We know that over the last couple of decades American students have been borrowing more money to pay college tuition, but do we really understand the magnitude of the debt and its implications, not only for higher education, but for other significant outcomes in society?
In roughly ten years, student debt has tripled. It is currently more than 1.5 trillion dollars and will be two trillion dollars (that is twelve zeros) in less than five years. To put this in perspective, if you combine ALL of the credit card debt held by everyone in America with a credit card (over 180,000,000 people), it would only add up to two thirds of student debt. Student debt is also larger, by 400 billion dollars, than all the car loans in the U.S. combined.
It’s not just the amount of debt, however, that is overwhelming. The nature of the debt is also becoming extraordinarily problematic. Here are some examples:
- Over 70% of all students take on loan debt (currently over 44,000,000 people)
- The average debt is now over $37,000 per person and roughly 20% of students owe more than $100,000 dollars.
- The average monthly student loan payment is now over $400 with about 20% of payments over $1,000 per month.
- The average bachelor’s degree borrower takes 21 years to pay off student loans.
- 64% of all student debt is held by women, but they earn 27% less than men after graduation.
- Nearly 40% ($600,000,000,000) of student debt is held by borrowers under the age 30.
- $100,000,000,000 of student debt is held by people over 60 years of age
- Half of all borrowers are making interest-only payments (which means they still owe every dollar of debt they started with despite making years of payments)
The scale of the debt problem is so great that it is affecting other parts of the economy and society as well.
The Federal Reserve Board of Washington, D.C. found that an increase in student debt has led to a decrease in home ownership. Controlling for the recession, they found that home ownership for the most indebted students, aged 24 to 32 years of age, declined by twice the rate as for the rest of the population. Relatedly, the Fed Chairman, Jerome Powell, noted that student debt is beginning to weigh negatively on GDP, with research suggesting it could be costing the economy between $86 and $108 billion per year!
Another study predicts that students who graduated from college in 2015 will have to delay retirement until the age of 75, in large part because of the increasing burden of student debt. Relatedly, it seems that the debt itself reduces mobility, which reduces income. Analysis sponsored by the National Bureau of Economic Research determined that once student debt is paid off, individuals tend to increase their income by nearly 17% within three years due to their comfort with relocating for higher paying jobs. Likewise, the lack of mobility while still under debt repayment depresses income, which lasts as long as the debt repayment itself!
And yet another study found that millennials are delaying both marriage and children, in part, due to student loan debt.
So, back to the core question of this article, how might this reality impact higher education? If the student debt bubble pops (massive defaults), it will drastically decrease the availability of future loans, both public and private, while lenders and the government figure out what to do. This will significantly decrease revenues across all of higher education because more than half of all financial aid revenue today is paid via student loans. If that were to decrease even modestly, most institutions of higher education, across all sectors, would simply be insolvent. Clay Christiansen, of Harvard University, has already predicted that half of all colleges and universities in the U.S. will be closed or bankrupt in the next ten years and that is even if the student loan bubble doesn’t burst. His argument is that the underlying financial model in higher education is fundamentally unworkable across the board and that disruptive innovations will accelerate the demise of many IHEs.
How did we get here with student loan debt? The full answer to that question is far too long for this article, but the basic dynamic is that over the last 25 years or so, tuition has increased dramatically (far in excess of inflation) while state funding for education has declined precipitously (shifting the tuition burden from tax payers to students and their families). There was also an increase in the overall student population, and thus borrowers, through 2011, at which point student enrollment began to decline. The shift from public funding of tuition to student self-funding has resulted in massive increases in borrowing. In 2004, total student debt was less than $400 billion. Today, as noted, it is over $1.5 trillion. That happened in only 14 years!
Whether the bubble pops and brings down much of higher education with it or not, the status quo of student debt is simply not sustainable. Something will have to give. It might be massive debt amnesty (paid for by taxpayers) or an entire generation or two may live much of their lives unable to own homes, buy cars, or invest for retirement. Many debtors will default, but will not be able to discharge student debt through bankruptcy. Some others will last long enough to get through 20 years of income-sensitive repayment, then have their balances eliminated (current federal law provides for that)—but it only works if you don’t have any missed payments, delinquencies, or forbearances. And, based on a new trend, some students will actually leave the U.S. and live abroad to escape what they see as crippling student loan debt.
In the interim, if the Education Department and accreditors can manage to get out of the way of innovation, new, disruptive models may come onto the scene that many students can afford without loans. Likewise, industry may fill part of the post-secondary education need at far lower cost. Regardless, the monopolies that have kept traditional higher education afloat for well over a century may have met their match in the student loan crisis.