds of students who earn four-year bachelor's degrees are graduating with an average student loan debt of more than $25,000, and 1 in 10 borrowers now graduate owing more than $54,000 in loans." The average student debt in 2011 was $27,547. In 1993, controlling for inflation, it had been $15,073. Again, the figures split by ethnicity: 64 percent of white students leave college with debt, as against 67 percent of Hispanic students and 81 percent of African-American students. Even the label, "student loan," may actually mislead: because uniquely with these loans "you can't refinance them, and you can't get out from under them by declaring bankruptcy. It's more like indenture." Right now, American consumers are pairing down their mortgage debt, but are beginning to borrow again for auto- and student loans. Buying a new car may well reflect a growing sense of confidence in the future among those fortunate enough to still be in permanent employment, but rising student debt is a measure of financial stress, not financial easing. A rate of increase of around 8 percent in the level of student debt in the first half of 2012 was much more the product of a poor labor market than of a buoyant one, as people unable to find work turned back to college in the pursuit of new skills and credentials.

A growing number of those students are failing to graduate even though they are in debt; and a growing number of those in debt are now defaulting on their loans. Amid a string of disturbing statistics on student debt, perhaps the most disturbing is this: a staggering 30 percent of those taking out loans fail to graduate having spent the loans, so entering the labor market without credentials but with debt. It is debt which they then find it difficult/impossible to replay, so that right now "student borrowers who leave school without a degree are four times more likely than graduates to default on their loans." But they are not alone in struggling so. Students who graduate struggle too. A recent USA Today survey of 265 colleges scattered across the United States found that their students were "more likely to default on their loans than freshmen [were] to graduate." These 265 were just a sample of the 514 "red flag colleges", as the Education Department labels them, where "the percentage of borrowers who started repaying loans in 2009 and had defaulted by 2012 was higher than the schools' graduation rates." The data on debt default just continues to flow. A 2013 report by the Federal Reserve Bank of New York found 43 percent of 25-year olds had student debt (up from 33 percent in 2008) and that of those with student debt, 35 percent "were at least 90 days late on their payments at the end of last year, up from 26 percent in 2008 and 21 percent at the end of 2004." And although since 2010 the federal government has provided loans directly to students through its own direct student-loan program, already 8 percent of those loans are now in default.

They and we all lose because of this. Students lose normal access to the American Dream, delaying other purchases defining of middle class life. The rest of us see lower levels of consumer demand, and a more sluggish rate of economic growth and job creation. The salary advantage of a college education remains significant, and the economy's need for an ever-more skilled labor force has not changed. But the burden of debt carried by more and more American students is slowing their rate of entry into home ownership, car purchasing and saving for their own children's higher education two/three decades from now. In a recent survey in Wisconsin, "students with bachelor degrees were taking an average of 19 years to pay them off, at an average cost of $117,000." And this was not just a problem for the 30+ generation. Former students now in their 30s may currently carry 40 percent of total student debt but "close to one-fifth of outstanding student debt [is] owed by households headed by borrowers aged 45-54, and nearly 1 in 10 households with student debt was headed by those aged 55-64." And private debt of this scale and distribution is not just a private matter. It has public consequences. It continues to slow the rate of recovery of the American economy as a whole, so reinforcing the pressure on public expenditure that is now driving the costs of higher education up for the generations of Americans to come. We are currently trapped in a cycle of low economic growth, low wages, low tax revenues and low state-support for higher education on the one side, and rising tuition costs, greater student debt, and restricted access to high quality university education on the other. Yet in the fiercely competitive economic world of the twenty-first century, anything discouraging the next generation of Americans from educating themselves to the full extent can only undermine the global position of American-based production, and so threaten the long-term living standards of us all.

So where is the public policy? And what kind of public policy can address this crisis of opportunity and rights? The slash-and-burn attitude of the Republican Party to spending on public education can only make things worse; and the brinkmanship that characterized the summer debate in Congress on rates of interest on student loans did nothing to build confidence in the minds of hard-pressed families that these loans, if taken, will in the long-term be affordable. The Obama administration's recent proposal to tie federal financial aid to college ratings that prioritize low-cost provision is clearly a step in the right direction, but as ever with this administration it is at best too little and too late. The proposal by Elizabeth Warren to fix student-loan interest rates at 0.75 percent is better still; but surely the time is ripe now for something much more fundamental: a full discussion of how best to provide access to college education to every American who can benefit from it, without that access crippling them with debt for at least half of their working lives. In 2012 the overall number of students enrolled in American colleges actually fell -- the first time this had happened since 2006 -- down by half a million to 19.9 million, with the bulk of the fall among students aged 25 and over. So surely now is the appropriate time to ask: how about free education for all, and a graduate tax to pay for it? Or how about a serious assault on tax evasion by corporate America, and the levying of a surcharge on the super-rich, with the resulting revenue ring-fenced for college aid? After all, everyone -- rich and poor alike -- will be more secure economically and socially if surrounded by a citizenry educated to the full. It is time to talk seriously about the best way to create such a citizenry. Clearly, the creation of more and more student debt is not that way.

First published, with full academic citations, at www.davidcoates.net