The Student Loan Crisis in America
Written by: Xiong Ran
Student loans, usually taken out for college or universities, are financial tools put into place for promising individuals to cover education costs, increase their potential earnings and allow them the opportunity to develop stronger professional careers. Based on the National Center for Education Statistics (NCES) (2021), over half of undergraduate degree students who have completed their degree have taken out student loans for their studies. It is also the case, in 2021, that Americans hold a total of $1.7 trillion in student loans, as seen in Figure 1 (Federal Reserve Bank of St. Louis, 2021), and numbers are forecasted by economists to grow to a projected $3 trillion or more by the end of the next decade (Stolba, 2021).
Figure 1: Student Loans Owned and Securitized (SLOAS) Source: Board of Governors of the Federal Reserve System (US)
Benefits of Higher Education
The societal benefits a country experiences from higher levels of education include and are not limited to a more productive workforce, reduced levels of poverty and crime, and social equality. High levels of education are indispensable to a country’s economic development, as it is generally the case that citizens with higher levels of education have higher income, purchasing power and financial literacy (Wolla & Sullivan, 2017).
Individual benefits of obtaining higher education comprise the development of critical thinking and social skills, networking opportunities and better employment prospects. As those who own a degree earn much more than those who do not (Wolla & Sullivan, 2017), it is often considered to be the golden ticket to success and financial stability. For low-income students, higher education is their best chance at social mobility and escaping poverty.
Causes of the Crisis
(1) Change in The Role of Education in Society
During the 1940s to the 1970s, less than 50% of people graduated from high school, and less than 10% held a college degree, as seen in Figure 2 (United States Census Bureau, 2021). It was a difficult feat to get into higher educational institutes as opportunities were rare, and the acceptance rate for universities then is about equivalent to the acceptance rate into Ivy League universities today (Crimson Education, 2021). It was also not as essential to obtain higher education as workers used to be able to afford a decent living through knowing a basic trade or working as a blue-collar worker - via occupations in automobile, manufacturing, mining and production. Getting a degree was aspirational and would bring them to a higher income class, but by no means necessary to make enough to support a family (Atlassian, n.d.).
Figure 2: Percentage Population Age 25 and over by Education Attainment Rate: 1940-2020
Source: United States Census Bureau
Even as we account for the population growth in the United States, in comparison, university admission rates have increased much more substantially. The population in the United States rose from 194 million in 1965 to 329 million in 2020 (The World Bank, n.d.), while university acceptance rates have increased tenfold, from 4% to over 40% since the 1960s (United States Census Bureau, 2021).
The workplace has changed dramatically since the 1950s, as we gradually entered the age of innovation and technology. Technologies such as telecommunication, automation, computers, and phenomenons such as globalisation and a more advanced financial system made the world more productive. Atlassian (n.d.) stated that by 2021, big tech companies will rule the world. Highly skilled roles requiring abstract knowledge have become commonplace. A high school diploma is no longer sufficient, as a bachelor's degree is often considered a bare minimum for employment now. The downsides of not owning a college degree are getting worse as time goes by. The importance of education is further fortified by the government, which recognises that a well-educated population will be a requirement to building a prosperous and strong economy.
Due to the phenomenon of drastic change in workplace culture and requirements, it has become necessary for students to strive for higher levels of education to keep up with these workplace trends. Education has become more and more of a necessity and a non-negotiable when it comes to seeking out good employment opportunities. And higher education institutes have the upper hand in terms of setting the tuition for their price inelastic service.
(2) Trend of Increasing Tuition Costs
University tuition has risen throughout the years, which made students taking on loans to fund their education increasingly common. As seen in Figure 3, university tuition has more than doubled since the 1980s. It is estimated that an average student pays around $25,000 per year to attend university education in 2018 when it used to only cost about $11,000 in 1985 (NCES, 2021). In addition, non-tuition fees that come with university education such as accommodation and board, educational supplies and transportation all add up to university being a very expensive experience.
Figure 3: Tuition Costs of Universities and Colleges
Source: National Center for Education Statistics
(A) Administrative Bloat
The former Secretary of Labour, Robert Reich, describes university administration as large and redundant (Johnson, 2019). University offices have employed hundreds of new non-academic and non-teaching staff, substantially adding to tuition costs. Provosts, chancellors and presidents make millions of dollars from universities. On the other hand, academic and teaching staff such as tenure professors and teaching assistants have been receiving less pay, demotivating them from staying in the profession.
(B) Lavish University Amenities
Lazy pools have appeared in the Universities of Alabama, Iowa and Missouri. Alongside that, more and more lavish facilities such as steakhouses, free movie theatres, hot tubs and rock climbing facilities are being built in universities. The cost of these lavish amenities has been passed onto students and their families (Koch, 2018).
(3) Overextension of Student Loans
Educational institutions hold no liability when students default, leaving students with unsustainable debt and public taxpayers with the responsibility to carry on the unmanageable debt. Loans have been promoted to students who are unable to pay them back, as there is a need to make a profit as well as cover operating costs. The biggest offenders being private for-profit and less-selective educational institutes (Looney & Yannelis, n.d.).
The consequences of the student loan crisis are massive. It is a complex and long-standing issue due for reform. It has adversely affected the national economy, exacerbated income inequality, and the situation is getting worse.
The crisis has negatively affected the purchasing power and credit score of borrowers. Furthermore, many borrowers are also expected to default on their loans, holding borrowers back from starting a business or purchasing a home, and making them less able to participate in the economy.
Additionally, the effects of income inequality are exacerbated as low-income students have found themselves stuck between the choices of either going into university and subsequently going into significant debt, or forgoing university but risking their future.
The student loan crisis is nothing new. However, simplistic reform is made impossible due to the size, history and complexity of the situation. Universities, government agencies, and lending institutions such as banks have built up a financing structure that is able to meet the immediate needs of students for educational loans but falls short in terms of long-term sustainability.
As higher education institutes have a conflict of interest with cost-cutting reforms, solutions to the student loan crisis will not be sourced from the establishment itself. Instead, the solution has to come from the external parties.
Pressure should be exerted to reduce redundant costs, cut administrative bloat and reduce spending across the board in general. Lavish amenities and a large university administration do not add to the quality of education, which is what should be the priority instead.
Instead of relying solely on paper qualification when conducting their hiring process, companies and corporate organisations who desire to support this cause can do their part by seeking out employees via the criteria of competency built through self-education, job training, apprenticeship and military training.
The solution to the crisis must also include accountability for the educational institutions that allow loans to be easily taken out. The government can work towards policies that incentivise universities and colleges to ensure students have the ability to pay back their loans before handing out loans. Careful assessment of criteria such as the likelihood of graduation and future ability to repay loans should be taken into account.
Higher education has become more important than ever in our technologically advanced and globalised society, and the negative consequences of not obtaining higher levels of education have been on the rise, both on the individual and societal levels. The student loan crisis is an issue where reform is in demand and long overdue. In order to tackle this, action must be taken on a nationwide level, targeting the root causes of the crisis.
Atlassian. (n.d.). A 2020 retrospective on the history of work. https://www.atlassian.com/history-of-work
Crimson Education. (2021, April 7). Ivy league class of 2025 admissions rates. https://www.crimsoneducation.org/sg/blog/admissions-news/ivy-league-class-of-2025-acceptance-rates/
Federal Reserve Bank of St. Louis. (2021, November 5). Student loans owned and Securitized. https://fred.stlouisfed.org/series/SLOAS.
Hanson, M. (2021, July 10). Student loan default rate. EducationData.org. https://educationdata.org/student-loan-default-rate
Johnson, D. M. (2019, September 23). What will it take to solve the student loan crisis? Harvard Business Review. https://hbr.org/2019/09/what-will-it-take-to-solve-the-student-loan-crisis
Koch, J. V. (2018, January 9). No college kid needs a water park to study. The New York Times. https://www.nytimes.com/2018/01/09/opinion/trustees-tuition-lazy-rivers.html
Looney, A. & Yannelis, C. (n.d.). A crisis in student loans? How Changes in the Characteristics of Borrowers and in the Institutions They Attended Contributed to Rising Loan Defaults. Brookings Papers on Economic Activity, Fall 2015, p. 46. https://www.brookings.edu/wp-content/uploads/2015/09/LooneyTextFall15BPEA.pdf
National Center for Education Statistics. (n.d.). Digest of Education Statistics. https://nces.ed.gov/programs/digest/d20/tables/dt20_331.95.asp
National Center for Education Statistics. (n.d.). Tuition costs of colleges and universities. https://nces.ed.gov/fastfacts/display.asp?id=76
Stolba, S. L. (2021, February 24). Student loan debt reaches record high as most repayment is paused. Experian. https://www.experian.com/blogs/ask-experian/state-of-student-loan-debt/
The World Bank. (n.d.). Population, total - United States. https://data.worldbank.org/indicator/SP.POP.TOTL?end=2020&locations=US&start=1965
United States Census Bureau. (2021, April 21). CPS historical time series visualizations. https://www.census.gov/library/visualizations/time-series/demo/cps-historical-time-series.html
Wolla, S. A., & Sullivan, J. (2017, January). Education, income, and wealth. Federal Reserve Bank of St. Louis. https://research.stlouisfed.org/publications/page1-econ/2017/01/03/education-income-and-wealth/