Why is U.S. college debt still such a problem?

I’m old.  I can remember the 1950s, when it was possible for an American from a family of average income to attend college and emerge free of debt.

Tuition was free in the University of California system and at City College (now City University) of New York.  Tuition at other public university systems was usually affordable.

Middle class families could save up for college.  Students from working-class families could earn tuition through a combination of summer jobs and part-time jobs.

That’s not to say college education was open to everyone.  You had to pass an entrance exam, which not everybody could do, and you had to maintain your grades, which not everybody could do.

But that was okay.  A hard-working person of average ability – at least if the person was white and male – could get a job with a livable wage without need of a college degree.  

(I’m not saying discrimination against minorities and women was unimportant.  I’m making the point that affordable higher education is not an impossibility.)

I feel sorry for young people today – and by young, I mean people age 50 and under.  They’ve been told that the only way they can get decent jobs is by earning four-year college degrees.  

But tuition is extremely high, and it is rising.  The only way most applicants can afford college is to borrow money. Usually  their mentors (although this is changing somewhat) tell them not to worry about going into debt because the value of a college degree will be worth it.

They go out into the world not with a clean slate, but with tens of thousands of dollars to pay off.  This limits their options.  They can’t, as I did, start out in a relatively low-wage job because it is something they like, and hope to work their way up.

If they hit some setback, where they can’t make their payments, debt can mushroom into hundreds of thousands of dollars.  And unlike other kinds of debt, it is not dischargeable though bankruptcy.

There is seldom or no attempt to assess credit-worthiness.  It is the sub-prime mortgage crisis all over again.

Colleges can charge sky-high tuition because students can borrow to pay it.   Lenders don’t have to worry about credit-worthiness because the borrowers, in most case, can’t get out of debt.  It’s a racket.

Chart One.

About 45 million Americans, just under one in five adults, owe a total of $1.76 trillion in student loans, according to an information service called NerdWallet.  Those age 35 to 49 are the group with the greatest amount of high debt ($200,000 and more). 

That’s more than 10 times as much as student loan debt in 2009, even though student enrollment has declined 11 percent since 2011.

The average U.S. household with college debt owes $58,238.  That may be a little misleading, because average isn’t necessarily replica.  Wolf Street estimated that half of the households owing college debt in 2017 owed $17,500 or less.  It was the big debtors who pushed the average up.

Chart Two. Source: NerdWallet

The chart above shows that Americans over 35 with college debt owed a greater average individual amount, and a greater combined amount, than Americans under 35.  And there are nearly equal numbers in each age group.

That’s not how things should be.  The older college graduates should have paid off or paid down their debt.

Here is NerdWallet’s estimate of the average debt for different types of degrees:

• Bachelor’s degree debt, $28,400.
• Graduate school debt, $71,000.
• Law school debt, $130,000
• MBA business school debt, $66,300.
• Medical school debt, $203,000.
• Dental school debt, $301,583.
• Pharmacy school debt, $179,514.
• Nursing school debt, associate degree, $19,928; bachelor of science degree, $23,711; master of science degree, $47,321.
• Veterinary school debt, $147,258.

Student loans as we know them originated with the National Defense Education Act of 1958.  The U.S. Department of Education would led students up to $1,000 a year to cover the cost of tuition.  The need for loans grew, and, in 1965, the student loan program was opened up to private banks.

The Student Loan Marketing Association, aka Sallie Mae, was created in 1972 as a government agency.  In order to increase the funds available for loans, it lent money, then securitized the loans and sold them to private banks, thus freeing up more money to lend out.

Two additional Congressional actions sparked the student debt explosion.  In 2004, Sallie Mae was made into an independent, profit-seeking organization.  It was soon joined by other lenders.

In 2005, legislation was passed making student loans virtually un-dischargeable in bankruptcy.  Senator Joe Biden, by the way, helped draft the 2005 legislation.  

In theory, college debtors can claim bankruptcy where there is “undue hardship.”  But hardly anyone is able to take advantage of it.

So students are basically at the mercy of predatory lenders.

What can be done about it?

Debt forbearance plans are usually a bad idea.  You can skip monthly payments, but the amounts are added to you total debt and you wind up paying a lot more.

Refinancing can be good if the new interest rate isn’t higher and the debt repayment period isn’t longer than with the old debt.

The U.S. Department of Education offers income-driven repayment (IDR) plans.  Under an IDR plan, borrowers pay 10 percent of their discretionary income over a period of 20 or 25 years, or until the debt is retired.

But if the payment is less than the amount of interest due, the unpaid interest is added to the total debt.  You in effect pay interest on the interest.  You could wind up paying more than you otherwise would.

Last August, President Biden proposed a new plan for federal student loan repayment that caps monthly payments at 5 percent of your monthly income.  After 10 years, whatever remaining balance you have would be eliminated if the original loan balance was $12,000 or less.

At the same time, Biden announced the cancellation of $10,000 of federal student loan debt for eligible borrowers, and $20,000 for federal Pell Grant recipients.   And under the American Rescue Plan Act, debt cancellations from 2021 through 2025 will not be taxable income.

College debtors meanwhile benefit from Biden’s Covid-19 student debt repayment pause, as long as it lasts.  There will be zero added interest until normal payments resume.

Loan forgiveness is popular. The federal Public Service Loan Forgiveness program offers student loan forgiveness for grads who pursue a career in public service. The proposed income-driven repayment announced last August would make it much easier for other borrowers to have their loans forgiven.

According to one estimate, Biden’s program would help around 40 million borrowers, nearly half of whom could have their entire debt forgiven. In total, the program could cancel $441 billion in loans, close to one-third of the federal government’s student loan holdings.

Critics say the administration has been slow to implement loan forgiveness, as indicated by the following chart.

Chart Three.

The Supreme Court is considering whether to strike down Biden’s debt cancellation plan altogether, because he allegedly has gone beyond his Constitutional authority.

In any case, loan forgiveness and Biden’s other proposals offer do not solve the overall problem.  As long as college tuition and fees keep going up, and students need to borrow money to pay the tuition and fees, the problem will remain.

Chart Four. Compare this graph with Chart One

Chart Five. Compare these figures with Chart Two.

According to one report, undergrad tuition at Switzerland’s Swiss Federal Institute of Technology ( ETH Zurich ) is $1,300 USD per year, undergrad tuition at Japan’s University of Tokyo is $4,000 USD per year, undergrad tuition at the UK’s University of Oxford is $11,000 USD per year, and undergrad tuition at the USA’s Harvard University is $54,000 per year.

The only  long-range answer is to break up the unholy alliance between greedy college administrations and predatory lenders

The best way to do this is to make public education free or affordable in state universities and community colleges, as it once was.  This is an investment that would be good for the country.

This is not something that could be accomplished by a Presidential degree or Act of Congress.  It would take a nationwide reform movement, operating in every state at all levels of government.

I admit this would be hard to do.  A much larger fraction of the population goes to college now than even the recent past, and tax revenues are lower.  But it’s not impossible if we the people decide it’s something we need.

What the government could do is to investigate and prosecute illegal practices by predatory lenders.  It could repeal the law forbidding student debtors from filing for bankruptcy.  It could make lending to pay educational expenses a public utility, and forbid lending to students who are not good credit risks.  It could increase funding for Pell grants., Veterans college benefits and other scholarship programs.

Meanwhile it behooves people who want an education to consider their options wisely.  You can learn just as much at a college without a famous football team, luxurious amenities and a beautiful campus as you can at a place that has them.

Also, be diligent in researching scholarships.  Billions of dollars worth of scholarships go unclaimed every year.

Or maybe you should postpone college until you can afford it.  Or maybe a college diploma is not necessary to achieve your life goals.  Learning takes place in many other places besides classrooms.  

Keep in mind that the more people who have college diplomas, the less the monetary value of that credential, in and of itself.  The true value of college education is what you learn, not the credential.

If you are thinking about taking out a student loan, I strongly recommend watching the video at the head of this post.  It’s a little long, but there is a lot of wisdom and good information in it.

LINKS

A Snapshot of Student Loan Debt by the Congressional Research Service.

Student Loan Justice web page.

Overcoming the Student Loan Crisis by Kristina Ellis for Ramsey Solutions.

Student Loan Debt Crisis Breakdown by Rebecca Lake for The Balance.

The Government Makes a Profit on Defaulted Student Loans by Angry Bear [Added 02/04/2023]

Student Loan Crackdown: Elizabeth Warren Pushes Sweeping Overhaul of College Debt System and More Forgiveness by Yahoo News.  [Added 02/05/2023]

The Non-Profit Complex Helps Keep the Student Debt Crisis Going by Conor Gallagher for Naked Capitalism (Added 02/04/2023]

 

Tags: College Debt