There has been an increased media focus in recent months on the rising cost of college tuition and the associated growth in student loan balances. In general, there is a sense that graduating college students are being saddled with so much debt that it will inhibit their ability to live as well as their parents or grandparents have lived. From a macroeconomic standpoint, the massive debt burden facing "Millennials" could potentially become a very big impediment to growth over the next decade. The worry is that heavily indebted graduates will have less access to credit, spend less, save less, defer home purchases, and slow new household formation. None of this is good for an economy that depends heavily on consumer spending.
Before we get into the numbers, let's define consumer credit. According to the Federal Reserve's website, total consumer credit consists of "outstanding credit extended to individuals for household, family, and other personal expenditures, excluding loans secured by real estate." So for purposes of this analysis, we are not considering mortgage debt, home equity loans, or HELOCs. For our purposes, you can think of consumer credit as the sum of all credit card loans, motor vehicle loans, education loans, boat loans and recreational vehicle loans. (There are some other minor contributors to consumer credit, but these categories cover the large majority).
Now, data on the Fed's website tell us that total consumer credit increased by about $482 billion from $2.6 trillion at the start of the Great Recession in December 2007, to $3.1 trillion at the end of 2013. Over this same period, student loans outstanding essentially doubled from $634 billion to $1.2 trillion. Therefore, the growth in student loans exceeded the growth in total consumer credit since the recession began. Said another way, consumer credit outstanding actually decreased from the end of 2007 to the end of 2013 if we exclude student loans from the calculation. Strikingly, student loans outstanding have gone from representing just 24 percent of total consumer credit to 40 percent of total consumer credit over a period of just six years.
The chart below depicts the cumulative changes in 1) total consumer credit, 2) student loans, and 3) total consumer credit less student loans. The first thing you may notice is that student loan balances experienced uninterrupted growth throughout the most serious recession in decades right on through today. This is represented by the pink line. The blue line shows that total consumer credit, which includes student loans, declined for a period in the years 2009 and 2010 before resuming a growth trajectory. This should not be totally unexpected given the severity of the recession. However, the green line shows that if we exclude student loans, consumer credit has still not recovered to the levels prior to the recession. This is pretty stunning given we are in the fifth year of the recovery.
Source: Federal Reserve
While consumer credit has resumed a normal trajectory (i.e., loan categories other than student loans are growing again), we remain concerned about both the recovery's dependence on student borrowing as well as the longer-term effects of so much student debt. The drag created by such big amounts of student debt is likely to reverberate throughout the economy for many years to come. This is just another reason we expect to remain stuck in a long period of sub-par economic growth.
Average tuition and fees for in-state student: $9,022 in 2011-12 Increased: 20.5% from a year prior and 98.3% from five years prior The worst could be yet to come for students in California's public universities. If California residents vote against state tax increases in the November elections, the school system will have to come up with money fast to fill the $375 million budget gap that would ensue, says Dianne Klein, a spokeswoman for the University of California's Office of the President, which is the headquarters for the 10 UC campuses. Under that scenario, tuition could rise 20.3% for the second semester of the upcoming academic year. Much of California's growing college-cost burden has been placed on out-of-state students. The 10 most expensive campuses for out-of-state students in the U.S. are all in California, where tuition, fees, room and board in total ran up to roughly $51,000 last year, according to the Chronicle for Higher Education. Klein says that despite the rising costs, overall applications to the UC system are going up; she also says that because of the system's financial aid programs, about half of all UC undergrads pay no tuition.
Average tuition and fees for in-state student: $9,428 in 2011-12 Increased: 16.8% from a year prior and 101.7% from five years prior Since 2008, Arizona's public universities have laid off faculty and staff and eliminated academic programs in order to make ends meet. This year, state funding will total $708 million, compared with nearly $1.1 billion for the 2007-08 academic year, says Katie Paquet, spokeswoman for the Arizona Board of Regents. As tuition costs have risen, the largest universities in the state have rolled out lower-cost ways that students can attain a Bachelor's degree. This fall, Arizona State University will open a new campus in Lake Havasu City, where annual tuition for state residents will cost $6,000, nearly 40% less than at its campus in Tempe. Also, Arizona's largest universities -- ASU, University of Arizona and Northern Arizona University -- are offering students who transfer from community colleges a lower-cost way to complete their Bachelor's degree; in some cases, students will be charged the cost of tuition during their freshman year in community college rather than the tuition the four-year school charges when they enter it. "Our goal is to provide more options to students across the state at varying price points," says Paquet. Separately, for the first time in two decades, Arizona State University and the University of Arizona have frozen tuition for in-state undergraduate students for the upcoming academic year. Tuition for out-of-state students will rise by roughly 3%.
Average tuition and fees for in-state student: $6,808 in 2011-12 Increased: 15.9% from a year prior and 74.2% from five years prior Beyond tuition hikes, Georgia college students are also facing cutbacks to a popular state scholarship program. Last year, the state reduced the amount of money it doled out to students through its merit-based Hope Scholarship, amid concerns that the program was underfunded. The program, which used to cover 100% of tuition costs at the state's public colleges for qualifying students, covered roughly 87% last year; this year, as tuition continues to rise, the scholarship will cover 81% to 85% of costs in the university system. The state is also looking at cutting direct funding to higher education. Georgia Governor Nathan Deal recently proposed a $54 million cut through June 2014, which if enacted would reduce spending over that period to roughly $1.7 billion. A decision is expected early next year. John Millsaps, spokesman for the University System of Georgia, says public institutions have had to shift much of the cost burden onto students as state funding dwindles. Over the past seven years, state funding went from covering 75% of the cost of educating students to 50%, he says.
Average tuition and fees for in-state student: $9,484 in 2011-12 Increased: 15.7% from a year prior and 67.3% from five years prior Unlike most states, Washington doesn't have an individual income tax; instead, it relies on sales taxes for much of its revenue. Income from that source slumped during the recession, leaving the state with less money to go around. To make up for the shortfall, the state granted permissions to its public universities to raise tuition, and students have felt the impact: Six years ago, it cost roughly $5,700 on average for an in-state student to attend a public college in Washington. That's hovering around $10,000 this year. In June, the University of Washington announced a 16% increase in tuition and fees for the upcoming year, following a 20% increase last year. The state is covering just 30% of the cost of educating its students, the lowest share ever, says Norm Arkans, a spokesman for the University of Washington. He says the institution's relatively low tuition and fees provided some leeway to raise costs, but adds that the strategy isn't sustainable in the long term.
Average tuition and fees for in-state student: $6,044 in 2011-12 Increased: 13.7% from a year prior and 65.8% from five years prior Few students have been immune to tuition spikes in Nevada. During the five academic years ending this past spring, Nevada raised tuition and fees at its community colleges by 48% on average, one of the highest increases in the country, according to the College Board. Costs at four-year public colleges rose 66% over the same period. And midway through the last academic year, the state approved an 8% tuition increase for all undergrads, which will kick in this fall. Still, despite the increases, the cost to attend a public college in Nevada remains lower than the national average, says Dan Klaich, chancellor of the Nevada System of Higher Education.
Follow Michael Farr on Twitter: www.twitter.com/Michael_K_Farr