The Rising U.S. Burden
In terms of American exceptionalism, student loan debt stands out. No other country imposes the kind of costs on college and university students that the U.S. does, and nowhere else do loans cover so much of those costs. Experts think that the roughly $1.3 trillion in outstanding education debt in the U.S. is more than that of the rest of the world combined. It’s a situation that educators, consumer advocates and members of both political parties all decry. Agreement on solutions is harder to find. In the meantime, young adults are delaying setting up their own households in the face of a mountain of debt. Recent studies also show a growing economic divergence between young Americans with and without student loans. There’s widespread agreement as to who is worst off: college dropouts. They’re stuck with debt but without the higher earnings a degree might have brought to help pay it off.
Democratic presidential candidate Hillary Clinton would spend $350 billion over 10 years to reduce student debt and rein in the cost of college, mainly by lowering interest rates and making loans easier to repay. Her chief rival, Vermont Senator Bernie Sanders, would make all public colleges and universities tuition-free.President Barack Obama has called on Congress to make community colleges free, a proposal Republicans have rejected, along with efforts by Massachusetts Senator Elizabeth Warren, a Democrat, to let about 25 million holders of student loans refinance their debt at a lower interest rate. Perhaps the biggest change in the field came without Congressional action: the Obama administration has sharply expanded programs in which struggling ex-students make payments calculated as a percentage of income. As of December 2015, nearly 4.6 million low-income borrowers had chosen that option. The income-based programs have a cost too: At least $39 billion over the next decade.
When the U.S. federal student-loan program began in 1965, its goal was to give students reliable access to funds that would help them get through college by deferring some of its cost until they had an income. Most loans were paid off in a few years, while the benefit of the degree lasted a lifetime. As the cost of college raced ahead of inflation, the federal loan program morphed into something larger and different. Commercial banks also ramped up their higher-interest lending for those whose needs exceeded the caps on federal loans. The biggest growth in the program came in the past decade, as student debt rose from $364 billion in 2004 to $1.2 trillion 10 years later, according to New York Fed data. After July 2010, the government cut out banks as middlemen in the federal loan business. Much of the savings was used to increase college grants, but some went to reduce the budget deficit.
Is the problem the loans or the cost of college the loans help students cover? A common criticism of proposals like Clinton's is that they don’t address the root problem of above-inflation tuition hikes. Making it cheaper to borrow, that argument goes, only makes it easier for schools to raise fees. Obama proposed a system for rating schools on affordability that could be tied to eligibility for federal aid. Colleges hated the idea and it was dropped. Republicans and Democrats have called for giving students more information about their loans. When students at Indiana University were told how much they would owe after graduation, undergraduate borrowing dropped by $31 million in one year. Sanders was the only candidate to propose anything like the path many other developed nations have chosen, of higher taxes to make public universities free or cheap. It’s an approach that harks back to the U.S. system of state universities. It’s also under pressure almost everywhere in an era of austerity.
The Reference Shelf
- Studies by the New York Fed and Pew Research looking at the effect of student loans on the economic well being of young adults.
- A June 2014 report by the White House on student debt.
- Resource pages from the U.S. Education Department and Consumer Financial Protection Board.
- An Organization for Economic Cooperation and Development survey of support for higher education.
- A Bloomberg News series on “Indentured Students” was awarded the 2012 George Polk award for national reporting.
- The Atlantic ran a set of charts in 2013 on “The Myth of the Student Loan Crisis.”
First published July 9, 2014
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Janet Lorin in New York at firstname.lastname@example.org
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