I am always amused when the press goes viral over a piece of information that is simply one point along a trend line that has been in place for many years. Lately there has been much in the press about the fact that student loan debt has reached $1 trillion. The fact is that student loan debt has been growing at just about the same pace since 2004-05. This trend can be clearly seen in The Atlantic chart of the day for August 18, 2011 here.
The growth is a function of the confluence of a number of factors. First, average debt levels of graduates from four-year schools have grown, but it is important to note that, even with that growth, the average debt among seniors graduating in 2010 was $25,250 per the white paper Student Debt and the Class of 2010 issued by the Project on Student Debt in November of 2011. Back in 1996, the average was $13,200, so the compound annual growth rate between 1996 and $25,250 was 4.8% — higher than inflation but not by much.
Second, a higher percentage of students are borrowing. Per the Project on Student Debt, 58% of undergraduates were graduating with debt in 1996, versus two-thirds today.
Third, more students are going to college. Per the National Center for Education Statistics, from 1995-96 to 2007-08, the number of undergraduates in the U.S. grew by 26%, from 16.7 million to 21 million.
Given that students typically have 10 years after graduation to repay their loans, these trends, of course, result in growing cumulative outstanding debt. So why is this topic so hot today? Certainly one factor is the high unemployment rate among recent college graduates. In times when jobs were easier to find, there was not as much concern about graduates being able to repay their loans. Families today are more cost conscious and price sensitive regarding higher education “purchases” than they were even five years ago.
The “chatter” on student debt is certainly also being fueled by politics, especially in a presidential election year where “out of control” college cost is a frequent headliner. The $1 trillion student debt figure is used as proof that colleges are charging “too much.” It is important to remember, however, that higher education is a free market offering lots of choices with many different price tags, prestige profiles, and delivery options. As consumers become less willing to pay high prices, colleges will respond either through increased discounts or lowering prices — and they will also need to change their offerings and delivery systems (either curricular or co-curricular) to then balance their budgets. The government doesn’t need to get involved — the free market will adjust.
In fact, as Sandy Baum and Michael McPherson pointed out in their May 6, 2012 Chronicle of Higher Education piece, the market, rather than the federal government, should set the price on student loan interest rates as well. They wrote, “the right interest rate on student loans — and the interest rate that will feel right to both borrowers and taxpayers — depends on market conditions.”
Although I find it ironic that the trends in student borrowing are suddenly garnering so much attention, it is not necessarily a bad thing. Students and parents may begin to make more rational decisions about borrowing for higher education in the future, which means that colleges and universities will need to do a better job of proving how students have benefited from the education they received. For years we have been encouraging institutions to do a good job of demonstrating ROI. Now students will be asking for that information as well.
What do you think?
Image © iStockphoto.
About the author: Kathy Kurz retired after 18 years as Vice President of Scannell & Kurz. Her area of expertise is developing strategic financial aid and retention programs designed to enhance enrollment and net tuition revenue results. She previously served as Associate Vice President at the University of Rochester and Director of Financial Aid at Earlham College.
Connect with Kathy on LinkedIn.