Analysis: Realities of the student loan debt crisis

Courtesy of Lendingmemo.com, Flickr Creative Commons.
Courtesy of Lendingmemo.com, Flickr Creative Commons.

It is commonly heard, especially on a college campus, that America is in the midst of a student debt crisis. Many presidential candidates such as Bernie Sanders and Hilary Clinton have each released plans to significantly reduce the costs of college to alleviate the debt pressures of student loans. But when it comes to American student debt, what are the facts?

According to an August report by the New York Federal Reserve, 11.5 % of student loans are 90+ days delinquent, amounting to a total of $1.19 trillion in debt, an increase of 0.4% from the past quarter alone.

Where is all the debt?

According to the Brookings Institution, which I would describe as a liberal-leaning non-partisan think tank that is consistently ranked the greatest think tank in the world, borrowers at two-year or for-profit private institutions consisted of roughly half of student-loan borrowers, yet were about 70% of student loan defaults. The massive discrepancy between the default rates of these students and those of four-year public and private institutions should come as no surprise, considering the bulk of the students attending the University of Phoenix were likely deemed unworthy of a more prestigious four-year institution for reasons I can leave to your imagination.

Image courtesy of the Brookings Institution.

It is additionally important to note although graduates of for-profit associate colleges typically earn greater incomes post-graduation than those without any college experience. However, they earn about one-third less than graduates of community colleges at more than four times the real cost.

Anecdata aside, the primary drivers of student loan debt appears to be convincingly students attending for-profit universities and has little to do with a four-year institutions such as Central Michigan University.

The Myth of Drastically Climbing Costs in Higher Education

I often hear the skyrocketing price of university tuition is a primary driver of student debt. However, I think there is little evidence to support this claim. In fact, in my opinion one of the most misleading facts when it comes to the cost of a four-year institution is citing the tremendous increase in the price of tuition the past few decades.

This is because although the sticker price has increased drastically, as the College Board describes, once adjusting for items such as scholarships, Pell grants and other forms of financial aid, the real price of a four-year degree has not actually changed all that much.

Image courtesy of the College Board.

What universities at large have actually been doing is increasingly engaging in a practice known as price discrimination. Essentially, they have shifted the burden of paying for college increasingly upon comparatively wealthy households, while through financial aid are allowing greater quantities of comparatively low-income students than what would otherwise be possible. To me, if anything this sounds like a positive development.

Furthermore, solely examining the costs I feel is misleading, as college graduates are still earning ever-increasing totals of income over their lifetime. Although I have previously discussed why I think these totals might be slightly inflated, Brookings calculated that after adjusting for inflation, individuals who enter college in 1980 typically earned roughly $260,000 more over their lifetime, while today, that figure has increased to more than $450,000.

Image courtesy of the Brookings Institution.

 

In other words, although the cost of attending a four-year university has increased in recent years, it is nowhere near the amount typically reported, and it is well surpassed by the increase in the benefits of attending college.

The effectiveness of free universal tuition

Another aspect of free tuition I rarely see discussed is we already virtually do have free tuition for lower-income individuals to attend community colleges. Evidence from the College Board suggests that net tuition (tuition paid after fees after aid) for community college was $0 for students from households earning $60,000 or less, while it was $2,051 for households earning greater than $106,000. Meanwhile, the graduation rate of these same institutions is according to our best estimate, a paltry 38%.  A recent paper from the National Bureau of Economic Research found more evidence increased financial aid does little to bolster enrollment at community colleges.

http://trends.collegeboard.org/sites/default/files/cp-2013-figure-12_0.png

As such, I just do not see any sort of credit restraint existing for current college students, especially community college attendees. Although I am not necessarily opposed to a universal free tuition plan per se (I can’t say I’ve ever been impressed by a proposal or would advocate either of Clinton or Sanders’s plans), I see it more as a wealth transfer to the comparatively wealthy and soon to be wealthy who do not necessarily need that subsidy.

­­What should be done?

A more reasonable fix to what exists of the student loan debt “crisis” would be to tie government student loan eligibility of institutions of higher education to the post-graduation job outcomes and graduation rates of their students. Not only could this be implemented overnight, but it would occur at virtually no expense to the taxpayer. “Shockingly,” what appears to be an approaching consensus of economists advocate precisely this reform.

Image courtesy of the IGM Economic Experts Panel of economists across the political spectrum.

Additionally, doing more to create more students who are adequately prepared for college would go an incredibly long way. Although this is a more contentious proposition position beyond the purview of this analysis, switching to a federal school voucher system I think will go a long ways, including in unexpected areas like closing the black-white student achievement gap.

Image courtesy of the IGM Economic Experts Panel of economists across the political spectrum.

 

Wyatt Bush is the assistant editor of CMU Insider. You can contact him at wyattbush@gmail.com. 


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