Is there any way out of the US student debt crisis?

By working three jobs while in college and with some financial assistance from her mother, Karen Hawkins managed to pay off her undergraduate loans of US$12,000 eight years after completing her bachelor’s degree at the University of Illinois at Urbana-Champaign.

However, paying off the US$55,000 in student debt that she accumulated after obtaining a master’s degree at Northwestern University has proved a lot more difficult. “I feel like I’m going to carry this debt for forever, which is why I keep lowering my monthly payments,” says Hawkins, a 43-year-old Chicago-based journalist and founder of Rebellious Magazine. “I think I’m down to US$250 a month now,” she explains.

With an interest rate of 5.375 per cent, to date she’s managed to pay off US$35,000 of the US$55,000 she owes the US education department. Although she doesn’t regret going to grad school, the experience has left her with some questions. “We are hampering an entire generation of people with all this debt; who benefits from that and why is it necessary?” she asks. “Why is it so expensive to get an education? I really want to understand why.”

Hawkins is one of the 44 million people affected by the US student debt crisis. Together they owe US$1.5 trillion in student debt, surpassing the nation’s credit card debt and second only to mortgage debt.

“Our generation has the most student debt of any generation that’s come before,” says Reid Setzer, a government affairs director at the Young Invincibles, a Washington DC-based youth advocacy group. “People realise that getting some sort of after-high school education is essential to being fully participatory in the modern economy. But right now people are not making enough money to pay off the large amount of debt that’s being put upon them. And that burden is very real for folks. In our conversations with young people, this is a constant theme.”

Reduced spending on education

According to a report from the Brooking Institute, close to 40 per cent of borrowers who entered college in 2003-2004 are now at risk of defaulting on their student loans by 2023. Some experts have warned that all these student loans are a financial disaster waiting to happen, drawing parallels to the shoddy mortgage loans that caused the 2008 financial crisis. Others say that in order for there to be a financial bubble the price of an asset needs to far exceed that asset’s actual value. For most people the increased earning power associated with a college degree still far exceeds the cost of getting that degree.

What is certain is that student debt is certainly influencing the labour market, says Douglas Webber, an associate professor of economics at Temple University in Philadelphia, pointing to evidence that degree holder are less interested in jobs with a public sector focus because of concerns over repaying their student debts. There’s also limited evidence that people are delaying decisions like buying a house, getting married and having kids. “We’re not at the point where those are huge effects right now, but if trends keep going the way they are, we’ll probably see more of that,” he says.

According to figures from the College Board, a higher education non-profit, tuition fees at public four-year institutions have increased 213 per cent over the last 30 years – from an annual average of US$3,190 in the 1987-1988 school year to US$9,970 in the 2017-2018 school year. According to a 2017 OECD report, the US has the highest tuition rates of all 36 OECD countries. In countries like Australia, Canada and Japan the average annual tuition fees are around US$4,500, while a third of the countries examined in the report don’t charge any tuition for bachelor’s degrees at public institutions.

The biggest driver of the student debt crisis is not that universities have hiked up their tuition fees in recent decades (although they have); it’s that states are spending much less money on higher public education than they used to.

Although decreased state funding for public universities has been a long-standing trend, the 2008 recession exacerbated this development with many states trimming their budgets and cutting down on money for public colleges. According to the Center on Budget and Policy Priorities, overall state funding for public two- and four-year colleges was US$9 billion below the 2008 level in 2017, after adjusting for inflation.

The gap left between what states are willing to spend on education and what universities are charging in the way of tuition has been covered by debt. In the US, students can take out federal loans, which are issued by the Education Department and account for 90 per cent of loans, as well as bank-issued private loans to finance their education. Interest rates on the different types of federal loans ranged between 5.05 per cent and 7.60 per cent for the 2017-2018 school year.

Hardest hit

Although graduates with tens of thousands of dollars of debt like Hawkins have dominated much of the news coverage on this issue, they are not the people who have been hit hardest by the student debt crisis.

The most vulnerable group by and large, experts warn, are students who drop out of college. This means they don’t get the salary boost associated with a higher education degree, but they still have to pay off the loans they took out. Two-thirds of borrowers who default on their student loans, meaning they are more than 270 days delinquent on their loans, do so on amounts of less than US$10,000.

This is where the for-profit colleges come in, Webber explains. “Many of the people who have taken out US$5,000 went to a for-profit college, and on average those have pretty poor outcomes and enrol a lot of minority students,” Webber explains.

To get the money it lent students back, the US federal government can confiscate wages, tax refunds and even social security retirement benefits. Because many of the students who enrol in for-profit colleges “either don’t graduate or get jobs that aren’t worth the loans they took out, you have this debt that’s going to accrue interest and the balance is just going to grow, and for many people it gets to a point where there’s no way they can get out from under it,” he says.

According to figures from the American Association of University Women, women hold two-thirds of the outstanding student debt – or almost US$900 million as of mid-2018.

Women take out larger loans than men and they also take longer to pay off the loans due in part to the gender pay gap. These problems are all compounded for women of colour. Black women on average take on more student debt than any other group.

Hawkins, who is African-American, says these disparities put women of colour in a double bind. “Because of institutionalised racism, classism, sexism, you’re just not going make as much money – even though you have the same education and qualifications. And then there’s the fact that you’re much less likely to have had help from your family,” she says. “So you’re going to have more loan debt and your income potential is much lower.”

Possible solutions?

Lawmakers like 2020 US presidential aspirant Bernie Sanders have proposed making public education tuition-free, while former president Barack Obama has proposed making two years of community college tuition free. Democratic senators also submitted a bill in 2017 that would allow private student loan borrowers to discharge their loans in bankruptcy proceedings, something that isn’t currently possible.

Advocacy groups for young people have made tackling the student debt crisis one of their core issues. Setzer of the Young Invincibles says that addressing the student debt crisis would mean doing something both for those people who have accumulated debt and future generations of students.

“First we want one income-based repayment plan that would allow folks to spend 10 per cent of their discretionary income for 20 years and then have the rest of their debt forgiven,” he says. “That would be highly effective. It would prevent defaults, and would allow people to manage their payments much easier.” He adds that a handful income-based plans exist today but notes that they are highly confusing and that student loan servicers have no fiduciary duty to act in borrowers’ best interests.

To help future generations of students, he says, the groupsupported the plan put forward by Hawaiian senator Brian Schatz, which would create a federal state partnership under which a pool of federal money goes to states to match what they spend per student on public higher education, dollar per dollar. In return, the states would have to provide tuition-free college to recipients of Pell grants, the US’ largest low-income, needs-based education funding programme, and also give them cost-of attendance stipends.

“That would cover things like transportation, childcare, books, rent – the more invisible barriers to people completing their education,” Setzer says. “In doing so you also have a much more direct effect on racial equity gaps and certain socio-economic gaps,” he tellsEqual Times. “Because we know by and large that people who have the least income usually are coming from communities of colour and that a high proportion of Pell recipients are first-generation students.”

If the current situation continues unabated, Webber says, students’ average debt will go from the current US$30,000 to US$40,000 or even US$50,000, with stalled upward mobility as the end result. “If this continues at the same pace that we’ve seen in the past decades or two, we’re going to see fewer people going to college,” he says. “They’re going to make the decision that the financial calculus is just not worth it. And this when on average when you look at the likelihood of success, a college degree is the safest financial investment that there is.”

As for Hawkins, if she could do it all over again, she wouldn’t do anything differently because her degree did increase her earnings potential. “I don’t think I would have gotten the opportunities to earn what I am making without my graduate degree,” she says. “In addition to the salary boost, journalism school enabled me to do what I really wanted to do – which was be a reporter.”