Record Student Loan Debt Demonstrates Private Funding Model’s Failure

BY HANK REICHMAN

According to a report by Bloomberg News, U.S. outstanding student loan debt reached a record $1.465 trillion last month, more than double the $675 billion outstanding in June 2009.

“The Bloomberg analysis found that loans issued about six years ago have the highest cumulative loss percentage compared to any other year since the financial crisis ended.  This indicates that students who took a loan in 2012 have had a much more difficult time making their monthly payments compared to students who received loans shortly before and after — students who have had a similar amount of time to pay them down.”

Over 2.7 million borrowers owe in excess of $100,000, of which, about 700,000 owe $200,000 or more, according to data from the U.S. Department of Education.  Borrowers in ages 25-34 owed $489 billion, slightly less than $530 billion balance for 35 to 49-year-olds.  Particularly troubling is that borrowers age 62 and older owed $62.5 billion in federal student loan debt and those in the 50-61 age group owe $213.6 billion.

The growing student debt has raised concern that the inability of people to pay back student loans could trigger or exacerbate a recession, much as the mortgage bubble did a decade ago.  “Over 90% of student loans are guaranteed by the U.S. Department of Education, meaning that if a recession causes a rise in youth unemployment and triggers mass defaults, this contingent liability could prove burdensome for the U.S. government budget,”  Paul Della Guardia, economist at the Institute of International Finance, warned Bloomberg.

In his must-read book, The Great Mistake: How We Wrecked Public Universities and How We Can Fix Them, Christopher Newfield notes that while “everyone knows the total amount of student debt is gigantic, . . universities have managed to avoid blaming themselves and assessing their own role in creating the problem.”  He explains:

Most of us assume that loans are a nonprofit service the federal government provides to students, and that the loan money supports core operations at the college they attend.  This belief is out of date.  In reality, student loans are part of the banking business in which the financial industry and the federal government turn a profit on the creation of student debt.

He adds, “The current financial aid system is structured to translate either flat tuition or higher tuition into higher debt.”  The result is a vicious cycle:

Under the private funding model (that leverages reduced public funding), tuition goes up, student debt increases, states spend more public funding on financial aid, which inspires them to deduct this from their spending on university operations, and that induces universities to increase both tuition and the gap between student need and actual aid, which both further increase debt.  As higher education is defined as a private good, the state and the university become antagonists, as do students and their universities. And everybody’s costs go up.

This can’t continue forever.  The skyrocketing student debt burden cries out for a solution based on a return to the notion that higher education is a public good, not a private perk.

 

One thought on “Record Student Loan Debt Demonstrates Private Funding Model’s Failure

  1. An important post that puts the issue in an accurate context. It also underscores a larger debate as to whether tuition per se is a viable higher education finance model for all but a small sector of specialty institutions. Our public universities in my view are among our national “Crown Jewels” (the Chinese certainly seem to think so) and may need to be re -characterized as strategic national assets perhaps no less a budget priority than the Pentagon (perhaps more so). The commercial student debt issue is effectively a national tragedy and now a national risk. Like many areas of economics (and in human rights), Scandinavia may represent the most enlightened and ultimately most long term effective policy options.

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