The Student-Loan Rate Impasse—or, At One Point Does an Impasse Make a Crisis Significantly Worse?

Much attention has been paid to the ballooning accumulation of student debt and its short- and long-term impact on the U.S. economy. As a response to the Great Recession, most states dramatically reduced their subsidies supporting public colleges and universities over a series of annual budgets. In the last year or two, some states have moved to restore some of that funding. But, nationwide, the net result has changed very little. Students continue to pay much higher tuition than they would have paid even six or seven years ago. Because grant programs have not expanded significantly—and certainly not enough to cover the dramatic increases in tuition—students have had to rely much more on loans.

In fall 2012, total student debt exceeded $1 trillion, and the total is now increasing by more than $100 billion per year. Among students who have had to take student loans—now about 60% of all students attending college–the average total debt on completion of a baccalaureate degree is now almost $30,000.

If that statistic does not seem overly alarming—it is, after all, about the price of a mid-sized new automobile—there are several reasons why it is going to increase much more rapidly than the price of such an automobile.

First, the percentage of students taking loans continues to increase and does not show any signs of plateauing. Most families in all but the most affluent 10% of households saw much of their wealth erode during the economic downturn. Housing values plummeted, retirement funds suffered major losses, and job losses, reductions in hours, and the lack of significant increases, or any increases at all, in salaries and benefits eroded savings. As a result, more students than ever simply cannot rely on their families to cover additional college costs.

Second, the “average” that I cited is a mean, not a median number. Even students from more affluent families are now covering at least some of their college costs with loans. At most private universities, students from affluent backgrounds have long constituted an ever-increasing percentage of the students attending. That trend is now occurring not only at the flagship public universities in most states, but even at many other public universities that previously seemed largely to target students from middle- and lower-income families. Given this change in student demographics, the mean debt being carried by students from lower-income or working-class backgrounds is probably much higher than the total mean debt, meaning that the median debt being carried by all borrowers is also very likely significantly higher.

One possible mitigating factor for lower-income students in terms of their total student debt may be that more of them are being forced by costs to attend community colleges instead of universities and to seek associates rather than baccalaureate degrees. But, of course, if that is the case, then they are being shut out from whatever lifetime advantages still accrue to those with more education and, more narrowly, to those with degrees from preferred schools. So, in either case, there is a long-term cost to them.

Third, although the ambiguity in the statistics concerning student-loan debt reflects the basic difficulty in tracking any rapidly increasing statistics, it actually involves only the most readily measurable portion of student loan debt—namely, federal student loans. Although state loans represent a smaller percentage of the total student debt, those programs have been expanding at least as rapidly as those on the federal level. There is, however, no data center for tracking the participation in all state loan programs nationwide. Moreover, although loans from private lenders are clearly much more numerous than state-managed loans, loans from private lenders are even harder to track, a circumstance compounded by their often being guaranteed by the students’ parents. The best estimate is that state and private loans represent about 35% of the total student debt. But no one really knows.

(As a side note, about six months ago, there was a story circulating that many student loans, particularly from private lenders, were not being used to cover college costs but were, instead, being taken by the parents of college students or the students themselves to cover other things such as home improvements or the purchase of an automobile, simply because the interest rates on student loans are so much lower than those on other types of loans. Given the general difficulty in tracking student debt, this claim seems immediately suspect—as impossible to substantiate as I suppose it would be to negate. Although I don’t doubt that some families have been trying all sorts of things to stay afloat financially, common sense would say that the size of the increases in tuition and other college costs would seem to demand that the great majority of the loans are being used to cover those costs. This story, I suspect, has gained some traction because it serves to downplay the increases in college costs and the increases in interest rates on student loans. In other words, it allows people with a self-interest in doing so to put quotation marks around the word “crisis” when asserting that the student-debt crisis is not really a crisis at all.)

Fourth, that student loan debt is trending dramatically upward is already apparent in some long-term numbers. Among borrowers over age 60, 2.2 million are still paying off student loans; among those 50-59, 4.6 million; among those 40-49, 5.7 million; among those 30-39, 10.6 million and among those 20-30, 14 million. One could argue that these numbers simply reflect the gradual repayment of student loans over the lifetimes of the borrowers, with a decreasing number of borrowers in each age group. Such an observation would, however, then beg the question of how accurate the analogy between current levels of student debt and a car-loan is. Such a lengthy term of repayment would seem to make student-loan debt much more analogous to a 15- to 30-year mortgage on a home.

In any case, if the number of students taking loans and the total debt assumed by each student are both increasing dramatically, and if the interest rates on those loans are not kept at a low rate, then it does not take a degree in statistics to project how the numbers across all of those age categories will soon be ballooning, especially since more than half of those who have graduated since 2008 remain underemployed.

Likewise, it does not take a degree in statistics to project how a near-lifetime burden of student–loan debt will reduce the ability to purchase homes, automobiles, and all sorts of other consumer goods, especially at a time when the incomes of the bottom 80% of Americans are either stagnant or declining and when employment is increasingly becoming contingent and less secure.

In fact, as in all economic downturns, displaced workers have swelled college and university enrollments. During this most recent and, for many Americans, ongoing economic downturn, many non-traditional students have enrolled because having lost seemingly secure positions, they have found no alternatives beyond contingent employment that promises to be a long-term, rather than a short-term, option. Because they very likely are already carrying some long- and short-term personal debt, these students are very likely also taking on student-loan debt. But they will not have any better immediate employment prospects than many younger graduates, and they will have a much shorter working life remaining to them in which to pay off that debt.

Fifth, and lastly, in terms of the current trends, the average debt being assumed by those pursuing graduate degrees is much higher than that for undergraduates—and even harder to track. But given the contraction in tenure-track faculty jobs, as well as equivalent contractions in the private-sector demand for advanced degrees in even the hard sciences and the dramatic decline in openings for those pursuing law degrees and some other professional degrees, it is very likely that graduate enrollments will begin to plummet because of simple economics well ahead of undergraduate enrollments. But a decline in graduate enrollments will immediately affect undergraduate costs because in most large institutions, graduate teaching assistants cover a large percentage of the freshman- and even sophomore-level courses, and any dramatic reduction in graduate enrollments will also soon be reflected in the numbers of available adjunct faculty. (Such a crisis might actually force a reversal of the current trends—a reallocation of revenues from administrative spending to instructional spending and a return to having most courses taught by full-time faculty. But I doubt it. It is more likely that any shrinkage in the labor pool will be used to justify a more universal reliance on something like MOOCs, and then when that “solution” proves pedagogically and even fiscally unsustainable, a succession of other “quick fixes” to what are now systemic issues will be attempted.)

Against this decidedly bleak backdrop, it seems extremely counterintuitive that both the Senate and the House would let the July 1 deadline for re-setting loan rates pass without resolving the issue at the very least for the coming year in order to prevent the interest rate from automatically doubling from 3.4% to 6.8%.

It is not as if members of both parties do not recognize that this is a serious issue. In fact, there has been an unusual amount of bipartisan collaboration in drafting a number of proposals to address the issue. (Even Louie Gohmert, whom I have demeaned in previous posts, has reached across the aisle—though I suspect that the resulting bipartisan proposal is not something that I would be eager to endorse.) Ironically, in this instance, the problem may be that there are too many different proposals being advanced, ranging from where to set the rate for the coming year to how to set the rate in perpetuity (whatever that term means in Congress-speak).

A succinct overview of the competing proposals and how some of them have fared in both the House and Senate when they have been brought to a vote is provided by GovTrack.US. Here are the opening paragraphs:

“In what could become an annual occurrence, Congress yet again faces a looming deadline to resolve the problem of student loan interest rates. Without Congressional action, the rate on federally backed Stafford loans is set to double from 3.4 percent to 6.8 percent on July 1.

“The Senate in early June failed to advance two bills meant to prevent this imminent increase in rates. A bill backed by Democrats would extend the current interest rate for two years, and offset the cost by ending three tax breaks. A GOP bill would peg all newly issued student loans to the U.S. Treasury 10-year borrowing rate plus 3 percentage points. Given the current Treasury rate of 1.75 percent, a student taking out a loan this coming school year would pay 4.75 percent for the life of the loan under this proposal. The Democrats’ bill garnered 51 votes, shy of the 60 needed to end debate, while the Republican proposal failed 40 to 57.”

The rest of the article can be found at: http://www.govtrack.us/congress/bills/113/hr1911#summary/oursummary

I will close by thanking all of you who signed the petition to avoid this doubling of student-loan rates. Petitions do not always succeed, but sometimes they fail in the short term and succeed in the longer term.

2 thoughts on “The Student-Loan Rate Impasse—or, At One Point Does an Impasse Make a Crisis Significantly Worse?

Your comments are welcome. They must be relevant to the topic at hand and must not contain advertisements, degrade others, or violate laws or considerations of privacy. We encourage the use of your real name, but do not prohibit pseudonyms as long as you don't impersonate a real person.

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s