The Student Debt Crisis Explained: How We Got Here, Why It's Getting Worse, And How To (Maybe) Fix It

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The Student Debt Crisis Explained: How We Got Here, Why It's Getting Worse, And How To (Maybe) Fix It

First the bad news.

Over the last decade, student loan debt in America has risen by 130%, to where it now tops $1.5 trillion, a record high. For perspective, that’s half a trillion higher than our cumulative credit card debt (also at a record high). The average college student graduates $37,172 in debt, and each year, in part because high interest rates compound that debt over time, more than one million borrowers default. Today, of the 44 million Americans who carry student debt, 10.7% are currently in default—a default rate that itself is rising at a troubling pace: We saw a 14 percent increase between 2015 and 2016.

Enter smilin’ Betsy DeVos, Secretary of Education, who is once more advocating for superfluously cruel solutions that will benefit the private sector while putting more students in deeper debt, and keeping them there.

We’re all familiar with the existence of the student loan crisis, but we’re not so familiar with the countless factors that have converged to create and exacerbate that crisis. Full disclosure: This is an incredibly complex topic, and because the current student debt crisis is a decades-long buildup tied directly to issues of socio-economic status, political ideology, race, geography, capitalism, federalism, taxes, and budgets, any single article on the issue will be at best incomplete. This is one of them.

With that in mind, here we’ll look at not only how the Trump administration contributes to the crisis, but we’ll try to unravel some of the major factors that have actually caused the crisis and how we might resolve it. Along the way, we’ll also kill some persistent myths. The answer here, if there is one, isn’t simple. “Free tuition” isn’t the silver bullet it seems like.

We can’t say we know how solve a problem if we don’t understand the problem. So if you’re into this, buckle up.

Betsy’s Bad Debt Bets

When Congress amended the Higher Education Act in 2008, they took student lending out of the hands of private lenders and put it solely within federal government domain. Though the government handles all the lending—i.e., backs all loans—it still outsources debt servicing to private managers. This creates a conflict of interest, so the DOE, through the Office of Federal Student Aid (FSA), conducts oversight of these private managers whose incentive is to increase and extend debt. That’s how they increase profits.

For this reason, loan managers often won’t tell borrowers about all available repayment options. Sometimes they’ll withhold information that might help a borrower get out of the hole—and out of their pocket. (Case in point: Navient, the largest student-loan servicer, now faces six lawsuits —including one from the Consumer Financial Protection Bureau—related to how it treats its borrowers.)

But the DeVos DOE isn’t doing a great job of oversight. In March, the DOE Inspector General published a report analyzing department oversight of nine private loan management outfits, concluding that the FSA rarely held servicers accountable and didn’t incentivize them to stop noncompliance practices that harm students. Individual states have now understandably written off any federal help, and many have taken steps to exercise oversight through existing state-level consumer protection laws: Rhode Island’s proposed Student Loan Bill of Rights aims to assume oversight of loan servicers who operate there; Maine, Oregon, and Connecticut have joined, and several other states have adopted similar proposals.

Under Obama, the DOE took steps to support and educate borrowers, but the Trump administration reversed them and sided with the private sector against students. Early on, the Trump-DeVos DOE stopped sharing critical student loan information with states, making oversight difficult. The administration’s HEA overhaul plan includes eliminating distinctions between regional accreditors (which oversee public and nonprofit colleges) and national accreditors (which oversee for-profit and online institutions), a proposal higher ed groups contend would all but wreck the oversight system and give debt managers freedom to fleece borrowers.

How Do You Solve A Problem Like FAFSA?

The Trump administration has another idea: To solve the student loan crisis, don’t give so many students loans! This is the wrong approach for a number of reasons—such as, say, putting college further out of reach for a greater number of Americans—but here’s what they want to do.

First, the White House wants to lower the caps on two loan programs that allow students to take out unlimited debt, arguing—fallaciously—that increases in financial aid fuel college price inflation. It’s an age-old conservative myth. However, researchers have found again and again that tuition rises even when aid does not. Between 1995 and 2014, for instance, the max federal loan cap changed only twice, yet tuition rose every year. This holds true for Pell Grants.

And for the third year in a row, Trump’s budget proposal calls for the elimination of the Public Service Loan Forgiveness program, a federal program created under President George W. Bush that forgives student loans for borrowers who work full-time in an eligible public service or nonprofit job. DeVos has tried unilaterally to smother the popular program: Last year Congress gave $700 million to a PSLF extension, to be spent over two years, but according to the Washington Post the DOE has so far only spent about $10 million. The DOE blocked access: In 2018, more than 38,000 people applied for loan relief through the extension program; 262 were approved.

DeVos herself seems characteristically confused about how to approach what she acknowledges as a crisis—though instead of seeing it as a crisis for indebted borrowers, she sees a crisis for taxpayers. In 2017, DeVos floated the idea of consolidating all nine student debt servicing companies into one, an anti-capitalistic monopoly that eliminates consumer choice and smacks of something like, “If you like your lender you can keep your lender.” The presumed thinking was to reward a single company friendly to DeVos’s interests, but she changed her tune. She now wants to open student debt to more private companies. Obviously this would make oversight more difficult, and then she’d argue to outsource oversight to private companies.

The Trump administration also tried to eliminate the Obama-era “borrower defense rule,” which caps the rates agencies can charge borrowers who default. Last December a federal court struck that down, ruling DeVos had to forgive $150 million in debt. Though in this case—as in many with Trump—the courts upheld morality, we need to remember the issue isn’t whatever success the administration meets, it’s the intent behind their systematic efforts. That intent, as always, is nonsensical and needless cruelty—a corrupt disdain for Americans in need.

But what do those Americans need?

In(to)tuition

The first thing we think of when we talk about the cost of college (and sometimes the only thing) is tuition. After all, isn’t that what we’re paying for? An education?

Well, not entirely. Tuition covers the academic part of college. We’ll get to the other side later. But cost of tuition is indeed a deterrent for a many Americans, and it’s climbed for decades. For the 2017-2018 academic year, tuition at a four-year private college cost an average of $34,740 a year; public universities on average charged in-state students $9,970 and out-of-state students $25,620. If we’re to solve the debt problem, we have to understand these costs. And if increases in financial aid aren’t to blame, then what is?

State funding cuts for higher ed. Emphatically.

When a state cuts college funding in its budget, state colleges put the burden on students in the form of higher prices. A CAP data analysis found a nearly exact parallel here: State funding declined by $1,382 per student over the last decade, and tuition revenue increased by $1,683 per student. So it’s not as if (all) state colleges are making extraordinary profits off of tuition—research shows that revenues per student at public four-year institutions in 2013 were nearly identical to 2008. (Elite colleges slightly increased revenue, but lower-tier schools actually saw revenue drop between three and six percent.)

In other words, any approach to student debt must incentivize states to contribute. After all—this is the federalism question—public higher education is the domain of states, not the federal government. We can see parallels to the Obamacare debate, and should remember how many states rejected federal money for Medicaid expansion.

Which brings us to the campaign trail.

Counterintuition

Democratic presidential hopefuls have been justifiably grilled about student debt. Thanks in large part to Bernie Sanders’ 2016 free college platform—which helped push Hillary Clinton to the left on the issue—the “free college” has become a litmus test. It’s simple and exciting and sounds great, and if we could clap our hands and make it happen, it’d be a better country. But “free tuition” alone, though necessary, isn’t sufficient to solve the debt crisis or the broader higher-ed crisis: Not enough students graduate, or don’t graduate with good degrees from good schools.

The Sanders plan—the only one going, co-signed by presidential contenders Elizabeth Warren, Kamala Harris, and Kirsten Gillibrand—wouldn’t even eliminate tuition. The $47 billion per year program—which Sanders proposes to pay for with heavy taxes on speculative Wall Street trading—offers states a 2-1 deal: The federal government will subsidize two-thirds of state college spending if states commit to pay the other third and meet certain discretionary budget requirements to do so. No public state college tuition will be “free” under this plan unless it convinces governors and state representatives to increase spending. Will they? Between 2008 and 2015, 47 states cut higher education spending.

Ironically, the most egregious example of the state-federal subsidy imbalance is Sanders’ home state: Vermont.

Why Some States Might Not Offer Free Tuition: A Case Study

Certain states—including big ones such as Texas, Florida, and California—have prioritized budgets to keep in-state rates fairly low. Not Vermont. The average annual cost of in-state tuition was $28,738 for the 2017-2018 academic year—twice the national average. That makes Vermont the third-most expensive, fiftieth-most affordable, and nationally most overpriced place to attend in-state college. Vermont is the second-least populous state. The least populous—Wyoming—is the most underpriced state.

States such as Vermont have no incentive to rework budgets to pay 1/3 the cost of in-state tuition. Vermont dedicates about three-quarters of its budget to mandatory programs such as welfare, Medicaid, and state employee salaries. Every other interest competes for the remaining twenty-five percent. Vermont ranks last nationally on spending per student on public college. This year Vermont’s State Colleges Chancellor requested an additional $25 million per year, about double what the state currently contributes: “[I]f the state refuses to invest in its public education system for the post-secondary years, they are making a decision that they are OK with Vermonters not accessing a high-quality post-secondary education system at an affordable cost.”

So Vermont covers a staggeringly low percentage of the total budget for its flagship school, UVM. And even though the in-state cost is among the highest nationwide, the majority of the state’s higher ed budget comes from out-of-state tuition. Only 20 percent of first-year UVM students are from Vermont. Fewer than 500 enrolled in 2015. That’s the most skewed in-state/out-of-state ratio of any public flagship in the country. The President of UVM blames in part Vermonters’ enthusiasm for out-of-state education. But the University of Delaware—another small East Coast state, within 100 miles of Philadelphia, Baltimore, and D.C.—has fewer out-of-state students: 60%. And considering the in-state cost, it’s no mystery why Vermonters might opt to leave.

In sum: Vermont doesn’t prioritize higher ed for its own citizens. Sanders, who hasn’t held state office, has had the dual luxury/ignominy of not having to address this problem, and Google will confirm he apparently never has. Notably, just a few hours before Sanders announced his 2020 candidacy, the Vermont legislature announced it was considering a bill that would indeed provide “free” in-state tuition. Except it doesn’t: It accounts for the difference between the exorbitant rates the state charges in-state applicants and what those students can get in financial aid.

On a national scale, David H. Feldman, PhD, and Robert B. Archibald, PhD— professors of economics at William & Mary—contend the Sanders bill “will require tax increases, or it will force states to move existing resources into higher education and away from other state priorities like health care, prisons, roads and K-12 education.” And according to a 2016 Campaign for Free College report, the bill hit states hard in revenue generated from tuition: anywhere between $5 billion (California) and $77 million (Wyoming). New York would have to contribute an extra $55 million to subsidize the plan.

This is why a federal plan that requires states to subsidize tuition almost assuredly wouldn’t meet with equal enthusiasm from all states.

Beyond Tuition

Tuition isn’t the only thing that contributes to debt. In fact, tuition only comprises 40% of the average cost of attending college. Other fees and room-and-board cost $11,140, books and other supplies add $1,240, transportation adds $1,160, and other expenses contribute $2,120. Remove tuition, and college still costs an average $15,660 per year. Outside costs have increased for a number of reasons, such as luxury amenities schools offer to attract students—chill dorms, climbing walls, lazy rivers, etc—as well as services such as healthcare and increases in administrative staff. (A typical university now employs more administrative staff than it does teachers.) For community college, tuition accounts for only one-fifth the average $17,930 annual cost.

Paradoxically—and parasitically—colleges have footed administration increases by shifting teaching duties from full-time faculty to part-time adjuncts and TAs. Recent studies show that part-time faculty and teaching assistants now comprise half the teaching staff at colleges and universities. Thirty years ago, they accounted for one-third. In other words, colleges don’t value their own purpose: The actual education. (And they don’t treat the adjuncts well, either.)

We can also look to extra costs in other nations that offer “free” college. Students in Sweden, for instance, paid an average of $19,000 in debt for living costs and other expenses in 2013. That year U.S. students paid an average of $24,800. In other words, free tuition will help the debt problem, but it won’t get close to solving it.

Plus there’s the graduation rate. Free tuition will incentivize more students to attend, but outside costs and other factors will still cause many to drop out. One recent California program granted free tuition to more than half of state community college students. However, fewer than ten percent of all its community college students completed a two-year degree in six years. The only thing worse than going into debt for a degree is going into debt for no degree. And we can’t attach GPA requirements to a federal bill in order to keep students invested, because that makes the program a scholarship.

Further—and closely related to completion rates—it might be surprising to learn that the age group with the highest per-dollar increase in student debt is 30- to 39-year-olds, who collectively now hold $461 billion in loans. Their level of debt has increased 30% since 2014. These students must either subsidize the above-mentioned costs of college through loans, or through outside jobs. It’s no surprise that so many choose loans.

Finally, we have the private school debt problem. For-profits and online schools lure many students with promises they don’t deliver, while overcharging dramatically. We have to look no further than the case of Trump University for evidence this predation can rise to criminal levels. Additionally, borrowers who graduated from public colleges in 2018 hold on average significantly less debt than borrowers who graduated from for-profit or private non-profit colleges. ($25,550, $39,950, and $32,300, respectively.) This means that unless free tuition—which will create more competition for in-state slots—also incentivizes colleges to substantially increase enrollment, it won’t guarantee everyone a slot who wants one. Students will still opt to pay (or be forced to) for private and for-profit schools, which often provide substandard educations and all but useless degrees.

Any debt reform must also address private colleges. Of those, the Sanders plan only addresses Historically Black Colleges & Universities. (From 2004-2011 Sanders’ wife, Jane, was president of a private college in Burlington, VT, which closed in 2016 because of financial problems largely related to the debt she accrued. During her tenure, tuition rose more than 60 percent—from $13,120 to $22,407—and enrollment dropped.)

That said, the “College for All” plan—again, the only coherent plan going—does increase education efforts to help guide students to better or more appropriate schools. Sanders’ bill would also cut the loan rate dramatically from where it now stands at 5.05%. In 2016 he said he wanted to cut new loan rates nearly in half, and reduce existing rates to just over two percent.

PHEW.

That’s it. More than anything, I hope you’ve left with a more round understanding of this enormous and seemingly intractable problem. Obviously, this touches many other facets of the American experience, but the bottom line here is that we need more people to complete useful degrees. The evidence is overwhelming: more education improves nearly all aspects of life. This is one of the most important but least understood or appreciated challenges we face. The more we understand the problem, the better we’re prepared to solve it.

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