Tag Archives: student loans

US Student Loan Debt Up 814% Since 2001


Mary Meeker of Kleiner Perkins Caufield & Byers, does an annual "Internet Trends" presentation, and this year's slide deck can be found here. Included in her presentation is an amazing graphic (slide 79 of 88) that you can see above; it shows how the share of US consumer debt has changed from the 4th quarter of 2001 to the 2nd quarter of 2012.

It is absolutely stunning how much – and how quickly – student debt has grown in this country. From $100 billion in 2001 to $914 billion in 2012 is an 814% increase in just a decade. The next fastest growth category is "home equity" at 390% and it wouldn't be a stretch to say that at least some of that is attributable to parents taking out home equity to pay for the kids' college tuition, so it's conceivable that education is responsible for even more debt than is being reflected by this graph.

One has to wonder – has higher education delivered a return that can possibly justify such massive debt?

What’s a Good Education Worth?

Fred Wilson has an interesting take on the student debt issue:

So we are big believers in the value of a higher education and we have invested in it for ourselves and our children.

I told the University President and the faculty members all that. But I also told them that I am deeply concerned that about the cost of a high quality education and the fact that it is getting out of reach for many. And I told them that I am not sure the return on the investment is as high as it once was for many degrees. And finally, I told them that too many students are walking out of college with a student loan burden that is crushing and that they can't and won't pay back. 

So how you reconcile these two opposing views and what can we do about it?…

But we also need to get more creative about the financing of higher education. We should measure the return on investment students are getting from the institutions they attend and the degrees they obtain and tie the amount of loans they can get to the returns they are likely to achieve. Students that attend institutions that can deliver higher returns should be able to take out larger loans.

Repayment terms need to change as well. Loan repayments should be capped at a percentage of current income. I know a woman who has been out of graduate school for more than a decade who dedicates one of her two paychecks a month to paying back her student loans. She is spending half of her take home income on her student loans. That is nuts.

Bubbles are driven by easy money that drives irrational behavior. Our student loan policies have been doing some of that. We can and should change our policies to force more rational decisions in the purchase of higher education in this country. 

There could be some pretty strong arguments made against tying the amount of a loan to the likely return of a degree. Someone who majors in English Lit with a concentration on 18th century poetry doesn't seem likely to have a high paying job, i.e. a high return, but you never know. There's also a compelling case for allowing kids to go on an intellectual exploration during their undergraduate years, and if you tie their loans to the return on any given degree you're likely to stifle that exploration.

But that's a nit-pick. Fred's core point, that we need to rethink how we structure and pay for higher education, is spot on. With two kids at NC State our family can tell you that the effects of reduced state funding are very real, and they are having a significant impact on students' abilities to fund their educations. Reduced state funding is leading inexorably to higher costs, which means more debt for students and an increasingly urgent need to figure out a way to turn the tide on student debt. 

Max Student Loans at $2,000?

Mark Cuban wrote the following in a blog post offering advice to the Occupy Wall Street protesters:

3.  Limit the Size of Student Loans to $2,000 per year

Crazy ? Maybe, maybe not.  What happened to the price of homes when the mortgage loan bubble popped ? They plummeted. If the size of student loans are capped at a low level, you know what will happen to the price of going to a college or  university ? It will plummet.  Colleges and universities will have to completely rethink what they are, what purpose they serve and who their customers will be. Will some go out of business ? Absolutely. That is real world. Will the quality of education suffer ? Given that TAs will still work for cheap, I doubt it.

Now some might argue that limiting student loans will limit the ability of lower income students to go to better schools. I say nonsense on two fronts. The only thing that allowing students to graduate with 50k , 80k or even more debt  does is assure they will stay low income for a long, long time after they graduate ! The 2nd improvement will be that smart students will find the schools that adapt to the new rules and offer the best education they can afford. Just as they do now, but without loading up on debt.

The beauty of capitalism is that people like me will figure out new and better ways to create and operate for profit universities that educate as well or better as today’s state institutions, AND I have no doubt that the state colleges and universities will figure out how to adapt to the new world of limited student loans as well.

Finally, the impact on the overall economy will be ENORMOUS. There is more student loan debt than credit card debt outstanding today. By relieving this burden at graduation, students will be able to participate in the economy.

We could argue about the $2,000 number, but he brings up some interesting points.  As I've mentioned in previous posts we are at the beginning of what will hopefully be 7+ years of our children attending college, and as you can probably imagine we're quite interested in how this all works. Last year when our oldest son was considering schools to apply for we had a few questions we asked him over and over when he was looking at private or out-of-state schools – "Is the difference in tuition between NC State (or any other state school) and Davidson (or any other private school) really worth it?  Will the curriculum meet your needs that much better? Is going to that school a necessity to get you into the grad school or job that you're considering?"

When you start crunching the numbers even a state school's tuition, fees, books and room and board add up to a hefty chunk of change. Without student aid you're looking at roughly $10,000 a semester and if a student graduates in four years that's $80,000.  Multiply that number by three or four and you have the total damage from a private school, and as they say in debates about the federal budget, "$10,000 here, $10,000 there and next thing you know you're talking serious money."

So how do people pay for this?  Some scholarships, some grants and lots of student loans. Unfortunately those student loans often lead to financial trouble, and in many cases students just can't, or won't, pay them off. In the '80s I worked as an intern for the National Association of Student Financial Aid Administrators (NASFAA) and back then delinquent student loans were a bigger problem than they are now.  As I made hundreds of copies of NASFAA's position papers and delivered them to the Hill I learned that schools were going out and hunting down students for whom they could secure government-backed student loans without regard for the student's actual ability to perform in the classroom.  As a result there were a ton of schools that were raking in the dough as huge chunks of their students dropped out. That means that in the worst cases people were accumulating huge piles of debt and not even getting a degree in return.  I seem to remember some reforms being implemented that helped reduce the drop out and default rates, but unfortunately loan default's are still a problem as highlighted in this Sep. 12, 2011 NY Times story:

According to Department of Education data released Monday, 8.8 percent of borrowers over all defaulted in the fiscal year that ended last Sept. 30, the latest figures available, up from 7 percent the previous year.

At public institutions, the rate was 7.2 percent, up from 6 percent, and at not-for-profit private institutions, it was 4.6 percent, up from 4 percent…

Although the new overall rates are the highest since the 1997, when they were also 8.8 percent, default rates peaked in 1990 at more than 20 percent…

Although for-profit colleges, which typically serve low-income students, enroll only about 10 percent of the nation’s undergraduates, Mr. Kvaal said, their students made up 150,000, or almost half, of the defaults…

The problem may be even greater. “Some research has shown that as few as one in five defaults at a for-profit college occur in the two-year window,” said Debbie Cochrane, program director at the Institute for College Access & Success, which runs the Project on Student Debt. “The extent of borrower distress is barely touched upon with these rates.”

The high default rate at for-profit colleges, the fastest-growing sector of higher education, has become an increasing concern for the government, since such institutions depend on federal student aid for more than 80 percent of their revenues. Last spring, in internal documents gathered from the publicly traded for-profit colleges for hearings on the student debt problem, the Senate Health Education Labor and Pensions Committee found that some companies estimated that their students had staggeringly high lifetime default rates — in one case, 77.7 percent…

Colleges with excessive default rates, either exceeding 40 percent in the latest year, or 25 percent for three consecutive years, can lose their eligibility for federal student aid programs. This year, five institutions — four of them for-profits — lost eligibility, Mr. Kvaal said.

In part because of the high default rates at the for-profit colleges, the department recently adopted regulations designed to curb recruiting abuses, and cut off eligibility for federal aid at programs that leave students with high debt loads and poor job prospects.

Reading this causes me to question whether or not capping student loans would actually lead to more for-profit schools stepping up to compete as Cuban suggests, but I do think he's right to call into question the whole higher education funding model.  If school's were suddenly faced with the loan spigot being turned off how would they adjust?  Would we see an explosion in affordable online learning initiatives?  Would we suddenly see the corporate world sending the message that alternative learning is fine by them, because quite frankly not enough students were coming from the limited number of schools left standing thanks to their massive endowments?  If so, would we see student's flocking to alternative forms of learning because they know that it could be the ticket to a brighter future?  Would they be happy without the keg parties at the Sigma Xi house?

Cuban's thrown out an idea that begs lots of questions and they're the kinds of questions I think we need to be seriously considering.