The Cost Behind Student Debt

One of the big issues discussed during the Democratic debate is college tuition and the trillions of dollars of student debt. Bernie Sanders is proposing a 2% interest rate on all student loans. Sounds great, but if tuition costs keep rising, it won’t matter. Students are still going to have a huge debt upon graduation. Maybe the solution lies in choosing a college or university where tuition costs are lower while the educational value is still world-class? 

In some cases, an associate degree may render a better paying job and a significantly lower student debt, but long-term mobility in the job market may be limited. Finding a company that pays for advancing your education may be another alternative to obtaining a higher degree, but some companies aren’t willing to make that investment. Colleges in the U.S. have a very small percentage of students that are sponsored, single digit numbers. Management consulting and to a lesser extent financial services and multinational industries see this move as advantageous for their company, but as you will discover, consulting firms are looking outside the U.S. for employees.

Some families don’t care about the high price tag, as long as their student(s) are able to attend the college of their choice. Which means that families aren’t turning down Harvard University for a lower-cost public institution. Even lower-income families, with their first generation college students, are not deterred by cost as their hopes are high for their kid’s education to bring a better life for all. College dreams are hard to shake, just look at student debt and you’ll see how important that degree is emotionally if not economically, at least for now.

While some families planned for their student’s college, most did not. Regardless, it still doesn’t fix the problem of rising tuition cost and a lack of adequate funding for those seeking to obtain a higher education without acquiring a large amount of debt. Although some states are placing a freeze on the tuition, none are looking to fund colleges the way they did a generation ago… but maybe they should. 

“… the old model, where we’d slash the heck out of higher ed in bad times, give it above-average support in good times, and colleges raise tuition to make up for the cuts, isn’t going to be sustainable,” said Scott D. Pattison, executive director of the National Association of State Budget Officers (NASBO).

So as the cost of tuition rises, families are expected to contribute more, while federal and state  contribution decreases. Add the worst recession since the Great Depression and you can see why student debt is so incredibly high. Many were hoping they could ride out the economic down turn while gaining a better educational background, but slow recovery and limited good paying jobs have made it very difficult for college students to pay back their debt. 

Once considered a beacon of hope, the Pell grant system, created to help students with financial need pay for college, has done very little to offset student debt. Since the 1970’s, Pell grants have not increased relative to the rising cost of tuition (maximum funding at $5,775; average funding received only $2,354), and some college students saw tuition cost increase as high as a 200% while they were trying to obtain their degree. 

Regardless, more students started turning to Pell grants to help offset the rising cost. During 2011, this influx of applications put the underfunded Pell Grant program in danger of a $18.3 billion shortfall. Instead of increasing funding to help the program, Congress opted to add $17 million by implementing some restrictions that included making students without a GED or high school diploma ineligible,  lowering the full-time maximum semesters for receiving aid from 18 to 12 semesters, eliminating students receiving 10% of the Maximum Award, and lowering the maximum income for the expected Family Contribution (EFC) from $32,000 to $23,000. 

This helped Congress diminish the funding shortfall, but it rendered a large number of students ineligible to receive a Pell grant, and these students had no choice but to turn to the student loan system to fund their college education.

Options for Distressed Students?

There is public service and teacher loan forgiveness programs, as well as, other circumstances where students can get part or all of their loan cancelled, but they’re limited, and for most students they are not an option. What are some other options? Loan forbearance or deferment programs are available. You have to apply to have either of these implemented, but the downside is your loan still accumulates interest while your payments are put on hold…racking up more debt.

Should students and families have accumulated so much debt? Depending on the degree and/or college, it may well be worth it, but before taking out a big loan, it may be wise to look at the cost-benefit of the institute you plan on attending.

Many students are opting for degrees where they see a high income reward upon graduation. If you’re thinking the tech industry is going to save you…think again. The tech, STEM and consulting industries are looking elsewhere for employees.

There are roughly 156,000 graduates with STEM degrees and only half as many jobs available. Just to make matters worse, a large number of those jobs are given to graduates from other countries, thanks to the H-1B Visa program. And if you think that’s bad, the industry is trying to convince Congress to increase the percentage they can hire from outside the US, claiming they can’t find talent locally. 

The largest sector for visas, right now, is in the consulting industry, to the tune of 40,000 of the 85,000 visas issued. “What these firms have done is exploit the loopholes in the H-1B program to bring in on-site workers to learn the jobs [of] the Americans to then ship it back offshore,” says Ron Hira,  professor of public policy at the Rochester Institute of Technology. “And also to bring in on-site workers who are cheaper on the H-1B and undercut American workers right here.” says Hira. 

Where Did all the Money Go?

States and institutions are going to have to look at other options to bring money back to the educational system. One look at their proposed budgets, and you’ll find that many states don’t plan on doing much. Pattison believes that almost no amount of state funding is going to make public education sustainable unless colleges and universities get their spending under control, especially when it comes to employee benefits like retirement and health care, which the report concludes is the driving force behind a significant portions of the tuition increases at many public institutions.

While this may be true, many states are having similar budget difficulties. The U.S. Government Accountability Office reports that, absent policy changes, the outlook for state and local sectors will decline steadily through 2060 if they don’t close the revenue expenditure gap.

According to The United States Government Accountability Office (GAO), the biggest factor Screen Shot 2016-03-09 at 10.01.50 AMcrippling institutions, state and local budgets are health care costs. Although, the past few years many states have seen improvements due to tax revenue and some economic recovery, the long-term outlook shows a decline in the state and local fiscal positions due primarily to the rising health-related costs of state and local expenditures in Medicaid and the cost of health care compensation for government employees and retirees. Health related costs are expected to rise from 3.9% of GDP to 7.1% by 2060, and that’s a modest expectation. All this will occur while wages and salaries of state and local government workers are expected to decline as a percentage of GDP. 

Pension plans have taken their share of hits as well. Many states have adjusted plans by increasing member contributions and decreasing coverage to extend their ability to pay pension obligations for retirees, but this isn’t the biggest issue with most state budgets, health care is still the big budget breaker. 

Another factor playing into some state budget problems are the increased costs in the correctional sector. According to the Bureau of Justice Statistics, states spent $29.5 billion for prisons in 2001, about a $5.5 billion increase from 1996, and that’s after adjusting for inflation. This increase in cost outpaced both health care and education. Why the increase? More than three-fourths of the states spent 96% or more of their prison funds on operation costs (salaries, wages, benefits, supplies, maintenance, and contractual services). Additionally, more states have increased for-profit prisons to more than 10%, and that number is growing.

If that isn’t bad enough, the U.S. has incarcerated more people than any other industrialized society. While other countries are looking at rehabilitation, we are spending more money on incarceration. We could/should rethink this expenditure, if not to help people get back on the right track, but to free more funds for our children’s education. Unfortunately, many states like Arizona are planning on allocating less money to universities, compared to just ten years ago, and increasing funding to the correctional sector. 

Federal money can help alleviate some of the problem by contributing a higher percentage of funding for health care and education, but this is still a short-term solution if rising health care and tuition costs are not controlled.  The Affordable Care Act may have a positive impact on the long-term outlook of health care, but some states will still see an increase in costs, especially where Medicaid coverage is below that of the ACA. 

The solution isn’t cutting Medicare, Medicaid coverage or pensions, but cutting the cost within the over-priced health care system. If we want to get serious about our children’s education, we need to follow the money right to health care’s expensive front door and start managing the over-priced pharmaceutical companies, eliminate health insurance companies, and regulate the inconsistent pricing throughout the system. State and federal legislators need to get serious about negotiating better pricing and curbing profit. Which isn’t very popular in an industry whose primary concern is profit.

The other alternative is to raise revenue through increased taxes…another unpopular idea, especially when it comes to a tax hike proposed for the top wage earners and corporations.

In the long-term, the health care system is going to start bankrupting other sectors of state and local budgets…namely K-12 education. With cuts already occurring in this area, how far are we willing to let our educational system diminish before we demand a cap on health care cost and start taxing the top wage earners and corporations to increase revenue?

If we want our children ready to compete in a job market that is steadily becoming more international, we are going to have to get serious about their education and how to protect it.


Other sources: CollegeBoard, National Association of State Budget Officers