are able to raise prices for decades at significantly aboveinflation?” asks Vikram Mansharamani, Yale Universitylecturer and author of
Spotting FinancialBubbles Before They Burst
.The result of this long-term compounding is striking. Within the University of California system, for example,average tuition in 1990 was US$2,000, which representedabout 6 percent of the state’s median household income.Today, the average tuition is US$10,000, which accountsfor 17 percent of median household income.
Combine a government that profits from lending to students,schools that profit from raising tuition, and students whobelieve a college degree is worth virtually any price, andthe result is a self-reinforcing cycle of increasing loanavailability begetting rising tuition begetting soaring studentdebt. U.S. students have incurred US$300 billion in newdebt since 2006, with the burden growing by 10 percentin the past year alone. Student loans have surpassed creditcard balances (US$830 billion versus US$825 billion) asthe second largest category of consumer debt, behind onlyhome mortgages.Today, says Mark Kantrowitz, publisher of financialaid-oriented websites www.finaid.org and www.fastweb.com,“the average debt at graduation is around US$27,000, notcounting parent-plus loans [which parents assume to coverexpenses beyond available student loans]. With them, it’sUS$34,000.”Meanwhile, private loans (offered by banks to studentswho need more than the US$20,000 annually the govern-ment is currently willing to lend) are growing at double-digitrates. These loans generally carry higher, variable rates,and though interest payments are deferred until six monthsafter graduation, they accrue from the inception of theloan. “So there’s a lot of negative amortization going on,”says Kantrowitz. The result: graduates with private loansend up owing considerably more than they spent on tuition.He estimates that US$160 billion of private student debtis currently outstanding.
Diminishing Ability to Pay
Even in good times, soaring student debt would be anominous trend. But for recent and prospective collegegraduates, these are not good times. Since 2000, the realcost of college is up by 23 percent, yet the real earningsof college graduates is down by 11 percent. And unem-ployment among recent graduates is high and stubborn. Whereas graduates in 2006 and 2007 had a 90 percentlikelihood of holding a job by the following spring, only56 percent of 2010 college graduates were as fortunate.Delinquencies and defaults, as a result, are soaring.According to the ED, 8.9 percent of federal student loanborrowers who entered repayment between 2008 and 2009had defaulted by the end of 2010, up from 7 percent theyear before. And default rates understate the real extent of the problem, according to a March 2011 report by theInstitute for Higher Education Policy, a Washington, DC,think tank, which found that only about 37 percent of borrowers from the 2005 cohort managed to make timelypayments. “Default rates do not include the many borrow-ers who become delinquent on their federal educationloans, but manage to avoid default,” states the report. “Itis important to note that for every borrower who defaultsthere are at least two others who were also delinquent ontheir student loans, but successfully avoided default.”The more recent the graduation, the worse the situa-tion, says Richard Arum
professor of sociology andeducation at New York University. “We’re following thekids who graduated in 2009, and a year after graduating,31 percent were living with their parents. They couldn’tfind jobs and are highly indebted.”Meanwhile, even in default, this debt doesn’t go away.The Bankruptcy Abuse Prevention and ConsumerProtection Act of 2005 declared that student debt cannotbe discharged in bankruptcy and gave the U.S. IRS thepower to garnish wages and withhold tax refunds to getwhat the ED is owed. Missed payments are simply addedto principal, so failure to pay results in a higher balancewhen and if a borrower lands that elusive well-paying job.The current lack of job openings is no doubt thebiggest reason for the surge in student loan defaults. Butthe economy is apparently not the only problem. First,says NYU’s Richard Arum, Americans’ belief in the eco-nomic value of a college degree has been inflated by anunusually positive recent past. “There’s always been areturn to college, but this was especially true between1980 and 2008, when a credential was quickly and easilyrewarded with a good paying job.”So while a college education remains a valuable asset,the widespread assumption that any amount of tuition-related debt is acceptable because the returns will morethan compensate is misplaced. “The bottom fell out in2008, and I don’t think it’s coming back,” says Arum.Even more ominous, “Large numbers of students aregoing through university without really improving theirhuman capital. They’re not coming out any more produc-tive than they went in,” says Arum. A study conductedby Arum and University of Virginia sociologist Josipa
U.S. Federal Education Lending
: BASED ON COLLEGE BOARD DATA
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010