How big of a problem is student loan debt in America? On one side, we are told that Americans have a staggering $1.3 trillion of student loan debt. The growth rate has been astonishing: ten years ago, the nation’s student loan balance was only $447 billion. We hear stories of a generation buried under a mountain of debt forced to delay marriage, homeownership and children because of the burden. Not that long ago, you could work hard and graduate debt-free. Today, that is an impossible dream for millions of Americans.
Not everyone agrees with this picture. Sandy Baum of the Urban Institute recently published a book arguing that the crisis is not as bad as it seems. College graduates will earn significantly more over their lifetimes than high school graduates. People with a college degree make 98% more than people without a degree. Most student loan borrowers get a good deal and an affordable monthly payment. There is a student loan problem, but it is much smaller than the doomsday scenario painted by the press. People who dropped out of college or over-paid for a questionable degree at a for-profit school need help. They will suffer from the burden of debt without the benefits of the degree. But most college graduates with debt actually received a good deal.
The public and private sector has been busy creating solutions. During the Obama administration, there has been a dramatic expansion of income-driven repayment options. If you have a federal student loan, chances are high that you can reduce your monthly payment during times of economic difficulty. And in the private sector, there are a number of banks and Silicon Valley startups helping people refinance their student loans. There are more than 19 lenders helping qualified graduates reduce interest rates to as low as 2.20%.
This is an election year, and there is no shortage of policy proposals. Both sides of the aisle seem to agree that the government should refinance existing student loan debt, rather than leaving it to the private sector. Hillary Clinton believes that families with income up to $125,000 should pay no tuition at in-state four year public colleges and universities, and community colleges should be free.
Most solutions have focused on:
- Helping people refinance or restructure existing debt
- Increasing taxpayer funding to reduce the need for students to borrow
But does education need to be this expensive? And why has tuition increased as dramatically as it has? According to some math from Professor Paul Campos, “if over the past three decades car prices had gone up as fast as tuition, the average new car would cost more than $80,000.”
A common explanation for the tuition increase has been the reduction in funding from state governments. As the states reduced funding, students had to step in with tuition. Per capita reductions in student funding has certainly been a contributing factor. But it is not sufficient to explain the entire tuition increase. From 2005-2010, public college tuition increased 20%. However, private colleges also saw an increase of 14% during the same period. The lack of state funding certainly cannot explain the rapid increase in tuition at private universities. Why was tuition increasing so rapidly (and well above the rate of inflation) at both private and public institutions?
Data and common sense can help diagnose the problem. When money is available, people (and institutions) will spend it. Easily available credit creates inflation, and tuition is no different. The easier it is to get the money, the less productive the use of the proceeds. Between 1993 and 2009, administrative positions at universities increased by 60 percent, compared to just 10 percent growth in tenured faculty positions. Were so many administrators really necessary? Or was it just an easy way to spend readily available money? To illustrate the concept, let’s look at the mortgage market.