2014 Most indebted graduating class to date: The student loan crisis

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June, 17 2014

Written by Paul Butler

With the academic year coming to a close, millions of high school seniors across the country have thrown their graduation caps in the air in celebration of an American rite of passage.   Over two thirds of these graduates – myself included – will be moving on to college in the fall, heeding the oft-repeated advice that post-secondary education remains a worthwhile investment.

Preparing for the next stage of our lives, we are also aware of a massive figure hanging ominously over our heads: student loan debt.   The sum of money owed by college graduates reached 1 trillion dollars in 2012 and by some estimates is now equal to $1.2 trillion.  Disturbingly, this growing problem shows little sign of slowing down anytime soon: the fraction of students who finished college with student loan debt rose from less than half of the class of 1993 to more than seven in ten of the class of 2012.

Most high school seniors are familiar with the inevitable barrage of glossy college brochures that extoll the lifelong value of a particular institution of learning without mentioning the debt incurred in the process.  Teachers and parents often join in on the drumbeat, urging students to continue to the next stage of the academic conveyor belt.   After being accepted to a college, teenagers are then encouraged by admissions officers and financial aid representatives to overlook the sticker price of tuition and sign the dotted line on their government-sponsored loans.  In effect, the whole world is telling students that despite the cost, they should pursue a post-secondary education, and for the most part, the data agree.  Accepting student loans to attend school remains a better – or perhaps more accurately, a less bad – investment than forgoing college altogether.  However, the fact that year after year, the best we can do is to advise our youth to purposefully subject themselves to immense debt for a diploma that is far from a surefire guarantee against underemployment or joblessness following graduation is troubling, to say the least.

 

For decades, college tuition has been increasing at a greater rate than inflation, housing prices, healthcare costs, and for that matter, virtually everything else in our country.   Not so long ago, Americans could hope to pay off public school tuition by taking up a job as a student, but it is now essentially impossible to work one’s way through school.   At Michigan State University, for example, Randy Olson compared his school’s historical tuition data with federal minimum wage trends and discovered that, while 203 hours of minimum wage work (essentially a part-time summer job) could cover a year’s tuition in 1979, a student today would need to work 1,420 hours at the current minimum wage to afford the same expense (this does not even include other costs such as room, board, and textbooks).  Despite the protestations of individuals such as Neal McCluskey, an associate director of the Cato Institute who complained that entitled students “could take a job at Subway or wherever to pay the bills… it seems like basic responsibility to me,” the reality that the average graduate leaves school owing $27,000 is not a symptom of laziness on the part of college-goers.

 

Another factor in the debt crisis, as journalist Matt Taibbi has noted, is that “a high percentage of student borrowers enter into their loans having no idea that they’re signing up for a relationship as unbreakable as herpes.”  Unlike credit card or mortgage debt, student loans cannot be discharged in bankruptcy, and the government can confiscate Social Security checks, paychecks, and tax refunds from individuals struggling to keep up with monthly payments.  Meanwhile, debt collection employees are given strict “monthly goals for wage garnishments and loan rehabilitation” and have been offered “bonuses of thousands of dollars a month, restaurant gift cards and even trips to foreign resorts if they collected enough from borrowers.”  Due to interest and fees, the government shockingly manages to collect well over 100 percent of the principal loan value even when students default.  Hidden beneath this is the disturbing truth that the government and the higher education industry have completely insulated themselves from the consequences of their loans: regardless of students’ ability to repay, legislators and colleges benefit tremendously from the current system.

 

Last summer, Congress overwhelmingly passed a bipartisan bill to tie student loan rates to the value of the ten-year Treasury note.  Largely absent from politicians’ self-congratulatory statements, however, was the reality that this new plan will lead to $184 billion in government profit off of students over the next decade.   Only eighteen senators voted in opposition, including Elizabeth Warren, who declared the legislation a “teaser rate student loan” scheme that “raises interest rates in the long-term” while using “students… to generate profits for the government.”

 

The basic issue is that each side of the political aisle has their own reasons for a shared general unwillingness to confront the root of the problem.  Democratic politicians, who receive disproportionately large campaign contributions from the higher education industry, tend to view the ever-increasing sum of student loans as an unabashed victory of educational access for those of all income levels.  The mere suggestion that this enormous flow of money from the government to colleges is contributing to the continuing growth of tuition prices is dismissed as an outdated right wing idea.  Conservatives, on the other hand, are perfectly content to attack the temerity of students who hope to outstrip the circumstances of their birth by attending the college of their choice.  Representative Virginia Foxx of North Carolina, for example, blasted people who “sit on their butt… in an opportunity society… [and] graduate with $200,000 or even $80,000 of debt because there’s no reason for that.” For the most part, though, Republican congressmen halfheartedly cast their votes for the current loan structure as a political attempt to show that they at least kind of care about students.

 

In truth, our nation’s federal loan system has become a giant subsidy for the higher education industry.  Schools have little to no incentive to lower prices: no matter the cost of tuition, students are able to attend college by shifting the task of paying for it down the road with the help of a government loan.  Competing for applicants and prestige has become an exercise in throwing money at the construction of elaborate academic buildings, dorms, and recreational facilities.  Most egregiously, while exhibiting an abysmal six-year graduation rate of 22 percent, for profit schools commonly rake in nearly 90 percent of their revenues from federal student aid.  All the while, the average student-to-faculty ratio of all colleges nationwide remains roughly the same as it was 30 years ago, indicating that the precipitous rise in tuition does not appear connected to any increase in academic quality.  Clearly, as Taibbi argues, “turning down the credit spigot would force schools to compete by bringing prices down. It would help to weed out crappy schools that hawked worthless ‘degrees in bullshit.’”  But this drive to decrease our reliance on loans should be accompanied by an acknowledgement that we are a nation built upon equal opportunity, and that regardless of their financial resources, students who are qualified to attend college should be able to do so without receiving the burden of crippling debt.

 

When determining how to make college both affordable and broadly accessible, we simply have to look at how it was done it our country’s past.  Robust funding for public schools, which for much of the 20th century was widely viewed as a worthwhile investment in our students, has been repeatedly slashed over the past few decades in states across the nation.  States that lower taxes, overspend on law enforcement, and then try to balance their budget in times of economic distress have often turned to reducing public school appropriations as a way to save money.  In turn, public schools have been forced to rely more heavily on money from students to stay afloat, which has predictably led to higher tuition.  Penn State serves as an ideal example of this phenomenon:

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As public school tuition has risen from lack of funding, the entire college market as a result has become less competitive.  Private schools have thus been able to increase tuition without fear of losing a large number of prospective students to public schools that are no longer such a great value.  By fully investing again in our public universities, we can transform government from being a contributor to rising tuition through the heavy use of loans to being a force that utilizes affordable state schools to restore competition and accessibility to the modern American college education.  If the University of California school system returned to being free for in-state residents, for example, it would eliminate debt for UC students while also acting as a source of competition that would drive down the prices of nearby private schools. According to the US Department of Education, making all public schools in the nation tuition-free would cost only 62.6 billion dollars, which by itself is less than the government currently spends just on grants and tax breaks for college students.  In comparison, our defense budget is over ten times as large, at $631 billion per year. 

 

Unfortunately, the prospect of free – or even significantly cheaper – public education is hardly even mentioned in the current political discourse.  Some legislators, however, are putting forth other proposals to try to put a dent in our nation’s student debt. Last month, Senator Elizabeth Warren introduced legislation to permit those with federal and private student loan debt to refinance their loans at the current 3.86 percent rate.  The law would be aimed at helping graduates struggling with debt locked in at interest upwards of 7 percent to lower their rates to more manageable levels.  While this legislation would be a small source of relief to those who have already finished college, Warren herself has acknowledged that it will not actually address the real sources of rising tuition.  Incredibly, even this modest effort was blocked in the Senate.  Additionally, last week President Obama issued an executive order extending the current “Pay as You Earn” program, which limits graduates’ monthly payments to 10 percent of their income and forgives loans after 20 years of payments, to those who took out loans prior to October 2007.  This measure will certainly help many graduates trying to repay their loans, but does not deal with current students and the problem of rising tuition.

 

As a teenager preparing to start at college in the fall, I am excited for what lies ahead, yet I find it hard to be optimistic about our ability to decrease student loan debt for future students.  The solution is not rocket science, but nonetheless, we don’t seem to be moving any closer to addressing the problem. However, as Americans continue to recognize the true negative impact of massive student loan debt on our country, hopefully the populace will vote for representatives who have in mind the best interests of students.

 

paulbutler  After graduating from Mt. Lebanon High School, Paul spent six months backpacking and working in Southeast Asia and New Zealand as part of his gap year.  Currently, he works as a tutor in the Pittsburgh area for Goldstein Test Prep.  Paul will be starting school this fall at Brown University, where he still has absolutely no idea what he wants to study.

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