American college graduates are suffering financially under the weight of $1.5 trillion of student loan debt. The bulk of that debt stems from worrisome federal student loan practices and ballooning state tuition costs. Approximately 75 percent of college students attend a state university or college with tuition rates set by legislatures or state institutions. Over 85 percent of student loans are generated under the federal student loan program. In the past three decades, tuition at state colleges has increased by 313 percent.
Oddly, some seem to blame “capitalism” for the student loan predicament. Ray Dalio, billionaire investor, cited massive student debt loads in a recent article that made the case for reforming capitalism. Presidential Candidate John Hickenlooper penned an op-ed for the Wall Street Journal boldly proclaiming he is running for president to save capitalism. The very first point in his argument is that (public) high school education doesn’t provide adequate training for the modern economy. Anecdotally, we have heard the federal student loan predicament conflated with capitalism.
The Hardship Is Real
The pain of student debt is real. Sadly, there are many adults burdened by thousands of dollars in loan debt. Khalilah Beecham-Watkins, a first-generation college student and young mom, is one of many who feels as if they’re a prisoner to student loan debt. Khalilah has been working to pay down her $80,000 debt while helping her husband tackle his own loan obligations. In an interview last year, she said, “I feel like I’m drowning.”
As is well-reported, many young adults feel like Khalilah. In the United States, the average student loan debt is more than $37,000. As unsettling as that figure is, some graduates face even higher debt loads. About five percent of degree earners have student loan debt totaling $100,000 or more. Stories like Khalilah’s need to be told so that students don’t flippantly take on crushing debt without recognizing the gravity of such a decision.
This significant debt load is exacerbated by the fact that many graduates are finding it difficult to find well-paying jobs, which has spiraled into incredibly high rates of loan delinquency: More than one out of every 10 loan recipients is unable to keep up with payments. The Brookings Institute estimates that nearly 40 percent of borrowers will default by 2023. These are sobering statistics, and it’s important that borrowers be fully aware of the risks and benefits associated with debt of all kinds, including student loans.
The Benefits of Investing in a College Degree
Despite the burden that comes with debt, there are undeniable long-term benefits to earning a degree. In our skills-based economy, it is no surprise that a person with a bachelor’s degree will earn significantly more than a person with only a high school diploma. It has been estimated that a bachelor’s degree increases a person’s average lifetime earnings by $2.8 million.
And the more degrees someone holds, the more their earning potential increases. Studies indicate that earning a graduate degree could triple a person’s expected income. But in the near-term, the financial stress of loan delinquency, deferred consumption, and lower net worth is real.
While the buck ultimately stops with each of us when it comes to our own financial decisions, the student loan quagmire is chiefly the product of federal policy. Federal laws prohibiting sound commercial lending practices and states setting tuition rates high enough to guarantee they’re able to absorb all the federal money they can are complicit in this widespread problem.
Bad Diagnoses Lead to Bad Prescriptions
Rather than addressing the underlying problems of federal financial aid and rising public college tuition, politicians like Senators Elizabeth Warren or Bernie Sanders are offering politically expedient ideas. Sen. Warren proposes debt cancellation of up to $50,000 to more than 42 million people.
Sen. Warren’s plan would eliminate debt for 75% of borrowers with student loans, and federal funding to ensure students attend state college for free. But nothing in life is free. Warren’s sleight-of-hand doesn’t make existing debt or future tuition magically disappear. Rather those costs are passed on to taxpayers. And since college graduates earn roughly twice as much as high school graduates and can expect to be in higher tax brackets, guess who would be paying the taxes for Sen. Warren’s plan.
Why Federal Loans Are Not Like Commercial Loans
To understand the federal student loan mess, it is necessary to understand some details about the loans that are at the center of the issue. The federal government provides a few types of loans, but the largest share of student debt comes from subsidized and unsubsidized federal loans.
In the case of a subsidized loan, the Department of Education pays the interest on the loan while the student is in school and for six months thereafter. A student can qualify for this type of loan whether or not they are creditworthy or have the ability to repay the loan.
In typical commercial lending, a bank would not offer a loan to an individual who didn’t hold a reasonable promise of being able and willing to repay it. This harkens back to 2008 when the US housing market collapsed because of irresponsible lending practices and the belief that everyone—no matter their financial situation—should own a home. It should be no surprise, then, that some economists predict a similar implosion of the student loan market. In other contexts, this would be called predatory lending.
The State’s Role in Tuition Inflation
The second contributor to these financial aid troubles is ballooning state college tuition rates. State legislatures and state institutions set public college rates, so these state officials should be held accountable to provide lower-cost alternatives. One lower-cost alternative to traditional on-campus programs would be to offer a basic skills-based college curriculum online at-cost, i.e., based on the marginal cost of providing downloadable lecture videos and similar programming.
While the total cost to a student of an online degree currently tends to be less than a traditional degree, the tuition is often the same. By offering video of select classes, schools could unlock the value of their existing educational resources and expand access to more students. However, state schools are largely immune from market discipline, which encourages cost-cutting and leveraging economies of scale. Instead of reducing operating costs and tuition prices, state schools soak up the flow of federal loan dollars.
On the finance side, state universities could offer their own alternative to federal student loans. Take, for instance, the market-oriented model of Purdue University and offer income sharing agreements (ISAs). Income sharing agreements allow consumers to pay off a debt by sharing a portion of the student’s income with the lender for a set number of years. Instead of a loan, ISAs allow investors to take “equity” in a student’s future earnings for a period of time.
The problem with the financial aid predicament is that market discipline has been eliminated from state college education and federal financial aid. Public colleges aren’t going to be privatized and run like for-profit businesses any time soon. However, by applying market-based innovations and lessons from the private sector to state colleges, it may be possible to expand access to state college, offer alternative financing arrangements (like income sharing agreements), and reduce the cost of college through technology and economies of scale.
Doug McCullough is Director of Lone Star Policy Institute. Brooke Medina is communications director at Civitas Institute in NC. Their opinions are their own. This article originally appeared on fee.org. Reptrinted in full, with permission.
Recently, the outstanding economist Richard Vedder penned a column in the Wall Street Journal on the problems of higher education in America. He titled it: “College Wouldn’t Cost So Much If Students and Faculty Worked Harder.”
The piece was a preview of his book on the subject, Restoring the Promise: American Higher Education Today to be published May 1. From his summary and from reading his previous writings on the subject, I’m certain the book will be outstanding
His analyses have coincided with my own as a Nevada legislator, higher education regent, college teacher and state controller, and he has brought good data to illustrate issues I have observed in those roles. So, here, I’ll present a summary of his WSJ piece, and in future column I’ll detail from my experience and his book some major issues and solutions to the serious challenges U.S. higher education faces.
Vedder begins: “One reason college is so costly and so little real learning occurs is that college resources are vastly underused. Students don’t study much, professors teach little, few people read most of the obscure papers the professors write, and even the buildings are empty most of the time.”
As a regent and part-time community college instructor for four years, I observed all these phenomena and more first hand. They are some key reasons higher education costs have increased faster in real terms than the incomes of students and their families while those students are being ever more poorly prepared for life and the job market. And taxpayers are shorted.
His first observation is that surveys show college students today spend about 27 hours a week in class and studying, while taking classes only about 32 weeks a year. Or, fewer than 900 hours a year on academics – “less time than a typical eighth-grader and perhaps half the time their parent work to help finance college.”
He notes other researchers have found that in the middle of the 20th Century students spent 50 percent more time – around 40 hours weekly. Grade inflation has vitiated their incentives to work hard because the average grade received has risen from B-/C+ in 1960 to B/B+ now.
Vedder notes that on some campuses students study much more. And, “Engineering majors probably work much harder than communications or gender studies majors.” Ditto, law and medical students. As a sometimes engineering major at Illinois, recipient of a masters from Stanford in Engineering Economic Systems and later law student, I know all that’s not new.
But neither he nor I are suggesting that students responding to the changing incentives is the only problem. Vedder confesses: “I’m part of the problem: I’ve been teaching for 55 years, and I assign far less reading, demand less writing, and give higher grades than I did two generations ago.” Most other professors are less demanding and productive in teaching and useful research than he is, while mostly hard-sciences instructors put in similar teaching and productive research time.
When I taught 15 years ago, I told my community college students at the start of the semester I would teach them just as I would at any four-year college, including the same reading, writing, homework and testing. However, I felt guilty because I succumbed to the grade inflation trend. On the other hand, because a third of them needed remedial English, writing and math skills (having been shorted by their grade and high schools), I provided that service.
Another point he makes is that objective measures show the results of college education today are underwhelming. Similarly, I noted in my controller’s annual reports that American K-12 students’ achievement scores in international tests are in the middle ranks of those for advanced countries, while our per-student spending is among the highest.
A major point I learned as a regent is that much of higher education’s problem is the proliferation of administrative and other non-teaching staff relative to all instructors. Because colleges and universities work hard to cover up this phenomenon, I had trouble getting data on it, and I look forward to his book for more information here.
When we understand the full dimensions of the problem, we can begin crafting remedies. Stay tuned.
Student debt has been rising and the average undergraduate doesn’t feel confident they will pay off their loans before middle age.
Lots of factors contribute to the increased debt a student faces. Some of these include:
Higher tuition costs
Increased time requirements to obtain a degree (5 year program vs 4 year)
Fewer students work while taking classes
More competition after graduation
Higher cost of living precludes early repayment of loans
And it is projected to rise. The Congressional Budget Office each year projects the total amount of new federal student loans the office believes they will issue with this year projected to be nearly $1.5 trillion.
Andrew Coates, candidate for University Regent in Southern Nevada, states, “One way that colleges can help students keep their debt under control is by locking-in tuition rates. This means that tuition will not be increased while a student pursues their degree. By locking-in tuition, students will know exactly how much they will pay each year in college, which will help them budget accordingly.”
So how can students curb their debt?
According to US News data, the average cost of tuition and fees for the 2018–2019 school year was $35,676 at private colleges, $9,716 for state residents at public colleges and $21,629 for out-of-state students at state school, with many universities easily exceeding these numbers. So students may want to consider getting early credits completed at community colleges and then finishing their degree at a university. Additionally, many will need to decide if its worth picking an out-of-state college for a degree that provides the same job market edge as an in-state school.
Many students don’t apply for grants, loans and scholarships because of time constraints, misconceptions such as they don’t fit a demographic, or “will be credit history required?”, and lack of optimism that they will even qualify.
Mark Kantrowitz, publisher and vice president of saveforcollege.com states, “More than 2 million students did not get a Federal Pell Grant even though they were eligible because they did not file the FAFSA.” FAFSA (link attached) is a free application for federal student aid assisting students who want to apply for a loan, grant or work study.
Scholarships are ideal in that they do not need to be paid back. Many can be found at scholarships.com.
Many students get a culture shock living on their own when they spend as if Mom or Dad is still footing the bill. If eating out nightly, shopping online, or using excess data does not fit into the amount your trying to live on each month, budget expenses early on and stick to it.
When we try to build our credit as a young adult, we may apply for a credit card that advertises to college students with no monthly fee and “rewards.” However, the interest rates can be up to 25%. If you do use the credit card don’t borrow more than you can pay off each month, always shooting for a zero balance.
Rent, transportation, utilities, meals, entertainment, internet and phone service, add up and can be more costly than tuition. Share expenses with roommates or family members to lessen your loan debt.
Cook and prepare meals for the coming days, use school Wi-Fi, carpool to class, purchase less beer, and use the university gym to save money.
But most importantly, don’t stress about the debt. Your efforts should be concentrated on your schooling and getting a degree is one of the best ways to combat your debt later in life.
If you think the American economy is booming now, just think what it would be like if American collegians had an extra $1.5 billion to spend—especially with President Donald Trump’s tariffs set to raise the prices of imported consumer goods despite he and his administration saying the tariffs won’t result in price hikes.
Well, if prices aren’t increasing, tariffs aren’t working. The point of a tariff is to make locally produced products more attractive to local consumers by raising the price of imported alternatives. This, in theory, would result in more local production and fewer imports. But a tariff is paid by the importer of a product, not the exporter. So the 25-percent tariff Trump recently leveled on Chinese imports is transferred to the American consumers of those goods, not the Chinese producers.
The trade war isn’t taking money out of the pockets of Chinese manufacturers; it’s taking money out of the pockets of American consumers of Chinese products and Chinese consumers of American products. And since the United States runs a $375 billion trade deficit with China, the only way Trump can “win” his trade war is if Chinese economists can’t do the math to match Trump’s tariffs dollar-for-dollar. It’s even becoming more likely trade with China ends altogether. China has already cancelled planned trade talks with Trump.
It is impossible for America to run a trade surplus with China because China produces more products Americans consider essential than America produces for the Chinese, including car, computer and mobile phone components. It’s lower labor costs and Americans’ addiction to consumption allow China to perpetually have the upper hand in a trade war. If an iPhone were made entirely in America, it would cost as much as a brand new car, so while Trump might be making some American-made products more attractive to American consumers, he’s doing so at the expense of American consumers who can’t do without many of the Chinese imports found in their technology and automobiles. Even the Tesla Model 3 can only be 95-percent American-made at most.
Since Americans will be paying more for computers, mobile devices and cars, it’s not entirely unreasonable to forgive the $1.5 billion in student loan debt and allow those accepted into college two years of college education free of charge. Students and parents are going to pay more for the devices required to attend college, and colleges are going to pay more for them as well, which will be reflected in tuition costs, which will further increase student loan debt while decreasing consumers’ available income for spending in the American economy, potentially sinking the stock market.
There are other reasons besides boosting the economy for the government to payoff student loan debt. First, today’s Associate’s degree, usually obtained in two years at a community college, is the equivalent of a 1980s high school diploma. Advances in technology have made working in what is now a global economy much more complicated and necessitates further education be obtained. Students are not leaving high school with the education necessary to provide for themselves let alone a family, and it’s not their fault.
Secondly, with 17 states offering tuition-free college programs, the trend seems to be students at least delaying the accumulation of student loan debt for two years, potentially lowering accrued interest as well as principal loan balances. In short, future college students in the United States will be saddled with considerably less student loan debt than current and past college students. Meanwhile, entire generations (and student loan debt does span generations), are suffering student loan debt and unable to stimulate the American economy by spending money on anything but debt and living expenses.
Finally, the collective credit rating of American college students, past, present and future, would receive a boost that could spur entrepreneurial growth and investment in businesses as a whole. America was the land of opportunity, where you could go from “rags to riches” with enough hard work. America used to be the best place to start a small business and be your own boss. That isn’t the case these days because despite incomes increasing for middle-class Americans, their purchasing power has barely budged since 1965. You can’t grow an economy in which most consumers have hardly more purchasing power than their grandparents did over 50 years ago, and consumer confidence in the stock market can’t increase if consumers have no means to express their confidence by purchasing stocks.
Lifting the $1.5 billion in student loan debt owed by 44.2 million American borrowers would allow 44.2 million Americans to spend their student loan payment, averaging $351 per month, stimulating the American economy instead of simply paying off interest. Lenders can’t be the only ones making money if the American economy is going to grow.
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It might be a while before post-secondary education is free for any American accepted to a public college or university. New York has become the first state to offer residents a tuition-free, post-secondary education at community colleges and public colleges and universities, and California could be next. That doesn’t help those of us who have already graduated from college with massive student loan debt, but you can get out of student loan debt without paying it all or worrying about interest accruing. The earlier you take these steps the better.
There are a ton of corporate scammers out there preying on recent college graduates struggling to repay their student loan debt. These companies offer nothing you can’t do yourself from the StudentLoans.gov website but charge a monthly fee for playing middle man between you and your student loan servicer(s).
You should be able to identify these scammers by their too-good-to-be-true offer, but if you ever call any other number besides (800) 557-7394 or (800) 557-7392, you’re likely dealing with a scammer. Keep in mind, though, that these companies already get a bad rep, so if you do end up being scammed, do not hesitate to demand a full refund.
This might sound impossible for an unemployed, college graduate, but it’s essential to improve your borrowing power during the six-month grace period you have before your first student loan payments are due.
What you can borrow depends on your debt-to-income ratio, which is probably pretty terrible for any recent college graduate looking for a job. But even if your income is low (or nonexistent), you can take steps to improve your financial situation by simply moving your debt around. The first step is prioritizing your non-student-loan debt.
Credit cards can be an asset if you use them correctly. If you’re struggling to find a job to improve your debt-to-income ratio by increasing your income, you must improve your debt-to-income ratio by reducing your debt. But how can you reduce your debt without income?
You should know which credit cards are costing you the most in interest. Some of these rates can be upwards of 30 percent, so check to see if there’s an opportunity to transfer your highest credit card balance to a credit card with a lower rate. You might pay a three percent fee on the balance transferred, but if that’s less than you’d pay in interest over the life of the introductory rate, better to pay that amount upfront during your six-month grace period.
The key is to never allow your credit card balance to grow. At the end of every month, your credit card balance should be less than it was when you graduated. That way, when the six-month grace period on your student loans expires, you can work with smaller (or nonexistent) credit card payments.
If you are tired of paying multiple student loan servicers, consolidate your loans under one servicer. This will make your student loan payments one payment paid to one servicer. The important thing to keep in mind when consolidating, though, is when asked the question of whether you work for a nonprofit, answer “yes,” even if you don’t. This will assure that your loans are consolidated with a servicer who qualifies for the Public Service Loan Forgiveness Program (PSLF). So if you end up working for a nonprofit in the future, your loans already qualify for the program.
You can only pay what you have, so anyone with student loan debt should be on an income-based repayment plan, unless, of course, you make a ton of money. If that’s the case you should just pay off your student loans as quickly as possible to avoid paying interest.
While you must reapply for an income-based repayment plan annually, regardless of your change in adjusted gross income, it will result in the lowest qualifying payment you can make on your student loans.
If your income is low enough, you could end up paying $0 per month, but unless you intend to work for a nonprofit for 10 years and have the remaining balance of your student loans forgiven, interest will accrue at an astronomical rate.
Under the PSLF program, if you make 120 payments -- even of $0 -- while working at least 30 hours per week for a nonprofit organization, the remaining balance of your student loans after those 120 payments will be forgiven. It will disappear.
You don’t necessarily have to be paid by the nonprofit. If you volunteer for 30 hours per week with a nonprofit or multiple nonprofits, you just need an executive of that nonprofit to verify that you work 30 hours per week for them using this form.
You can even start a nonprofit and have a member of your board verify your work hours. I just found out all the work I did for a nonprofit I started to grow ice sports in my hometown qualifies me for the PSLF program, so if there’s a cause near and dear to your heart that isn’t being addressed by a nonprofit, start one. It’s as easy as raising some money and filing some corporate paperwork with the state to acquire tax exempt status. (Note: partisan political nonprofits and labor unions do not qualify.)
Don’t let student loan debt cripple your economic outlook. Take these steps as soon as possible to get out of student loan debt.
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