In April, NEJHE launched its New Directions for Higher Education series to examine emerging issues, trends and ideas that have an impact on higher education policies, programs and practices.
The first installment of the series featured Philip DiSalvio, dean of the College of Advancing & Professional Studies at the University of Massachusetts Boston, interviewing Anthony Bryk, president of the Carnegie Foundation, about the foundation’s efforts to study alternatives to the current system and the possibility of recommending revisions to the credit hour.
In this second installment of the series, DiSalvio speaks with Mark Kantrowitz, publisher of Fastweb.com and FinAid.org and author of “Secrets to Winning a Scholarship,” about what some say is a looming student loan bubble.
The context
The public has begun to question whether the high cost of a university degree is worth the price, especially at a time when more and more graduates with crushing student-loan debt cannot find jobs after college.
Student debt burdens have reached $1 trillion this year, according to the Consumer Financial Protection Bureau, up from $200 billion in 2000.
A recent study by Sallie Mae, showed that 70% of families are eliminating college choices based on cost. At the same time, three of four students ages 14 to 23 have “some” or “major” concerns about how they’ll pay for college, according to a new study released by the Northwest Education Loan Association.
Concurrently, the annual price tag for a college credential has risen dramatically with no sign of slowing down. The cost of college rose 440% between 1982 and 2007, compared with the cost of living rising by 106% and family income growing 147% during the same period.
Exacerbating what Kantrowitz refers to as “widespread struggling to repay loans” are the job prospects for graduates. Growing numbers of college students are ending up in relatively low-paid jobs traditionally held by people with modest levels of educational attainment, or worse, unemployed. Current figures show that more than 30% of recent college graduates are employed in low-skilled jobs.
Kantrowitz points to the increasing number of college graduates burdened with excessive debt. And when the debt is out of sync with incomes, he notes, the problem reaches critical mass. He envisions a legacy of debt, where today’s graduates will still be paying back their own student loans when their children are in college—with the debt burden on the next generation that much greater.
These issues pose significant challenges to students, parents, college leadership and higher education policymakers. For students and parents, it will be making wise choices and hard decisions about the future. Alternative pathways to a higher education without the burden of strangling debt might be an option for many.
For higher education institutional leaders, it will mean a greater awareness of the debt levels incurred by their graduates and an understanding of the implications those debt levels will have on their graduates’ lives. Differential pricing, programmatic strategies and an institutional commitment to minimizing student debt will have to be considered.
Policymakers will need to break down access barriers to a quality higher education without breaking the financial backs of students and their families.
The interview
DiSalvio: Some see a looming student loan bubble with student debt burdens adding $110 billion in new debt last year and America’s overall student loan burden hitting $1 trillion this year. Student debt is piling up so quickly; it now outpaces credit card debt growth. Do you see this rapidly rising debt burden trend bursting?
Kantrowitz: I don’t think we are in a student loan or higher education bubble as much as a severe decline in college affordability.
For there to be a bubble, you have to have a disconnect between the price and value of an asset, fueled by an oversupply of liquidity, i.e., easy access to credit. When that easy access is withdrawn, the bubble bursts and the price of the asset drops back to the intrinsic value of the asset.
Higher education is different than the real estate market. You can’t flip an education the way you can flip a house. There isn’t really much of a disconnect between the average price of a higher education and the intrinsic value. One method of valuing an education, at least financially, is in the income that it enables. Currently, the average income of a college graduate is sufficient to repay the average debt of a college graduate. Individual students may vary from the averages. Some may borrow more to go to a more expensive college and earn less. But on average most students who graduate from college with a bachelor’s degree are able to repay that debt. The average debt at graduation for bachelor’s degree recipients is around $27,000 and the average income is $35,000 to $45,000.
You can define excessive debt in various ways. I tend to define it as when the total student loan debt at graduation exceeds the student’s annual starting salary. If your total debt is less than your annual income, you’ll be able to afford to repay your student loans in 10 years or less. You could also look at debt-service income ratios where 10% or lower is affordable, where 15% is a stretch, and above 15% the borrower will struggle.
I find comparing total debt to total income is something that students and parents are much more capable of doing than trying to remember a debt-service-to-income ratio and what that means. Also, when a borrower’s student loan debt exceeds their annual income, they are going to qualify for income-based repayment.
For the most part, less than 10% of borrowers currently graduate with excessive debt by any definition of excessive debt. The income-based repayment plan has less than 3% of borrowers participating in it. It’s a safety net for people who have too much debt. It bases payments on income instead of the amount owed. Looking at the distribution of student debt at graduation at around 10%—a conservative estimate—many are struggling. For there to be a bubble forming, we’d have to have at least a quarter, maybe a third of borrowers with excessive debt. We are not there—at least not yet. But, fast forward 20 years, we may very well be.
Another part of the definition of a bubble is the bursting of the bubble. In order for a student loan bubble to burst, you would have to have new loans evaporate. Currently, 93% of new education debt comes from the federal government, with the remaining 7% comprising private student loans and state loan programs. The private student loans are all credit-underwritten for the most part and consequently they are not lending to sub-prime borrowers. Federal student loan programs as a whole are profitable for the federal government. The subsidized Stafford Loan may be unprofitable, but the unsubsidized Stafford and Plus loans compensate for the losses from the subsidized Stafford loans.
Reaching a $1 trillion milestone may be impressive, but it is a natural consequence of the nature of student loans. Student loans are repaid over decades, not months to years like credit cards and auto loans. Each year, there are new students borrowing new loans, ensuring continued growth in the outstanding debt levels. The failure of government grants to keep pace with increases in college costs are a primary driver of the growth in student loan debt.
DiSalvio: A recent study by the Federal Reserve reports that 27% of the 37 million student-loan borrowers in the U.S. are delinquent on their loans. Will this growing tendency affect higher education enrollments? If so, which sector of the higher education industry will it impact most?
Kantrowitz: I dispute the Federal Reserve numbers. The Federal Reserve relies on Equifax data and the Equifax data has been wrong in the past and I think it’s wrong this time.
Let’s compare this with the 90-day delinquencies as reported by Sallie Mae, the largest private student lender and still the largest holder of federal education loans outside of the direct loan program as reported in recent 10-K filings. They have a 4% 90-day delinquency rate on private student loans and an 8% 90-day delinquency rate on federal loans. Admittedly, they haven’t made a new federal loan since July 1, 2010 when the Health Care and Education Reconciliation Act switched over to 100% direct lending. The aging of a portfolio does have an impact on the delinquency rate, but we’re talking about a factor of four difference between what Sallie Mae is reporting and what the Equifax data is claiming. I think they may be mis-classifying the six-month grace period as though it were part of a delinquency period.
The delinquency rates may affect enrollments somewhat. Increases in delinquency and default rates have the potential to change the public’s impression of the value proposition and that may impact enrollments. The news media coverage makes people more wary of debt.
The affordability of a college education will have a much greater impact on enrollments. The failure of grants to keep pace with increasing college costs causes declines in college affordability. Decreases in college affordability forces students to borrow more or shift their enrollment from higher-cost colleges to lower-cost colleges. For example, they shift from nonprofit colleges to public colleges and from four-year colleges to two-year colleges and—especially among the low income students —to not pursuing a college education at all. Low- and moderate-income students are increasingly being priced out of getting a college education.
Fastweb.com conducts an annual survey of high school seniors about how they select where to apply and where they choose to enroll. We identified—in our 2011 survey—some students as being “switchers” if the initial set of colleges to which they were applying were predominantly public colleges and they ultimately enrolled in a private nonprofit college or vice versa. What we found is that 24% of students who preferred private nonprofit colleges ended up enrolling in public colleges, and 9% switched in the other direction. In both cases, the primary reasons for the switch all had to do with money. The switchers from private nonprofit to public colleges couldn’t afford the private nonprofit colleges. For the students who switched from public to private nonprofit colleges, the primary reason for switching was the receipt of a generous financial aid offer from the private nonprofit college.
DiSalvio: Will these issues around affordability for a college education change the way higher education will do business in the future?
Kantrowitz: Families are becoming increasingly price-sensitive and more sophisticated in their understanding of college costs. Rather than looking at the sticker price, middle- and upper-income families are looking at the net price, much more so than low-income families.
The net price is having an effect on college choice. If the difference in net price between two colleges is $1,000 or less, families are choosing the colleges they perceive to be the better quality or the better fit, or whatever their criteria may be. If the difference is more than $5,000, then they are choosing the college with the cheaper discounted sticker price. In between these two extremes, they are agonizing over the decision. A $5,000 difference in net price multiplied by four years is the equivalent of $20,000 that they must either pay out of pocket or borrow. It’s a significant amount of money. It increases the $27,000 average student loan debt up to $47,000. You’re taking something that would have been an average amount of debt all the way up to more debt than 90% of their peers.
They are becoming increasingly price-sensitive, especially as the new U.S. Department of Education disclosures have come online and are providing families with clear, correct and comparable information on college costs and affordability. First there are the net price calculators, which may have some teething problems, but are still a step in the right direction. The net price calculators help families make more informed decisions about the trade-offs between college affordability and the other factors they typically consider. Then, there are the financial aid shopping sheets. They standardize the financial aid award letters and provide families with more clarity. Right now, adoption of the financial aid shopping sheet is voluntary. Only about 10% of colleges by enrollment have adopted the standard. These are mostly public colleges who look a lot better than private nonprofit colleges as to college costs and college affordability.
There are proposals in Congress to make the financial aid shopping sheet mandatory. The next time families complain to their members of Congress about how college costs continue to rise, making the shopping sheet mandatory is a very easy solution for Congress to pursue. It doesn’t cost the government anything to implement this. So I think it will eventually be mandatory either by Congressional fiat or by peer pressure. If you have a critical mass of colleges using it, families will begin to ask: “What does the college that doesn’t use the shopping sheet have to hide?”
DiSalvio: In this time of rising student loan debt with decreases in household income and the sense that a college degree no longer guarantees a good job, is there a value gap in higher education?
Kantrowitz: We have to distinguish the current economic downturn from the long-term trends. During periods of high unemployment, college enrollment increases. This is known as the countercyclical effect. More borrowers also struggle to repay their student loans—a temporary scenario.
Nevertheless, baseline college affordability continues to decline, especially because the federal and state governments, despite rhetoric to the contrary, continue to cut their support of postsecondary education on a constant dollar per student basis. This has been the trend for the last 40 years and it will probably continue for the next 40 years. That is, unless there is some sort of a watershed event that changes the thinking of policymakers.
Cutting investment in student aid is shortsighted, because college graduates pay more than twice as much in federal income tax as high school graduates. It’s an investment not only in the future of the particular student, but an investment in the future of the United States of America. Members of Congress and state legislators don’t seem to realize that now, but eventually they will. The pendulum doesn’t swing in the other direction very quickly.
Over the next 20 years, the spending per student on a constant dollar basis will continue to decrease despite increasing total dollars spent on higher education. The failure of grants to keep pace with increases in college costs will cause ever-increasing debt.
In addition, about one-third of the students graduating this year with bachelor’s degrees have enough debt that they can qualify for a 20-year or longer repayment term. That means they will still be repaying their own student loans when their children—the next generation—are in college. They won’t be able to save for their children’s education and they won’t be willing to borrow to help their children pay for college because they’ll still be up to their eyebrows in debt. Accordingly, the burden on the next generation is going to be that much greater and they will be forced to borrow more.
The problem occurs when debt is out of sync with income. Overall, family incomes have been stagnant for a decade and their ability to pay for college has not improved. Starting salaries have continued to increase somewhat. The average starting salary for a bachelor’s degree, depending on the data source, is about $45,000. Some say $35,000, but it’s somewhere in the range of $35,000 to $45,000. The average debt at graduation is $27,000 and that goes up by about $1,000 a year. So if income is not increasing by much and debt at graduation is increasing by about $1,000 a year, $45,000 minus $27,000 yields about 18-year’s worth of debt increases before debt catches up with incomes.
DiSalvio: Where are these trends leading higher education? What is in store for the academic enterprise and how can higher education leaders and policymakers prepare for the future?
Kantrowitz: Twenty years from now, we’re going to reach the point where the debt at graduation will routinely exceed starting salaries. So borrowers will struggle to repay their student loans on a widespread basis. There are always going to be some students who vary from the averages. Some students will always enroll in the most expensive college and major in a field of study that doesn’t pay very well. In contrast, students who graduate with a bachelor of science degree in nursing, with a $60,000 to $70,000 starting salary, will be fine regardless of whether they fall at the 90th percentile or just the median amount of debt.
We’re going to have many more students each year graduate with excessive debt, so I think the one thing that policymakers, presidents and financial officers of the institutions need to start doing is monitoring the situation of their graduates.
Institutional leaders need to know what percentage of their graduates are graduating with excessive debt—by whatever measures they choose. That means they will need to survey their recent alumni to ask about their employment status and starting salaries. This information would add to our understanding of which majors have high levels of debt. This would give institutions a greater awareness of the trend as it occurs, enabling them to watch as it gets worse. By monitoring the trends, they may be able to do something about it. One alternative is to adopt a differential tuition policy with lower tuition rates for the less lucrative fields of study. In some states, they’ve been proposing to do the opposite to encourage students to go into the STEM fields (e.g., Florida). I don’t think you’ll get a student who isn’t attuned to STEM fields to go into it—the National SMART Grant tried this approach and had only limited success—rather, reducing the cost of education for STEM majors may be a recruiting tool to get more STEM students to enroll in Florida colleges. An awareness of the problem will help people think about possible solutions.
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