Student Debt Bubble - part 2


studentdebt headerThere is no single reason why student loan debt has gotten so out of hand. Increased tuition costs, reduced state spending, borrower behaviors, and even choice of major all play a role.

First, tuition rates skyrocketed in recent years. From 1999-2009, average tuition at public four-year colleges increased 73%, and in many states, tuition has continued to sharply rise. One reason for this is that state governments have spent, on average, 28% less on higher ed since the recession began in 2008.

Logically, as state spending decreases, it has to be made up — and student borrowing has historically helped compensate for the shortfall; in 1987, students only paid about 23% of the cost to fund higher education, but by 2012 their share had increased to over 45%. Since federal loans will not cover the increased costs, many students are turning to private loans.

Another factor is the nation’s more relaxed attitude toward borrowing in recent times. It is important to note that students 20 years ago were stricter in their borrowing and graduated with a median debt burden (monthly loan payment as a percentage of monthly income) of only 3.3%. By 2003, the median debt burdenexitIcon of nearly 90% of borrowers hovered around 8%. Prior to 1992, only those students who demonstrated financial need could participate in the federal student loan program; after 1992, many requirements for borrowing from Uncle Sam were relaxed.

There are several other interesting trends that have come to light in recent years, although they don’t lend themselves to simple conclusions. One is that students in the Northeast and Midwest tend to have much higher debt loadsexitIcon when compared with their fellow students in the West. One theory to explain this is the significantly higher concentration of students attending private colleges in the Northeast and Midwest. However, since many private nonprofit colleges actually have a lower “net price” (cost of attendance after grants and scholarships are awarded) than public schools, borrowers may actually need to take out fewer student loans than those who attend public institutions.

Another trend to watch is that graduates with liberal arts degrees suffer higher debt burdens. According to a recent report in the Wall Street Journal, the median debt load for graduates of design, music, and art schools in 2010-2011 was $21,576, while the median debt load of graduates from liberal arts schools was $19,445. In comparison, median debt load for students who graduated from research universities was $18,100 during the same academic year.

Sadly, graduates with these degrees often have the most difficulty paying back their loans. In a recent study by Georgetown University’s Center on Education and the Workforce, those who graduated with degrees in photography and the fine arts suffered unemployment in the range of 10.1%-11.49%, while others with liberal arts degrees, such as anthropology, English and foreign languages had unemployment rates between 8.1%-12.6%. Likewise, employed individuals with degrees in the liberal arts who have jobs still experience the lowest wages, generally speaking.