How Student Loans Helped Destroy America

NewsweekFlagTrashOn March 30 2010, President Obama signed “historic student loan legislation” into law. The Education Reconciliation Act is intended to generate $61 billion in savings, by streamlining the student loan program and reinvesting the money to make college more affordable. Sadly, it is too little, too late.

Once a Great Nation

The student loan burden on today´s working population has already destroyed the economy, practically removed any last semblance of freedom in our workplace and just served to fatten the wallets of the bankers, lawyers and corporate suits that now run the country. The virtues that once made America a great nation have been abused by those entrusted with its care, and even $61 billion will not reverse the situation that we now find ourselves in.

The History

In 1944, the GI Bill (“Servicemen´s Readjustment Act”) was enacted to help war veterans further their educations and, in turn, increase the number of employable persons in order to strengthen the U.S. economy. Throughout the next twenty years, improvements were made to this system through the National Defence Student Loan Program (1958 – aka Perkins Loan Program) and the Higher Education Act of 1965 – creating the Guaranteed Student Loan Program.

Sallie Mae

Although it would be easy to say that the rot set in with the founding of Sallie Mae in 1972, you have to acknowledge that they only exaggerated  later problems through their incompetence and greed. In 1972, people still worked their way through college, and Sallie Mae was established to simply facilitate loans to those who needed them, rather than lend any funds themselves.

No. The cause of all today´s problems are those pillars of education – the colleges.

The Facts

The colleges have been increasing the cost of tuition by far more than the increase in the Consumer Price Index for over three decades. This may not be hot news to many people, but the graph below shows by just how much.

Average Annual Percentage Increase in Inflation-Adjusted Prices 1979-2009 - Source: The College Board, Trends in College Pricing 2009; Annual Survey of Colleges.

Average Annual Percentage Increase in Inflation-Adjusted Prices 1979-2009 - Source: The College Board, Trends in College Pricing 2009; Annual Survey of Colleges.

The coloured bars show the percentage above the Consumer Price Index that tuition fees have risen on average each year. So if we take the (lowest) increase of “four year” tuition and fees at public colleges and universities between 1979 and 1989 (the dark blue bar), we will see that every year tuition fees increased by an average of 3% above the Consumer Price Index. This might seem like quite an insignificant amount, but compound 3% per annum over a decade during which the CPI increased by 82% and the total increase in fees during the period is an unjustifiable 137%.

The Last Twenty Years

Effectively, colleges in the 1980´s felt it was okay to increase tuition costs by 67% more than the rise in our incomes and the cost of living. And, because they got away with it in the 1980´s, they did it again in the 1990´s – only this time by more! Consequently, when the new millennium started, they thought “What the Hell!” and really got down to screwing students.

In the period from 1999 to 2009, the Consumer Price Index rose by just 28.50% over the decade. College tuition fees over the same period rose by 104.20% – more than four times the cost of living!

Grants & Loans

Federal and private grants have attempted to keep up with this criminal increase … … …

Growth of Federal, Institutional, Private & Employer, and State Grant Dollars 1998-2008 Source: The College Board, Trends in Student Aid 2009

Growth of Federal, Institutional, Private & Employer, and State Grant Dollars 1998-2008 Source: The College Board, Trends in Student Aid 2009

… … … but have been insufficient to cope with the costs associated with getting an education in America, and consequently the amount of borrowing that has taken place has risen dramatically… …

The Growth of Stafford, PLUS and non-Federal Loans 1998 - 2009 - Source: The College Board, Trends in Student Aid 2009

The Growth of Stafford, PLUS and non-Federal Loans 1998 - 2009 - Source: The College Board, Trends in Student Aid 2009

… … … with the biggest growth area being the “unsubsidized” loans.

The Banks

The banks and credit institutions are far from blameless in this scenario. For decades, they have been courting students with vast credit facilities and offering irresponsible lending to students who not only had to cover the costs of tuition, fees, room and board, but who also wanted to live. The alternative “education” loans available to students resulted in larger and larger loan balances, and the banks have been allowed to get away with acting as predators on the innocent, meaning that the debt burden on students was increased by “easy credit” where otherwise they may have found alternate funding. However, if the college fees were not so high, students may not have had to borrow in the first place!

The Project On Student Debt

In a survey conducted by the Project for Student Debt, over 50% of respondents had taken out private loans to supplement their Federal (subsidized) loans, and the average debt for a graduate on finishing their education is now over $60.000.

Average Undergraduate Debt, Graduate School Debt and Total Debt for Graduate Degree Recipients, 2007-08 - Source: The College Board, Trends in Student Aid 2009; NPSAS, 2008

Average Undergraduate Debt, Graduate School Debt and Total Debt for Graduate Degree Recipients, 2007-08 - Source: The College Board, Trends in Student Aid 2009; NPSAS, 2008

It is not to say that students would not have found themselves in a debt situation after they graduated, but had college tuition fees stayed in line with the Consumer Price Index, you might have been able to slash these figures by 90%.

How has this volume of debt helped destroy America?

According to the US Department of Education, there is currently $605 billion in Federal Education Loans outstanding, of which $47 billion is in default. These are just the loans that have been made by the Government, or subsidized by the Government, and do not include private finance (estimated at a further $157 billion). The total amount paid out since the Guaranteed Student Loan Program was introduced in 1965 stands at $1.17 trillion, so this implies that more than half the loans ever made to students are still to be repaid.

Consumer spending is the engine of the economy, so imagine how the American economy would have benefitted with an extra $½trillion over the past forty five years – or at least 90% of it, had tuition fees been kept in line with the cost of living (because these are such substantial figures, it might help to explain that $½trillion equates to about all the money paid out in Federal pensions every year).

student debtAlthough outstanding student loans account for a small proportion of the countries national debt, it all contributes towards:-

A decline in economic growth due to money that could be used for capital expenditure being redirected into loan repayments. A weaker currency, making our imports more expensive and also allowing for US assets to be “gobbled up” by foreign interests at bargain prices. A waste of national resources to pay interest on loans from other countries. Higher Interest Rates for both businesses and individuals.

And, more importantly of all, students that have graduated from college over the past ten to fifteen years are becoming more comfortable with debt because it is something they have had to cope with since going through college. These are the guys who are now promoting debt leverage and selling derivatives on Wall Street in order to pay back their own loans. Effectively encouraging more debt to try to escape their own!

What a shambles, and what an ever-increasing circle of debt we now find ourselves surrounded by. You may feel that achieving your degree will be one of the hardest things you ever do – try paying for it!

The Future – If there is one

President Obama has at least taken a step in the right direction with the introduction of the Educational Reconciliation Act, however the alarming news broke even before his signature had dried that Sallie Mae are lobbying to be responsible for the administration of this new program!

Drastic action is called for, and quickly. The final solution could be a combination of any of the following suggestions (although it would be good to see them all implemented):-

Cancel all provision for unsecured loans, credit cards and other finance for anybody under the age of 21. If students are unable to get easy credit, they are unlikely to run up such fantastic debts. Furthermore, if credit is not available to college students, educational institutions are going to have to bring their tuition fees down or very few will be able to afford them. Colleges will be empty. That is basic supply and demand.

Cap what colleges are allowed to charge. Pell grants have been linked to the Consumer Price Index, so why not college fees? If colleges had to pass exams to justify their existence, how would yours fare?

Kick out the corruptors. It is not just the credit card companies who come bearing gifts. Some credit institutions have been known to make generous donations to your college to keep the fair trade away.

Clear all outstanding student debt. It would cost the government less to repay every student debt than they have already spent on war this year and the long term benefit to the American economy would at least be tangible! However, the President could simply redirect funds set aside for bank rescue packages to the banks as loan repayments, and this way it would not cost the tax-payer a cent more.

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Can´t see it happening? If everybody with an outstanding student loan, failed to make payments on it for the next three months, do you think somebody might take notice?

You are the next generation of law makers. This is your responsibility.

education bomb 2