On 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.
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
… … … 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
… … … 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
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).
Although 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.
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.
{ 22 comments… read them below or add one }
“If students are unable to get easy credit, they are unlikely to run up such fantastic debts.”
This is true. However, that also means that the expansion of federal aid, far from being “a step in the right direction,” also helped fuel the tuition increases. You note that the massive federal aid increase came at the same time as the massive tuition increase. They both feed each other.
Each time the federal government steps in to help the current generation of college students with their loans, only a small handful of current students win. The colleges and universities always respond by just increasing their tuition as fast as the aid increases. The real winners are the colleges to any federal aid, not that many students.
So price caps, government bailouts, student welfare, and restrictions on anybody under 21 from fully functioning in society. You going to repeal the 18 yrs right to vote as well?
Easier solution is to stop the mind set that everyone has to go to college for a good job.
The real reason for the GI Bill was to keep young men returning from the war out of the work force. (Too many chasing too few?)
Also, regarding “working your way through college”, it was made a no-no by Stanford University sometime in the late 50s or early 60s. (I don’t remember exactly, but I do remember my father telling us at dinner. It was interesting to all of us as he, as the youngest child of Italian immigrants had worked his way thorugh Stanford Medical School in the 30s).
WTF.
Seriously? I saved every penny so I could go to grad school and pay the tution in order to graduate debt free. Now you are saying everyone that borrowed should get a free ride and I have to pay more in taxes to cover them? If you clowns do this I will personally find you and get every dollar back.
Oh yeah! Lets all STIFF those who lent us money for our education!! that’ll teach’em!!! That’ll teach US too, about evading personal responsibility. Hiow conveeeenient!
If whoever wrote this were “really” familiar with Zen, he would know the monks at Daitokuji would take a bamboo stick across his back, were they to hear this kind of nonsense.
As the ancient koan goes: “If you meet a loan deadbeat in the road, KILL HIM”.
The obvious point to be drawn is that the artificial increase in the number of dollars chasing the scarce resource of education drove the price up. The colleges were in on the scam always raising the tuition to absorb the new money.
When I went to school, I was able to save enough from a manual labor job to pay for a semester’s tuition and books. Try that now.
It’s so true. At the colleges I follow closely, there’s a repeating cycle. Tuition and other costs reach a point at which students and families are strained to the breaking point. There may even be street demonstrations.
Then there’s an increase in loans, grants and subsidies. It relieves the pressure only briefly. Within 24 months costs are again on their way to the breaking point. And the cycle repeats.
On the other hand, surrounding the campuses, there are several reliably thriving businesses; tanning parlors, travel agencies and liquor stores.
Um, how about c) students pay back their loans?
My salary is just a fraction of what the government pays for left-handed screwdrivers: does this mean I should be paid more? If someone’s foolish enough to pay $200k for a social sciences degree, then that’s their problem. Choices have consequences, and everyone knew the terms up front.
First, the “government” is us. You are suggesting that those who were frugal, paid off their loans or decided against advanced education because of the cost, now should pay off other people’s loans?
Second, the bank rescue packages are to be repaid. At least, some assets would be acquired in return.
You aren’t talking about “making law”. You are talking about theft.
I have to disagree that student loans are a problem. I was only able to attend university (and graduate in 4 years), because of a student loan and between one and three part time jobs, and working summers. This was 1978 through 1982. If not for that loan, I would be flipping burgers, so to speak.
You raise many good points,but most have to do with issues that are outside of the “loan” issue. I agree with you on these – ie educational cost increases, which I believe are directly related to the increase in union parasitism (including tenure) in the last thirty years.
I like what you have to say up until you get even more statist than BHO at the end. Cap the amount that colleges can charge? Excuse me, but if you’d been reading the and believing the first part of the article that wouldn’t be necessary at all. Just stop the subsidy; prices will drop.
Also, why the gratuitous reference to war spending? Gee we could’ve saved a whole lot of money in the 1940s that way. Why didn’t the “Greatest Generation” come up with that idea? We’d be speaking German, but that wouldn’t be so bad. Remember, September 11 alone cost us one trillion dollars. It’s incalculable how much it’s worth to us to have a second democracy in the Middle East.
My impression is that a lot of elite schools implement something like a total employment program for their graduates, in order to keep their ranking up in Barrons, U.S. News, etc. Many schools do this by creating new bureaucratic positions every year, providing “services” of dubious value to the students. Tuition is increased to pay for the costs of hiring all these graduates, and as a result current students need to take out more loans.
Maybe one important step in accomplishing the reforms you are suggesting would be to persuade Barrons & U.S. News to exclude employment in higher education bureaucracies from employment statistics for purposes of calculating rankings.
“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.”
Seeing as I took out the loan, it IS my responsibility. So I’m going to pay it back.
I was responsible and went to a cheap college and graduated sans debt. So if the gummint gives everyone $85,000 who went to a $25,000 a year private school to get a degree in education and weren’t smart enough to realize what a bad investment they were making, do I also get rewarded with $85,000? Or does your idea only reward those who made stupid decisions?
You wrote: “Imagine how the American economy would have benefitted with an extra $1/2 trillion over the past forty five years – or at least 90% of it, had tuition fees been kept in line with the cost of living.”
College may be (and probably mostly is) a bad investment, but your economic insights are wrong.
Look at it this way. If you were correct, than ALL loans would be disastrous, because future loan repayments would cut into future spending, sinking the future economy!
In reality, a loan is only a transfer. It allows a student to pay his teachers today for an education that is supposed to increase his productivity tomorrow. He will repay the loan out of that increased production and value, tomorrow. His teachers can buy more stuff today and remain employed.
The only question is whether college is a good investment, loans or not. I think it is usually a bad investment, and its increasing expense makes it a worsening investment. Students suffer from this bad investment by ending up with less material wealth, because their productivity is not increased by as much as the cost of the education.
Worse, their productivity is not increased as it could be by a practical and useful education at a reasonable cost. We all suffer somewhat from their missed opportunity to learn something useful rather than something of high status.
What is the actual value of a college education, after correcting for the following effects?
(1) Colleges select for high IQ
(2) Businesses select for IQ by requiring a college degree for executive-track training.
(3) There is a cultural belief that a person cannot succeed without a college degree, limiting the success of non-graduates.
Employers and schools often dismiss the value of earlier college training, even in the case of future doctors and lawyers. The college education is regarded as an indication of dedication and interest. But, the employer or graduate school implies that the student should “forget what you have learned” and start to learn the real subject, if he can.
So, a college degree may be valuable mostly because of cultural bias, the lack of a more efficient and cheaper alternative, or the prohibition against employers giving aptitude tests (from supreme court rulings). How much does the “learning” in college really matter?
People mature from 18 to 22 while in college. Most mature in their discipline, outlook, and knowledge, but I think that has little to do with the college. Colleges are happy to take credit for the advancement of some, while writing off the failures as “not doing the work”.
College is an Expensive IQ Test
http://easyopinions.blogspot.com/2008/07/college-is-expensive-iq-test.html
I have an easy solution to this problem… The Universities should offer the loans, not the U.S. Government. That way, they carry the risk as well as the benefit. Then they will make sure that their investment dollars are spent wisely, to ensure that they will get their loans paid back.
You fail to point out that the loan programs have multiple repayment plans that can reduce the montly payment to as low as $5 a month and forgive (cancel) the unpaid principal after 25 years of payments. Also, borrowers can have unpaid principal reduced when they work as teachers or in public service. who work as teachers. The standard repayment plan is minimum payment o $50 or a 10 year term. The other options are: Extended, Graduated, Income Bsed, Income Sensitive and Income Contingent.
Student loan repayment is reported to national credit bureaus. To stop making payments for 90 days would negatively affect a borrower’s credit score and his/her ability to purchase a house or car.
The focus of your article that higher education costs are fueled by increases in the maximum amount a student can borrow and his borrowing the maximum amount. What percentage of a university’s costs are paid via tuition and fees? Other factors contribute to increased in tuition. Has the state legislature funding to higher education kept pace with inflation? Are schools taking appropriate measures to reduce costs? A solution involves much more than a ceiling on student loans–the current economy, Congress, state legislatures, higher education administrators, and students.
Our current problem: A downturn in the economy causes more students to enroll (5-15% increase in my state)…increased classroom expense when state funding has been reduced by 10-15%.
In the US, it is virtually impossible to practice as a lawyer in any state unless you graduated from an accredited law school. This is nonsense – anyone who passes the state’s bar exam should be allowed to practice law. If the bar exam is too easy, make it harder (and fail more law school graduates). The incestuous relationships between legislators, law schools and bar associations are clearly illegal trusts. Likewise the trusts between colleges and their accrediting bodies.
Your diatribe against colleges is populist bunk. Colleges offer a valuable commodity. Like anyone who has something to sell, schools charge whatever the market will bear, as they should. The problem (as you somewhat cover) is that easy student loans have made people willing and able to pay almost any amount of money to attend. Put it this way: Even as high as tuitions are, most good schools still turn away a huge chunk of prospective “customers” in the application process.
But look, the colleges are caught in a trap, too. It’s not like the professors are swimming in money. All those tuition hikes have in turn fueled an arms race between schools to remain competitive. The building booms on campuses across the country have been amazing: Everything from academic buildings and labs to student life centers, “diversity” centers, and luxuries galore (food courts, state-of-the-art fitness centers, etc.).
Capping tuition will do nothing but cause an artificial shortage in higher education. Just look what happened when Nixon capped gas prices. Price caps always lead to rationing.
It a shame that such a serious issue has to be so childishly presented. This does not help convince anyone who isn’t on board already.
Colleges are drowning in money and have no obligation to produce anything at all. This situation must be remedied in some way, either by competition (good idea) or legislation (bad idea).
A
In Canada, student loans can’t even be discharged by declaring bankruptcy. It follows you to the grave.
Ben,
The word “commodity” does not mean what you think it means.