Could the U.S. Future Economic Growth Drivers Be Under Attack?
We've all heard about student loans. They are constantly mentioned in the media - often with much scrutiny and in a negative light.
While it would be nice to attend college without having to take on debt in the US, the truth is that student loans are often a necessity for those looking to obtain a higher education – especially considering the rate of increase in average college tuition.
Compared to most nations, student loans play a significant role in the United States debt structure. Nearly 20 million Americans attend college each year, out of whom close to 60% borrow annually to help cover costs. The average student loan debt at graduation has tripled since the 1990s. This is really bad news for Millennials and the coming generations!
Millennials face record levels of student debt, and the culprit seems to be the explosive increase in the cost of a college education, coupled with a lack of wage growth.
Here are some key facts..
Student loan debt in the United States has been growing rapidly since 2006, rising to $1.6 trillion by 2019, roughly 7.5% of GDP
Student loan defaults are disproportionately concentrated in the for-profit college sector
The number of graduates in 1940 numbered only 186,500. For the population at the time, this meant that less than 5 percent of adults had a college degree. As a reference point, if one of these graduates attended Yale University, it would have cost them $450 per year. Adjusted for the rate of inflation, that $450 in 1940 is worth about $9000 in the dollars of 2019. But the reality of the number today is over $50,000!
Among borrowing graduates with typical earnings and debt levels, eight in ten will pay more than 10 percent of their earnings in the first year of repayment.
On the other hand, don't nearly see these growth numbers in wages that are supposed to cover these loan payments as the graduates enter the workforce.
The average annual growth in wages was only 0.3% between January 1989 and January 2016. That means the cost to attend a university increased nearly eight times faster than wages did.
Each successive flock of graduates are worse off than the last. There is a tremendous disconnect between the rising costs of education and the flattening of wages, which is only making it harder for graduates to make ends meet while paying back staggering amounts of student loans.
Why Has the Cost of College Outpaced Inflation?
Looking into the different causes of higher tuition fees, the issues seem to be stemming from the following sources:
* Less Government Financial Support to Colleges:
As costs from things like health care and pensions increase, states have to find cuts somewhere to balance their budgets. State budget builders know that colleges can get away with steep increases, so college support has been slashed.
* Cost of Construction and Amenities:
Specialized buildings of all kinds, and university fitness centers compete with the finest private clubs. Many colleges even have a sport climbing walls and lazy rivers. All of these amenities are there to attract students and professors, so colleges have to compete.
* Higher Administrative Costs:
Fundraisers, financial aid advisers, global recruitment staff, and many others grew by 60 percent between 1993 and 2009. This is 10 times the rate of growth of tenured faculty positions.
* Compensation:
As of 2015, average pay for private-college presidents in the United States surpassed $550,000, with 58 presidents taking home more than $1 million a year.
And finally..
* Student Loans:
Yearly student-loan origination grew from $53 billion to $120 billion between 2001 and 2012. Meanwhile, average tuition rose 46 percent in constant dollars during that same time frame. Since students can borrow enough to pay the higher costs, schools are less inclined to keep costs in line.
And accordingly, the visions cycle begins.
The Default Rate is on the rise
The student loan default rate has more than doubled between 2003 and 2011, and 40 percent of borrowers are expected to fall behind on their student loans by 2023.
Below is the 'percentage of balance 90+ days delinquency' by loan type which measures the missed loan payments for over 90 days. The highest delinquency percentage is in student loans - and rising - compared to other loan types.
The Potential Impact on the Economy
Student loan debt can affect more than just individual borrowers; it has the potential to have a widespread economic impact. Because of these student loans, many are unable to buy houses and cars, spend on credit, start businesses and families, save or invest.
The housing market, has made a strong recovery since 2008, but according to one study, student loan debt delays home-ownership for borrowers by an estimated seven years. That can cause supply and demand to swing out of balance if more homes go up for sale, but fewer buyers are shopping. That in turn, could lead to decreasing housing prices and further pressure on the economy.
A recent analysis by the Urban Institute found that a 1 percent increase in student debt decreases the likelihood of owning a house by 15 percentage points.
In a nutshell, what we can be facing is: less interest and fee revenue for lenders and banks, fewer people buying cars or homes, using credit cards or spending in general. This directly affects businesses and can slow down economic growth in the future.
What to do next..
The student loan debt dilemma still has no clear solution. For the time being, students' only option may be to learn as much as possible about the costs of a college education and the financial repercussions of taking on student loan debt before borrowing.
A systemic solution to the student loan crisis will be required. It can't be a simple short-term cure like debt forgiveness or tuition price caps because the impact of student loans is primarily long-term and focused on the demand of the next generation in the economy.
Debt forgiveness carries with it the moral hazard of pushing more student's to take debt in the future as they would be expecting the government to forgive their debt (not a viable solution)
Finding ways to control rising higher education costs seems like an obvious step but implementing rules and regulations designed to do that may actually have an adverse effect on the educational system as a whole, from decreased quality due to cost cutting, decreased capital expenditure, etc.
One of the viable structural solutions to the problem could be to increase the supply of higher education. This can insure the long term downward price pressure to the tuition fees and makes it more affordable to get into college.
The coming years for the current generation and beyond, may witness a strong shake of faith in the current economic models in the U.S., and the perpetual growth assumptions may start being questioned, unless quick and bold solutions are made to the student debt crisis.