The Problem of Education Finance
After receiving a report that details students’ growing dependence on financial aid, Secretary of Education Arne Duncan lauded President Obama for making more student aid available in the face of rising tuition costs. About a month ago, the Secretary commended the president for reaching an agreement capping interest rates for 11 million students currently servicing federal loans. The student loan compromise with Congress is like handing a life jacket to someone who is about to go over Niagara Falls. Student borrowers are in trouble, and no one is doing much about it other than making more debt available. Secretary Duncan acknowledges the escalating cost of college in his most recent press release, but only can bring himself to gently admonish states and private institutions to do something.
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President Obama weighed in with a proposal last week to tie federal grants to a series of rankings that measure net tuition costs, graduation rates, and economic prospects of graduates. The President’s idea requires Congressional approval and wouldn’t apply until 2018. Even it became law it wouldn’t do anything for many years. My guess is that President Obama’s idea would do little to curb tuition inflation. Rather, it would create a financial hole for expensive, non-elite private schools. In any event, the proposal doesn’t do a thing about the looming crisis of student indebtedness.
In 1972, when I first went to college, the average cost of a year in a four-year college was $2,047 ($10,880 in 2012 dollars). Since I graduated the cost of has been rising 1.9% per year faster than inflation, driven by an annual real increase of 2.6% in tuition. Since 1999, the cost of college has been rising even faster in real terms (2.8%), and public institutions have borne the brunt of the increase (3.5%). Today, my year in college would cost an average $23,666.
The rate of inflation in higher education wouldn’t be half as troubling if it weren’t being fueled by debt, particularly student loans. The National Post Secondary Student Aid Study (NPSAS-12) released on August 13, 2013, shows that 71% of all undergraduates are receiving financial aid of some kind, amounting to about $10,800 per recipient. Fully 42% of all undergraduates utilized loans averaging $7,100. 70% of graduate students receive an average of $22,000 in aid with 45% of them drawing an average loan of $21,400.
How fast is student debt rising? To get an idea, I looked at the New York Fed’s report, “Household Debt and Credit” issued this month. The data in the report only goes back to 2003, when total student debt was $241 billion. As of the second quarter of 2013, the total had risen to $994 trillion, an annual rate of increase of about 15% per year! To put that figure in perspective, overall consumer debt has only risen 4.4% per year. While mortgage debt is still the biggest consumer obligation at $7.8 trillion ($8.4 including home equity loans), household real estate is worth $18.4 trillion. In other words, an asset backs the mortgage, even if the value of that asset isn’t as high as it was in 2008. By the way, auto debt is $814 billion, and has only grown at a rate of 2.4%. Student loans are big, growing fast, and backed by nothing more than a student’s ability to eventually pay principal and interest. Trouble is brewing.
Which type of consumer loan has the highest delinquency rate? Student loans at 10.9%. Credit card delinquencies are running at 10% and mortgages at 4.9%. While mortgage and credit card delinquencies have fallen since the Great Recession, student loan delinquencies have risen.
What happens if the delinquency turns into a default? The Federal government informs us that “the consequences of default can be severe, and then goes on to list eleven bad things that are likely to happen. And thanks to 11 USC 523(a)(8), student loans cannot be restructured or forgiven in bankruptcy. As horrible as defaulting on a car loan or home loan can be, the consequences aren’t as dire.
While tuition continues to rise substantially faster than inflation, state support for higher education has been cut by $8.7 billion or 11% between 2008 and 2012. Your state tax bill may have fallen a tad, but the short-fall has been made up by increases in federal aid, particularly Pell Grants, which aren’t subject to sequester. The remaining gap has mainly been filled by student debt.
The student debt problem is not nearly as large as the mortgage crisis of 2007. However, it is concentrated in a key demographic that has been critical to our economic prosperity and upward mobility over the years. The children of the wealthy will enter the work world largely debt-free as they always have. Millions of others will discover that they can’t move forward because they are weighed down in debt.
 To see a more colorful critique of student loans, see, “Ripping Off Young America: The College-Loan Scandal” by Matt Taibbi in Rollingstone. http://www.rollingstone.com/politics/news/ripping-off-young-america-the-college-loan-scandal-20130815
 Digest of Educational Statistics, US Department of Education, Table 381 (2012)
 Flow of funds Report, Federal Reserve, Table B100 (1Q 2013)