May 8, 2017    9 minute read

Soaring Fees: Breaking Down the US Student Debt Crisis

Reaching Melting Point    May 8, 2017    9 minute read

Soaring Fees: Breaking Down the US Student Debt Crisis

Since 1982, US college tuition fees have risen by 500%, which is significantly faster than inflation. As a result, middle-class families are suffering as they struggle to send their children to university. Accordingly, the estimated student debt in the U.S has reached $1.3trn, with student debt default rates at over 10%. In the last 10 years alone, tuition prices have gone up by almost 50%.

The Government’s Role in the Crisis

A lot of the blame can be placed on the Department of Education, which was created in 1980. The federal government either lends directly to students in the form of loans/PELL grants, or they guarantee and co-sign the loans that students get from private lenders. The problem is that the universities know this; hence they can bid up the tuition prices because they know the taxpayer (government) is guaranteeing student loans.

Private lenders willingly lend thousands of dollars to students because they realise that even when the student defaults, the federal government will cover their losses. In other words, it is a game whereby lenders always win. As a result, there has been an inflationary spiral in tuition fees and the students get stuck with the debt. When the government guarantees the loans, students can borrow much more and hence colleges bid up the prices to compensate.

Students increasingly complain that their degrees are not worth the price they pay. Accordingly, universities are getting filthy rich, while students and potentially the taxpayer suffer. In short, the government is a direct cause of the debt crisis and to avert this crisis the US must stop committing more money to the Department of Education.

The graph below shows how the government is a major part of the problem. As shown, between 1958 and 1978 one can see that the cost of college (blue line) has risen in line with the consumer price index (green line). But by 1982 one suddenly see costs rising much faster than inflation and by 1994, total price quadrupled from $18,000 to $60,000. This inflationary spiral in tuition costs began at exactly the same time the Federal Department of Education was created.

Image result for college tuition prices nflation

Breaking Down the Numbers

Empirical evidence seems to support this assertion. Before the federal Department of Education was created in 1980, college tuition was affordable.

However, critics will say that demand to go to college at that time was low. There are two arguments against this assertion. First, the supposedly lower demand is compensated by the fact that the supply of colleges was lower. Second, and the fastest rate of increase in college graduation happened between the 1950s and 1970s. In 1945 only 3% of Americans had a college degree but by 1978 that number had risen to 22%, despite no Federal Department of Education and prices increasing in line with inflation.

Analysing the trend with regards to Yale University’s tuition fees is revealing. In 1920, Yale’s tuition fees were $160 per year. If you worked in Henry Ford’s factory you would earn $5 per day. This implies that a blue-collared factory worker could work for 32 days and afford tuition at Yale for a whole year.

Similarly, in 1962, the tuition fees were $3,000 per year in today’s money. The minimum wage adjusted for inflation in 1962 was $9 per hour, meaning that one could work for 330 hours per year to cover their entire tuition, which is would be equivalent to 1 hour per day, implying a part-time job as a waiter could cover your tuition fees at one of the world’s most prestigious universities.

Today, fees are $40,000 per year, and the median salary in the US is $30,000 per year. Therefore, it is impossible to make any meaningful contribution to your tuition working as a blue-collared worker. As a result, students are heavily indebted. In order to reduce this debt they will forego things like saving for retirement, which in the long run could result in more dependence on public pensions (which already has unfunded liabilities of $50trn).

Further Evidence

In 1985, tuition fees for non-residents at University of California, Berkely were $5,000, but by 1996 they doubled to $12,000. One has established that the federal department of education began in 1981, so one can clearly see that government guarantees have mirrored the inflationary spiral that has taken place since the 1980s.

Proponents of more state and federal funding to universities will say that during the 1960s and 1970s (tuition was around $1,000) the Californian state government gave subsidies to the university directly and in return tuition would be lowered as universities raised their money from government funding. While this is true, only 32% of Berkeley’s funding came from the state in 1967.

Today when you add up federal, state and local funding, over 60% of operating funds actually comes from the government, so by that logic tuition should be falling.  The empirical evidence shows that cuts in state subsidies by Arnold Schwarzenegger in 2004 did not account for the rising tuition. Today Berkeley’s tuition stands at $38,000 per year for non-residents.

A Possible Solution?

The solution is to eliminate the federal Department of Education in its entirety. States used to handle education before the 1980s and even to this day, states contribute the majority of K-12 public education.

However, this would mean that overnight all the government guarantees, loans and PELL grants will end for students. What does this mean? Private lenders like Sallie Mae suddenly have something to lose, as the lenders’ losses will not be covered when a student defaults. Therefore, rather than being able to borrow tens of thousands, lenders will have to lend less money because of the risk of default. Students can’t bid up prices with subsidised and guaranteed loans, and therefore universities will have to slash tuition fees in order to fill their places.

Lower income students can always use scholarships or grants from the universities’ private money to get an education. In fact, universities may have to offer up more grants from their pocket to fill their classrooms. This was a policy used before the 1980s, a time when graduation and admission were rising rapidly but despite this price of education at UC Berkeley only rose by 24%.

Additional Problems

Critics of this proposal are worried that the removal of these guaranteed loans will lead to universities cutting back on their research, faculty and technology and everything else that is needed to enhance education to accommodate for the fall in tuition fees. However, part of the problem with this ‘education bubble’ is that universities aren’t using enough of their revenues from the $80,000 degrees towards enhancing skills and education.

Much of the money is used to pay senior faculty high salaries and for fancy facilities such as bigger student centres and sports stadiums. This is shown by the million dollar salaries paid to presidents of the universities and other faculties such as sports coaches. For example, the head football coach of the University of Alabama made $7m in 2014. As for sports facilities, University of Michigan has a 106,000 seat football stadium and the University of Tennessee has a 101,000 stadium. Are the revenues really being used for education?

Where to Make Cuts

1. Reduce the pay of senior faculty.

Cutting pay of senior faculty may be a good start. As mentioned earlier the football coach for Alabama University earned $7m in 2014. Similarly, the President of Yale made over $1m in 2014. So an obvious place to start is to introduce pay cuts.

2. Cut spending by getting rid of courses that are useless.

Resources are not being invested in the right courses and millions of students are studying degrees that arguably don’t contribute to human capital.

What’s more, a book called ‘Academically Adrift: Limited Learning on Campuses’ strongly suggests that many degrees are, in a sense, useless. The book written by two university professors concluded that 45 percent of college students “demonstrated no significant gains in critical thinking, analytical reasoning, and written communication during the first two years of college.”

In 2003, 23% of all college graduates earned degrees in STEM (subjects that had very high employment) but by 2010 this number had fallen to 17%, so this a proof that university is increasingly becoming a somewhat foolish investment.

The government should divert these resources to job training and apprenticeships for high school graduates rather than sending everyone to university to study useless degrees.

Cutting off the subsidies means that lenders will refuse to lend or will demand higher interest rates for students that study worthless degrees. This is because these courses have high unemployment rates for graduates; so private lenders would see these people as ‘high risk’. As a result potential students thus have an incentive to pursue more fulfilling and cheaper alternatives like job training/apprenticeships and would not risk going into debt to study those aforementioned degrees.

Universities can cut costs by simply refusing to offer such courses. Additionally, costs of facilities for students will fall as fewer students risk going into debt to study those aforementioned courses.

3. Cut funding to sports facilities

Universities such as Berkeley face a budget deficit of $150m. One way to cover the shortfall and lower tuition is to sell large sports stadiums to professional teams. Varsity football teams could instead use professional teams’ stadiums without spending millions on building stadiums.

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