OCCUPIED TUCSON CITIZEN
All across the United States the after-effects of the housing crash are still being felt, from vacant houses to a stagnant economy. However, when it was announced last year that student loan debt in the USA had exceeded one trillion dollars, and Standard & Poors warned that student debt now exceeded credit card debt, some economists expressed their concern that another possible financial bubble was threatening the United States. How it is that “student loan debt,” something that doesn’t even exist in most countries of the world, could threaten a great nation’s economy is a tale that requires some telling.
The growth in tuition and enrollment
It is first a tale of the dramatic growth of tuition in the United States, which at public universities grew by 120 percent in inflation adjusted dollars between 1979 and 2009 as the universities were forced to charge more in order to offset declining endowments and lower state funding. Indeed, whereas in the 1970s tuition was roughly 26 to 28 percent of median family income, it is now nearly half (the current average cost for an undergraduate student at public universities is $15,600 a year, at private non-profit colleges $26,600, and at for-profit colleges nearly $31,000). In spite of this, the total number of students enrolled in secondary education continues to grow, from twenty-four percent of all 18-24-year-olds being enrolled in a college or university in 1973 to the present forty percent.
This ever increasing enrollment is primarily fueled by the knowledge that one must go to school in order to be successful, or at least to keep from sliding into the economic underclass: a high school graduate, for example, only earns half as much as a college graduate and is three times more likely to live in poverty. But it wasn’t always like this. According to Thomas Brock, an analyst for the National Center for Education Research, for “much of the nation’s history, a college education was not needed to make a decent living. Indeed, after World War II, the difference between the average wages of high school and college graduates was small and shrinking.”
There is also, however, pressure in this context on the children of upper- and middle-class families, though in their case it is a question of which college to attend. The difference between graduating from a prestigious, private university such as Harvard and a good public university such as the University of Illinois is a large one, and can often mean the difference between, for example, having a career in the federal government instead of local government, or in an international conglomerate as opposed to a local business. It isn’t then any wonder that Harvard has had, for example, a 600 percent increase in undergraduate applications over the number who applied in 1965, although tuition and room and board for a single year at Harvard costs $54,496. Nor is it surprising that graduates of prestigious “Ivy League” schools such as Columbia University or Georgetown University graduate with an average debt of $132,000.
College graduates, or indentured servants?
Normally, economic logic would dictate, if the price (tuition) were to rise, there would be a fall in demand (the number of enrolled students). Americans, however, have defied this economic logic not only with the sense that it is necessary at all costs to get a college degree, but also through the special device of government student loans. Which is to say that, because the banks would not grant loans to most students (because they have no income and few assets), and without regard to their sense that without the loans they will not have a future, the government either gives them loans directly or “guarantees” their loans. This system has the advantage that it is similar to direct government backing for the student, but it is a loan, and so officially doesn’t increase the government deficit. Still, however, the debt load increases significantly, not only for the debtors (the students) but also for the creditor (the government), especially when the average graduate has a debt of $24,301 dollars and faces an uncertain job market (in fact, the government more and more admits that many of the students won’t be able to pay off their loans).
College graduates (and those who received student loans but didn’t finish their studies) must however deal with the problem most immediately. It is said that their situation is a modern day form of “indentured servitude,” after an early American form of debt bondage in which workers were transported to America and then would work for free for several years to pay off the debt of their travel costs. Frequent newspaper reports illustrate what is meant by this analogy. One typical article describes a young woman from Ohio who graduated with $140,000 in student loan debt after attending a for-profit college, and currently pays roughly $1,700 a month in loan payments. Despite the fact that her monthly payment is more than her rent and car payment combined, she will have to continue to pay it for some ten years before the debt is paid off. This is assuming, of course, that she is steadily employed during that time and able to make the payments, a by no means universal experience given that over half of all recent college grads are unemployed (or employed at lower paying jobs not requiring a college education).
And here we enter into a very interesting aspect of student loans. On the one hand they are very easy to get—one only need register for classes at an accredited college to be eligible—but it is very difficult to get out of them. Generally, American bankruptcy law has adjusted itself to the realities of a consumer economy (reliant as it is on tempting people into buying things they don’t really need with money they don’t really have) and long ago rid itself of the traditional harsh and retributive measures against those in debt. Thus with credit card debt and home mortgage loans it is relatively easy to declare personal bankruptcy and get rid of the debt. Student loans, however, are not covered by the bankruptcy laws. And while no one with student-loan debt will be subject to the horrors of an executor barging into their home and claiming their property, as is still the case in some countries, neither can they get rid of this debt, no matter how old they are or dire their circumstances. This is illustrated by some of the other horror stories that appear in the newspapers, such as the recently reported case of a 71 year-old dentist who ran up $100,000 in debts to get his degree which, after his practice got off to a slow start and he couldn’t keep up with the payments, eventually swelled because of interest to over $500,000. He continues to work full-time well past retirement age to pay the $36,000 dollars a year that he must pay on the loans.
Further fueling the growth of student loan debt is the degree to which the federal student loans have subsidized the rapid growth of for-profit colleges. The United States has a long—and rather unique—tradition of private colleges and some of the most prestigious universities (Harvard, Princeton, Yale, Columbia, University of Chicago, Stanford) are private. These schools are, however, and always have been, nonprofit, and are therefore very different from private but also for-profit schools. These colleges, which had previously formed a negligible portion of the market, experienced rapid growth after 1992 when a rule change allowed federal student loans to also apply to for-profit colleges; they now constitute over ten percent of overall enrollment. The importance of the federally guaranteed student loan to their dramatically increased market share can be seen in the fact that the nation’s largest chain of for-profit colleges, the University of Phoenix, gets 88 percent of its revenue from federal money, mostly student loans, and a 2012 Senate report estimates that some 32 billion dollars pass from the taxpayer to the for-profit colleges every year.
There are certain obvious problems of educational practice associated with the fact that the for-profit colleges spend more on marketing than they do on instruction, hire ten times more recruiters than career services advisers, and devote less than a third of what public universities spend on educating students even though they charge nearly twice as much as their public counterparts for tuition. But the problem from the student debt point of view is that they often succeed, with their aggressive marketing and hard sell tactics, in getting people to take out student loans when they really shouldn’t. The result is predictable: for-profit schools, which enroll 10% of the students into colleges, use up 25% of government financial aid and account for 44% of student loan defaults.
Will the student loan bubble lead to a repeat of the crash of 2008?
Though some recent newspaper headlines raise this specter, e.g., “Student Loan Debt Bomb: America’s Next Mortgage-Style Economic Crisis,” the financial impact of student loans is not at all comparable to that of home mortgages—student loans make up 8.5% of total household debt in the United States compared to mortgages making up 71%. In addition, since the federal government underwrites most of the loans, the rising student loan default rate won’t threaten the bank system’s solvency. But, of course, given the fragility of the financial system overall it could be a contributory factor in another financial crisis, either by forcing a considerable portion of a key consumer demographic into insolvency, or shifting their debt onto an already financially beleaguered federal government in some kind of a debt forgiveness plan.
Given the realization of just how large the student loan debt has grown, the increasing default rates, and the fact that saddling recent college graduates with huge debts is not only bad for them but bad for the economy (i.e., even if they can find a job and so pay back the loans, they have little money left over with which to buy houses, cars, etc.), there is increasing pressure to do something about the situation. But any actions to solve the problem create further problems: an obvious solution would be to follow a European model by limiting overall enrollment in secondary education and having competitive exams for the available spots; a further, but not so direct, possibility would be to put into practice a proposal of some conservatives according to which student loans would only be granted to students studying in areas in which they were likely to find jobs after graduation.
Any move to limit enrollments, either directly or de facto by limiting student loans, would however have some serious economic and social consequences. In many towns and smaller cities across the country, for example, the only remaining “growth industry” is the local college or university, which is often the city’s largest employer (American universities are often cities within cities, with sprawling campuses patrolled by their own police forces and administered by bureaucracies that might well be larger than that of the town or city they are located in). It would also bring to an end the last remaining pocket of the housing boom, as the continuing growth in enrollment has been met by a continuing construction of student housing (now largely privatized). Indeed, much of Tucson’s downtown redevelopment and mid-town housing plans are tied in with a continuing boom in student housing and enrollment.
More generally, such a cutback would have a profound effect on the American psyche in that it would remove the last vestige of the American sensibility of unlimited possibility. Even for Americans of middle age there remains well into life an option of returning to school and choosing a field or course of study that will, maybe, change one’s life around and allow one to become a “success.” And the concept of success is a very practical one: it means that somebody makes good money, not that they become enlightened or gain great knowledge. Indeed, since the 1980s students have increasingly been enrolling in practical degree programs such that enrollment for business degrees is now quadruple that of English, history and foreign language degrees combined. Indeed, this fact undermines the fiscal conservatives plan to limit student loans to those areas where there are jobs, since students are already focusing on those areas. What limiting enrollment or student loans would do, then, is remove an important, if increasingly illusory, social escape valve and force large numbers of Americans to directly confront the reality that there are only a finite number of “good” jobs and that they, in all likelihood, will never have one of them.
No doubt mindful of the social consequences of removing that escape valve, few are suggesting such a course. Though Mitt Romney, a strong advocate of for-profit schools (who in turn gave considerable amounts of money to his campaign), criticized Barack Obama’s attempts to regulate the for-profits and tried, in very general terms, to blame Obama for the student loan crisis, he never said exactly what he would do differently. He never even seriously challenged Obama’s proposal to ease the terms of the currently outstanding student loans (e.g., limiting required payments to ten percent of a person’s income and forgiving the debt after twenty years in those cases where the student managed to keep up with the payments), much less criticize the president for not effectively checking the growth of student loan debt by the most obviously effective method: cutting back on the number and amount of loans granted.
We can reasonably expect then, that this issue will continue, along with the rising student loan debt and default rate, to increase in its importance in the coming years.