The Debate Questions Not Asked, Part 2: Student Loan Debt
Date posted: Thursday, November 1, 2012
What happens when skyrocketing tuition costs meet an unemployed population?
Editor’s note: Binders full of women. Sketchy tax plans. Horses and bayonets. If you followed the presidential debates, you recognize these and a multitude of other sound bites and catch-phrases. However, there were several issues that were not discussed at much length, or with great clarity, even though they critically impact the nation. This piece is the second in a three-part series that asks Construction contributing writer Shiva Bhaskar several of these pressing questions, so that he can explain why they are of great importance. For Part 1, about unemployment, click here.
Question: What steps do you believe should be taken in order to reduce the burdens of college student loan debt and lower the costs of undergraduate education?
State of the Debt Pool
Earlier this year, the Federal Reserve Bank of New York announced that the total outstanding student loan debt in the United States now exceeds outstanding credit card debt. This was followed by findings from the Consumer Financial Protection Bureau, calculated using a different method, that total outstanding student loan debt has passed $1 trillion. The rise in student loan debt has been particularly pronounced over the last seven years, as total outstanding student debt has risen by 148 percent since 2005.
Average college tuition costs have spiked sharply over the last several decades, and especially in the last few years. This means that student repayment obligations are likely to be substantially higher in the near future, as those still enrolled in college, and very recent graduates, begin to make up a larger portion of the total pool of education debtors. A highly instructive chart from financial reporting firm Bloomberg makes clear that college tuition expenses have soared by more than 1,200 percent over the past 30 years. By comparison, medical costs increased by 601 percent and food costs by 244 percent. Tuition pressures are particularly acute at public universities, as evidenced by a 20.5 percent increase in year-over-year tuition costs in the University of California system and a 16.8 percent year-over-year increase in Arizona.
If the labor market for recent college graduates were stronger, perhaps this debt burden would be less severe. However, since 53 percent of recent college graduates are either unemployed or underemployed, making loan payments on time has become increasingly challenging.
Increases in Education Costs
In order to understand how to reduce student loan debt, it is crucial to first assess the reasons behind the large spike in college tuition costs.
Substantial state budget cuts in funding for public universities have led to increased tuition costs. A September 2012 report from the Federal Reserve Bank of New York highlights this problem. Between 2000 to 2011, the portion of public university revenues provided by state and local governments fell from 70.7 percent in 2000 to 57.1 percent in 2011. Furthermore, during 2000-2010, per pupil public funding (that is, total state and local government funding support to public universities, divided by the total number of students), fell by 21 percent. During this same period, net average tuition increased by 33.1 percent.
To further ascertain the impact of cuts in public funding upon college tuition, the report’s authors compared funding cuts with tuition increases from 2000-2011. From 2000-2007, there was a relatively insubstantial correlation between public funding cuts and tuition increases. However, after 2007, the pronounced impact of state spending cuts upon public university tuition became clearer. For the states with the largest cuts in overall public spending on higher education, a 10 percent spending cut was correlated with a 3.1 percent increase in tuition. Thus, at least in the post-Great Recession environment, it appears that a lack of state funding for public universities, and major cuts in such funding, is tied with sizable increases in tuition. This is particularly troubling, since long-term budgetary trends suggest that state funding for higher education will remain at suboptimal levels for years to come.
Another frequently cited reason for rising tuition costs is the current system of student lending itself. Postsecondary education (college, community college, and non-degree programs, as well as graduate education) can be funded through the use of student loans only if the educational institutions in question meet the requirements of Title IV of the Higher Education Act. That is, these institutions, whether non-profit or for-profit centers of learning, must be licensed in the state where they are based, be accredited by a recognized agency, and be deemed eligible to participate in student aid programs by the Department of Education, which maintains various eligibility requirements regarding default rates, revenue sources for institutions, and distance learning.
An Abundance of Financial Aid
Former Secretary of Education (under President Reagan) William Bennett has argued, for at least the past several decades, that an abundance of federal student aid dollars to educational institutions allows for inefficiency and waste, and thus leads to runaway educational costs for students. This is now popularly known as the Bennett hypothesis.
Recent research has shed some light on just how financial aid at eligible institutions affects tuition costs. Claudia Goldin of Harvard University and Stephanie Riegg Cellini of George Washington University examined data from for-profit educational institutions, both those eligible for federal student aid under Title IV, as well as those that were not. Goldin and Cellini found that Title IV-eligible institutions charged 75 percent more tuition to their students than those that were not Title IV-eligible. Furthermore, the dollar value of this excess tuition is about equal to the amount of federal financial aid received by students at these institutions, thus “lending credence to the Bennett hypothesis that aid-eligible institutions raise tuition to maximize aid.” This research is limited in its scope, however, since the study only considers for-profit educational institutions.
Larry Singell and Joe Stone of the University of Oregon assessed how federal Pell grants impact tuition at non-profit public and private institutions. Unlike many other forms of financial aid, Pell grants do not require repayment by the students who receive such aid. Singell and Stone found that while there was little impact upon tuition prices at in-state public universities when Pell grant aid was increased, for private universities, increases in tuition matched increase in Pell grant aid nearly 1 to 1. Similar results were found for out of state tuition at public universities. Thus, there is a meaningful relationship between increases in certain forms of federal financial aid to students, and tuition at eligible colleges and universities.
The Rankings Arms Race
Another factor that has driven up costs, and thus tuition increases, at elite universities, is the extent to which college rankings, and considerations of perceived prestige, drive universities to spend extra not only on quality faculty and research, but also amenities ranging from more elaborate dining facilities to rock-climbing walls. Also, higher tuitions are often viewed as a sign of prestige. Perhaps no better example of this trend can be found than at George Washington University. Stephen Trachtenberg served as the president of George Washington from 1988-2007. During his tenure as the president of the university, tuition, in today’s dollars, skyrocketed from $25,000 per year in 1988 to $51,000 in 1997.
How did this happen? When Trachtenberg began strategizing on how to improve his university’s rankings, he found that his peer institutions were schools like Tulane, Boston University, Emory, and New York University. All of these were private schools in urban settings, with U.S. News and World Report rankings between 21-50. U.S. News and World Report rankings are in significant part dependent upon factors such as per-student spending, and the quality of campus life, which can depend in significant part upon facilities like fitness centers, dormitories, and dining halls. By these measures, a school that is able to spend more stands a better chance of being highly ranked.
Trachtenberg thus began spending on such big-ticket items as campus cafes and plush student housing, following the motto “Never stop building.” As more applicants began choosing George Washington over peer institutions, and the university’s ranking increased, other universities also began spending more in order to keep up, sparking a tuition “arms race,” where average tuition at most private universities (in 2010 dollars) more than doubled between 1980-2010, and spending on non-educational assets outstripped that for research, academic support, and instruction.
Trachtenberg elaborated on the effects of rankings and prestige in a piece for The Atlantic. He analogized differentiation amongst universities with purchasing jeans, noting that while a pair from Wal Mart might cost $29, one from Ralph Lauren costs $98. Both will “cover your backside,” but there is an aura of status with the pricier Ralph Lauren brand. A similar dynamic exists amongst universities, especially those ranked between 25-50 in the U.S. News rankings. These schools seek to use a variety of strategies, many focused on quality of life factors, in order to differentiate and distinguish themselves. Trachtenberg argues that such extra-academic positives do serve to attract more talented faculty and students, though, as discussed above, it comes with a hefty price tag.
Perhaps some of the most insightful work on this topic has come from former Harvard University President Derek Bok, particularly his 2003 book Universities in the marketplace. Bok believes that modern universities should be understood as not just institutions of learning, but also, and perhaps even more importantly, as revenue-seeking participants in the marketplace. Universities use money as a means to increase prestige and poach talented faculty, and in seeking to increase revenues.
This is accomplished through a variety of methods, from excessive emphasis on collegiate athletics, to collaborating with corporations on scientific research, which includes entering into agreements that delay publication of research until profitability is ensured. This can also spill over into conflicts of interest in faculty promotion, as well as decreased socioeconomic diversity amongst a student body. Bok’s work is clearly a valuable framework through which to understand why universities are willing to use increased tuition as one means of boosting their financial base, and thus U.S. News rankings.
Four Possible Solutions
1. The second coming of the G.I. Bill
Numerous fixes have been offered for the vexing problem of excessive student debt. Perhaps one of the most compelling comes from Adam Lewin, founder of Credit.com and former director of the New Jersey Division of Consumer Affairs. Lewin argues for a National Service Corps, a sort of follow-up to the G.I. Bill that allowed countless WWII veterans to obtain an education and contribute to society in some way (and has been followed by the Post 9/11 Veterans Education Assistance Improvements Act). Essentially, this program would function as an expansion of the existing Americorps program, where students receive assistance in loan repayment in exchange for their service in some relevant capacity, whether through teaching, working as an engineer on a public works project, or numerous other undertakings. Of course, there are major logistical concerns to resolve in such a venture, since it would potentially involve coordinating millions of individuals, not to mention the thorny problem of resolving partisan gridlock to secure the funds required, particularly in the face of the highly contentious fiscal battles of recent years.
2. Bankruptcy law reform
Another potential solution is the passage of reforms to bankruptcy laws, which currently render student debt as nearly undischargeable in a bankruptcy filing, barring a showing of undue hardship (which tends to be extremely difficult). Easing the process of filing bankruptcy for student loans might ease negotiations to reduce the amount of debt owed, since lenders would be aware that students enjoy the option of filing bankruptcy and discharging all of their debts, which would then leave the lenders with absolutely no repayment of their loans. Such changes might also make universities more hesitant in encouraging students to take on expensive loan packages, and could encourage greater thought on how to curb tuition costs.
However, critics of such plans argue that student lending is an inherently risk-heavy business, and very different from credit card borrowing. Unlike credit card debt, which generally accumulates somewhat gradually, and requires a showing of credit worthiness in order to raise borrowing limits, student lending involves the distribution of tens of thousands of dollars before lenders have any inkling as to whether buyers will be able to repay loans (in fact, according to data from the Federal Reserve Bank of New York, 27 percent of all student loan debt is currently delinquent for repayment). Considering such a high level of risk, the argument goes, making student loans dischargeable in bankruptcy will have the unintended consequence of making availability of these loans far scarcer.
3. Different majors, different costs
Another potential approach involves expanding the use of differential tuition. Differential tuition involves charging undergraduate students different amounts of money based on their course of study. For example, those studying computer science might pay a higher tuition than English majors, because of the higher average earning potential of computer science majors. Through doing so, less lucrative majors might fight it more affordable to pursue their desired course of study, since lower lifetime earnings are partially recouped in lower tuition costs. A study from Cornell University indicates that amongst universities that offer doctorates as well as bachelor’s degrees, 41 percent utilize differential tuition, and that a majority of “flagship” institutions now implement tuition plans that make use of differential tuition.
Such programs have been a source of controversy, since some argue that they will shift students toward pursuing courses of study that they are less interested in, and also depress interest in programs like engineering, at a time when technical knowledge is more crucial than ever. Additionally, the idea of one student heavily subsidizing the education of another is viewed by some observers as unfair. They argue that since graduates of more lucrative majors will likely earn more and thus pay more in taxes for the rest of their lives, they are already paying a premium for their educations. Instead, these critics argue, those who chose majors with a lower earning potential should perhaps be the ones paying higher tuition, in order to create some disincentive to choosing a course of study that carries a lower economic impact.
4. Get rid of the government
The most far-reaching proposed reform to student lending argues that the government should cease its involvement with student loans altogether. Economist Richard Vedder of The Ohio State University is one of the most prominent advocates of this approach. Vedder references Goldin and Cellini’s work on the effects of student loan upon tuition costs, and also argues that since 40 percent of students don’t graduate within six years of matriculation, federal student loan programs are funding many unqualified students who will ultimately default on their loans. Vedder also notes that there is no adjustment of student loans by the ability of borrowers to repay such loans; for example, highly employable engineering graduates don’t enjoy lower student loan rates than those with some less financially promising majors.
For these reasons, Vedder argues for treating student loans like credit cards or car loans (both of which are the domain of private lenders), and also providing vouchers, similar to Pell Grants, to students. These vouchers would be progressive in nature, so that low-income students receive the most aid and upper class students little to no money. Vedder acknowledges that college enrollment rates would drop but believes this to be a net positive, since so many college graduates are underemployed and unemployed. Vedder further states that the number of low-income college students would increase, thanks to expanded voucher assistance.
The Obama and Romney Angles
1. What the president has done
Some steps have already been taken to limit the burdens of student debt. Congress agreed to extend the 3.4 percent interest rate on subsidized Stafford student loans, which would have otherwise doubled to 6.8 percent. However, the actual impact of this reform will be rather small, since at most, borrowers would have paid around $9 a month more if the higher rate had taken effect. Furthermore, President Obama sought to expedite a law passed by Congress that caps the maximum amount that can be required in annual repayment of student loans at 10 percent of discretionary income, reduced from the prior rate of 15 percent.
President Obama has also sought to apply cost-saving approaches to reducing college tuition, through proposing a program that provides $1 billion for a grant program (in addition to another $8 billion in work study funds) that offers financial incentives to universities that are able to control tuition costs. The approach of this program is similar to the Race To The Top initiative, which provided financial incentives to states that implement innovative educational reforms, based on the belief that highly effective teachers can improve long-term educational and career outcomes for their students.
Perhaps the most notable action by the Obama Administration on student loans was to end federal subsidies for private student loans under the Federal Family Education Loan Program to the government’s Direct Loan Program (a move expected to save approximately $58 billion over 10 years, according to the Congressional Budget Office), and shifting $39 billion of these funds toward the government-run Direct Loan Program programs, and for expanding Pell Grants. This move was widely criticized by many conservatives as a government takeover of student lending programs.
2. What the governor has argued he will do
Governor Romney has proposed resurrecting the role of private student lenders, which was curtailed by the Obama Administration’s aforementioned ending of private loan subsidies. He has also argued for better disclosure requirements concerning repayment rates and employment statistics for various academic programs, in order to provide borrowers and their families with a more comprehensive understanding of student borrowing. Romney has also argued for more educational innovation in order to reduce costs, though, just as with President Obama, the specifics of how this might be accomplished are still a work in progress.
Educational debt, along with a grim employment picture, are two of the most pressing issues facing young voters today. That the presidential debates did not address questions of college affordability and student debt is not only disappointing, but renders these debates automatically less relevant to one of the most crucial challenges the nation must grapple with in the years to come.[pinit]