Saturday, October 27, 2012

Soaring College Debt Means One Thing: Education Levels Will Fall

In June of 2012, President Obama told a college group that “making college affordable” was “one of the best things we can do for the economy.”  So what has been happening financially with college?

Student borrowing started to rise along with large tuition increases in the 1980s.  The mean student loan debt among college seniors in 2008 was over $23,000, along with an average of $4,138 owed on credit cards.  The share of students with loans increased from 47% of those starting college in 1995 to 53% beginning in 2003, with the portion of bachelor’s degree recipients owing money on student loans up from 45% in 1992 and 1993 to 66% in 2008 and 2010.  Average amounts increased from $24,000 in 2009 to $25,250 the next year and an estimated $27,200 in 2011.  Loans from private sources have become more common since 2002, as borrowers responded more to direct marketing efforts.  Defaults on student loans, though still far behind the 1990 historical high of over 20%, have become much more common since the Great Recession, increasing from 7% in the 2009 fiscal year to 8.8% the next.

Now, for the first time, total national student loan debt exceeds that owed on credit cards.  As of the middle of 2012, Americans had a total of over $1 trillion in student debt, of which over $850 billion was borrowed from federal government sources.  For-profit universities, not included in the 2010 numbers, have much higher rates.   More loans have been cosigned, the rate increasing from 67% in 2008 to over 90% just three years later.  Defaults were close to 10% for those starting payments in 2009, a four-year doubling.  Approximately twice as many borrowers who have defaulted outright are in arrears, and only 37% of those who started making payments in 2005 have paid them in full and on time.  Additionally, of course, many students have debt they will repay to parents, which according to one estimate were $6,800 per student.  Federal student loan debt cannot easily be erased in bankruptcy, with laws allowing garnishment of Social Security checks or tax refunds.  As Mark Kantrowitz, proprietor of two college-payment websites put it, “student debt goes up and it doesn’t ever go down.”

As before, loan repayment rates are not the same for all groups of students.  Those who fail to complete college are, as of 2012, over four times as statistically likely to default on student loans as those who obtain their degrees, with a rate of 16.8% compared with 3.7% of graduates.  More borrowers have been dropping out as well, from 23% of those starting college in 1995 to almost 30% eight years later.  However, students taking on debt see it as positive, with one study showing the self-esteem of those aged 18 to 27 correlating positively with amount owed on student loans and credit cards.  Many just older, though, became less optimistic about the debt.

Meanwhile, the Obama administration has reduced the requirement for minimum federal Stafford student loan payments to 10% of the borrowers’ disposable income, reduced from 15%, effective 2014, along with forgiveness of all balances owed, if sufficient payments have been made, after 20 years instead of the 25 it has previously been.  The interest rate on current loans, though, increased from the temporary 3.4% figure to their previous 6.8% on July 1, 2012.  The rise was not as significant as it may seem, as it only affects money borrowed for school years starting in 2012, and will amount to an average of only $6 per month per loan year, yet it will still make a difference.

What does the growth of student debt, often unpayable, mean for the choice to go to college?  While higher education still correlates with higher income, there are severe problems with it.  Non-federal governmental loan sources decreased 24% from 2001 to 2011, while tuition at state colleges increased an average of 72%.  Typical annual costs for tuition, other fees, room, board, and other living expenses at Ohio State are about $25,000, with the University of Dayton, which advertised itself as affordable costing about $48,000, and Oberlin $60,000.  Already, lower-income students, according to Kantrowitz, are more often choosing community colleges over more expensive four-year schools.

What will happen with all of this student debt?  Without a vast increase in the number of jobs, it is hard to imagine it being paid off.  The chances are good that an Obama administration, or one later, will forgive it.  That will mean more money lost, and more hardship stretched across the nation.  As with mortgages and housing loans, it will be harder to get money for college.  Private lenders will drop out.  Admission rates for four-year schools will do what they have not done since before World War II – they will fall, maybe substantially.  Private, four-year schools will face the issue of how much of their often ample endowments to spend supporting students who would otherwise not have a chance of attending.  That will put the problem where it truly belongs, in the hands of these private organizations which have much more disposable income, in effect, than any government agencies.  Yet the result will be lower education levels, in general, for Americans. 

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