Is the Near-Trillion-Dollar Student Loan Bubble About to Pop?
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“If you want to take a relation of violent extortion, sheer power, and turn it into something moral, and most of all, make it seem like the victims are to blame, you turn it into a relation of debt.” -- Economic anthropologist David Graeber, author of Debt: The First 5,000 Years
Tarah Toney worked two full-time jobs to put herself through college, at McMurry University in Abilene, Texas, and still has $75,000 in debt. She graduated in six years with a Bachelor's in English and wanted to go on to teach high school.
“Right about the time I graduated, Texas severely cut funding to our education system—thanks, Perry--and school districts across the state stopped hiring and started firing. It became abundantly clear that there was no job for me in the Texas public school system,” she told me. “After two months of job searching I got a temporary position in a real estate office.”
She continued, “In August my post-graduation grace period was up and all of the payments on my student loans amount to $500/month. Adding that expense to my monthly bills puts me at $2,100 per month. If I don't make my payments they will revoke my real estate license, which I need in order to do my job.”
Max Parker (not his real name) enrolled at Texas A&M in College Station, Texas to get a BA in economics and a BS in physics. His freshman year was great—his parents had saved some money to help pay the bills, and after that he was able to get “more generous” student loans. He took a job to help cover the fees and bills that his student loans wouldn't cover, and worked about 35 hours a week during his sophomore year while taking 15 hours of classes—but found that his grades dropped with his workload.
“Part of the reason I thought to take on such a heavy load was the university's newly (at the time) implemented policy of flat-rate tuition,” he explained. “This policy stated basically, no matter how many hours you enroll in (full time) for the semester, you will pay for 15. This means, you enroll in 12 hours or 20 hours, and you'll pay for 15 hours either way. Being economically minded, I wanted to make the best decisions I could with the money I had been loaned, so I enrolled in 15 hours.”
He adjusted his course load, but in the spring of his junior year, a family emergency led him to withdraw midway through the semester, taking incompletes in his courses.
“I am 25 years old now, and shacking up in my parents' guest bedroom,” he told me. “I have successfully made four payments on my student loans in the past three and a half years. I have over $48,000 dollars of student loan debt, and absolutely nothing to show for it. No degrees. No certificates. No qualifications. I have continued my education to the best of my ability since leaving A&M, but always at community colleges and always paying for everything out of pocket. As you can imagine, since I'm not 'qualified' for a decent paying job, my savings for school piles up very slowly, and then disappears when August and January roll around. I haven't been back to school in about a year now, and I currently work at Subway, making sandwiches. I don't make my loan payments.”
He's about to join the military because he sees it as his only option. “I am depressed at the idea of signing my life away for four years so I can fight someone else's wars. I am angry beyond belief that it's come to this,” he said.
Kate Sternwood (not her real name) was recently laid off from a job at a nonprofit organization where she was making $55,000 a year. She has $40,000 in debt from the University of Massachusetts. “When I called my repayment program to tell them I was losing my job, they told me my payment would go from $400 a month to $384 a month because making $55K a year I already qualified for the "hardship" rate.”
The agency in question is Van Ru, a collection agency that takes loans from the Dept. of Education if they go into default. Sternwood said they can't even tell her what the rate will be when she's paid enough to get out of default because they don't know which bank will end up with her loans.
Colleen Williams, a writer in New York, has $975 a month in payments on various student loans from her undergraduate degree at the University of New Mexico and her graduate degree from Parsons School of Design; $325 of that is automatically debited from her account each month after she went into “Student Loan Rehab” after a default.
“When you default on government loans, the collection agency the loans eventually go to are ridiculous,” she said. “Obviously someone defaulting on student loan debt does not have the payoff amount, and they will argue with you, repeatedly, to get you to pay $30,000 off, in full. 'Don't you have a friend you can borrow the money from?' etc.”
Williams noted that she's not pursuing the career she originally intended after Parsons, which was fashion design. “If I could do it all over again, I would have gone into science,” she said.
Matt Hindman graduated two years ago from Temple University in Philadelphia and is pursuing a career in film. “We are all trying to get our feet wet in our collective industries. The job hunting process costs money too,” he pointed out. “I don't think it makes sense that I got penalized for being late on payments during my first year out of school. Plus I went into forbearance once, so now my interest is super high from that.”
The story is the same around the country. The economy is stagnant, the job market terrible, and graduates who used to believe their degrees would lead to good jobs are struggling. Meanwhile, the unforgiving student loan system continues to penalize them for their inability to pay.
As Mychal Denzel Smith at the Grio pointed out, “The fundamentals of our economy aren't strong, but they are the same as ever: we are a country built on low wages and debt.” With those low wages, and particularly with the likelihood of finding a job remaining so low, students who took on debt to pay for an education cannot pay it back. We're in the middle of another bubble—a student loan bubble. And it doesn't look like we've learned much from the impact the popping of the housing bubble had on our economy—the same lending practices are continuing.
Since the beginning of the recession, most types of credit have gone down. The only exception to that rule has been student loans.
A recent piece in the Atlantic noted that student debt has grown by 511 percent since 1999. At that time, only $90 billion in student loans were outstanding—by the second quarter of 2011, that balance was up to $550 billion, according to the New York Fed. And the Department of Education estimates that outstanding loans total closer to $805 billion—and that number will pass $1 trillion soon.
As student loans rise, so has delinquency. Phil Izzo at the Wall Street Journal reported that 11.2 percent of student loans were more than 90 days past due and that rate was steadily going up. “Only credit cards had a higher rate of delinquency — 12.2 percent — but those numbers have been on a steady decline for the past four quarters,” he noted.
It shouldn't be surprising to anyone that student loan defaults are going up as young workers especially are struggling in the current economy. Izzo reported, “Workers between 20 and 24 years old have a 14.6 percent unemployment rate, compared to the national average of 9.1 percent recorded in July. That comes even as the share of 20- to 24-year-olds who are working or looking for a job is at the lowest level since the 1970s, before women entered the labor force en masse.”
In his Huffington Post blog, Michigan Democratic Representative Hansen Clarke noted, “This year, the average borrower graduating from a four-year college left school with roughly $24,000 of student debt, despite the grim statistic that -- according to a Rutgers University study -- only 56 percent of 2010 graduates were able to find work following completion of their studies.”
Back in July, credit rating firm Moody's Analytics warned that student debt could lead to the next economic crisis. How did student loans go from “good debt” that could be expected to pay off--Pew found that an adult with a bachelor's degree earns about $650,000 more during their career than a typical high school graduate—to a bubble that threatens the economy?
According to the National Center for Education Statistics, college enrollment skyrocketed 38 percent, from 14.8 million to 20.4 million, between 1999 and 2009. (The previous decade it had only gone up 9 percent.) This should be a good thing—except it was not accompanied by measures to make tuition affordable for working families who wanted to send their kids to school. Combined with the decline in the type of union manufacturing jobs that used to allow workers to be comfortably middle-class without a college degree, we've wound up with working-class families taking on debt to send their kids to college, which they are told will help those kids make more money.
Labor economist Mark Price told me:
“Manufacturing was a path into the middle class that didn't require a college degree but manufacturing has shrunk as a share of all employment and access to similarly high paying good jobs in the service sector typically requires a college education. One other complicating factor is that that the manufacturing that remains in this country often does require more than just a high school diploma for entry.”
As student loans are relatively easy to come by, both from the government and from private lenders increasingly getting into the game, universities have been able to keep hiking tuition without seeing a drop in enrollment. Students are still advised that student debt is “good debt,” as noted above, and that they will be able to pay it off—but the costs are rising far more rapidly than average incomes.
The Philadelphia Inquirer reported that Temple University has raised tuition every year since 1995—it's gone up 9.9 percent for in-state students. At the University of Pennsylvania (an Ivy League private university—Temple is the state school) tuition went up 3.9 percent to $42,098 a year. “Throw in a dormitory bed, meals and books, and the price reaches $57,360,” wrote Inquirer reporter Jeff Gammage.
Josh Harkinson at Mother Jones pointed out that like anything else, the bang for your buck isn't the same at different universities. Private universities have increased per-student spending by about $7,500, he wrote. But public community college spending per student has stayed flat at around $10,000—while those private college students get $36,000 spent on them. He wrote, “It should come as no surprise then that graduates of prestige schools continue to outpace other collegians.”
All of these factors have combined to send student loan debt into the stratosphere. Daniel Indiviglio at the Atlantic pointed out, too, that student debt has far outpaced the growth of all other household debt over the past 10 years—including increasing twice as fast as housing debt. He argued:
“This wasn't just any average period in history for household debt. This period included the inflation of a housing bubble so gigantic that it caused the financial sector to collapse and led to the worst recession since the Great Depression. But that other debt growth? It's dwarfed by student loan growth.”
RJ Eskow at the Smirking Chimp noted that the same banks that broke the economy by creating that housing bubble are responsible for the student debt crisis—as well as the federal government, which issues student loans. “[T]hese debts were incurred with broken promises. Much of that money is owed to the government itself, and billions are owed to the banks we bailed out at taxpayer expense,” he wrote.
Student loans are not really comparable to housing loans, though: if you default on your student loans, there's nothing to repossess. Instead, you'll face a drop in your credit rating, and constant pressure from the types of collection agencies that Williams and Sternwood discussed above. They can garnish your wages, as Williams explained, and even if you declare bankruptcy, your student loans don't go away. And as Hindman noted, miss a payment, and your interest rate goes up, creating a punitive spiral of debt there's no way to escape from.
Even if mass default isn't likely to happen the same way mortgage defaults did, Indiviglio wrote that the cost of college and debt is already slowing the economy. “As Americans grapple with high student loan payments for the first few decades of their adult lives, they'll have less money to spend and invest,” he wrote, pointing out that all the money going into colleges and the pockets of lenders in the form of interest is being funneled away from other places it could be spent. “Of course, this would be a rather unfortunate irony: higher education is supposed to enhance a nation's growth, but with such an enormous debt burden, graduates might not be able to spend and invest enough to allow that growth to occur.”
Iris Van Kerckhove, who blogs about business at On My Grind, wrote:
“Now the labor pool is flooded with people who have postgraduate degrees and are desperate for work. Employers are overwhelmed with the number of applicants and, in response, demand higher qualifications as a way to filter the applications. Yet higher education institutions continue selling something that doesn't exist-- a guarantee of a better future. Something's gotta give.”
So what can give?
Mychal Smith reminded us that just last year in his State of the Union, President Obama proclaimed, "No one should go broke because they chose to go to college.” He called for student loans to be forgiven after 20 years—10 for those who go into public service—and a $10,000 tax credit for families paying for a four-year college.
But that's not a solution for people like Parker, who was unable to finish school because of the cost, or Toney, who wanted to go into public service but saw that door shut in her face with state budget cuts. They're in debt now, not in 20 years, and $10,000 doesn't begin to cover their debt, let alone the $80,000 Williams owes for a graduate degree. As tuition goes up thousands of dollars a year, a $10,000 tax credit looks pretty measly—and the chances of getting even that through the current Congress are slim to none.
The Philadelphia Inquirer reported that New Jersey's state legislature has a bill under consideration that would ban state colleges from raising tuition more than 2 percent a year. Keeping tuition down is certainly part of the solution—tuition growing faster than wages is a recipe for defaults as students struggle to pay back their loans. In addition, just as housing prices going way up wound up pricing many people out of home-buying, increases in tuition will price students out of an education—particularly if the benefits of that education become less clear, as jobs remain hard to come by.
One university actually lowered its prices recently. The Inquirer reported that Sewanee, the University of the South, a private school in Tennessee, cut its annual cost 10 percent, from about $46,110 to $41,000--without closing programs or laying off staff:
“Enrollment was better than expected, alumni giving went up, and some parents donated the $5,000 price difference back to the university. The deficit turned out to be half of what was projected, at $1.5 million, and Sewanee got the bump in publicity it sought: Campus visits increased 60 percent.”
But what do we do for the people who've already finished college but are stuck without jobs and with mounting debts? RJ Eskow proposed a “Youth WPA,” imitating the Works Progress Administration from the New Deal to put young people to work rebuilding our infrastructure, developing new business ideas, make creative works that we can all enjoy, and more (his six-part proposal is worth reading in detail).
An idea that's been getting a lot of traction lately—including an online petition pushed by MoveOn member Robert Applebaum that has 320,000 signatures as of this writing—is student loan forgiveness as economic stimulus.
Rep. Hansen Clarke introduced a resolution in Congress, co-sponsored by 12 other members, that includes student loan forgiveness in its suggestions for bringing down the U.S.'s “true debt burden.”
In his Huffington Post blog, Clarke wrote:
"Congress is now completely focused on reducing debt. This would be a positive development, if not for one detail: it's focused on the wrong kind of debt.
With over a quarter of all American homeowners "underwater" -- owing more on their homes than their homes are worth -- and total student loans slated to exceed $1 trillion this year, it is household debt, not government debt, that is constraining spending, undermining confidence, and precluding sustainable long-term growth.”
Clarke is right. For years, credit was a substitute for real wage growth in the U.S. And now as that debt burden has grown unsustainable, working families are barely able to keep up with payments, let alone spend enough to get the economy back on its feet. And student debt, as we've shown, is on the least sustainable trajectory of all.
Mychal Smith wrote:
“[C]onsider the potential impact on the economy if all of a sudden 35 million people were able to add to their monthly budget anywhere between $400 and $1000 that they no longer needed to satisfy exorbitant student loan repayments. And no longer faced with the threat of default(at a rate of 7 percent as of September 2010), credit scores would rise and more people with inclination toward starting small businesses (those things that every politician proclaims drive economic growth)[could do so]. Debt free degree holders would allow for more risk taking and innovation.”
Student debt forgiveness would put $400 a month back into Sternwood's pockets, $975 a month in Williams'. Even just forgiving the government loans would probably allow Parker to finish his degree instead of going to war.
Of course the resolution is unlikely to pass Speaker John Boehner's Congress, and even if it does, it's just a resolution. But the instant popularity of Applebaum's petition shows something: Americans realize that student debt at the current levels is completely untenable, and something must be done soon.
Republicans love to talk about the debt we're leaving our children with. But saddling them with record levels of student debt and no jobs with which to earn money to pay it back hurts young people much, much more than government budget deficits.