College Just Got a Lot Costlier

The Progress Report. Posted July 6, 2006.

On July 1, interest rates on student loans experienced the greatest jump in history, with the variable rate on common Stafford loans shooting up almost two percent for students and graduates. The rate hike comes as a result of the Deficit Reduction Act of 2005, which was signed into law by President Bush on Feb. 8, 2006 as part of an effort to save the federal government more than $22 billion over the next five years. (By comparison, the Department of Defense spends approximately $8.1 billion a month in Iraq).

In today's global technology and information-driven society, obtaining a college diploma is more important than ever. The average college-educated worker [PDF] earns about 73 percent more over a working lifetime than a high school graduate, and faces a 40 percent lower risk of unemployment. A college education opens up windows of opportunity, while leaving school prior to earning a post-secondary credential closes doors. But rising costs and shrinking financial aid are making higher education increasingly inaccessible for many Americans. Lack of academic preparation, inability to pay for a full college experience, and economic pressures to seek full-time employment already prevent many students from completing a post-secondary program [PDF]. The student loan interest rate hikes will only exacerbate the problem.

Putting higher education out of reach

As of last Saturday, the new variable rate for Stafford loans will be 6.54 percent for students and 7.14 percent for graduates. In the 2004-2005 school year, the rates on the same loans were just 2.77 percent for students and 3.37 percent for graduates, and in 2005-2006, the rates were 4.7 percent for students and 5.3 percent for graduates. The interest rate hikes are estimated to add an additional $2,000 in loan payments to the average borrower's debt.

The rate hikes are only the latest blow to students trying to overcome the economic hurdles of earning a post-secondary degree. As a new report by Sen. Edward M. Kennedy's (D-MA) office [PDF] explains, "The cost of attending a public four-year college increased 32 percent between the 2000-2001 and 2004-2005 school years. The cost of attending a private school has also risen considerably -- a 21 percent increase -- and has reached nearly $26,500 a year."

Compounding the problem is the fact that family incomes have not been able to keep up with the exorbitant costs. According to the Kennedy report, "Median family income increased less than six percent" over the same period of time. This fall, Campus Progress will be launching a campaign focusing on the issues of student debt and access to higher education. Click here to sign up for more information.


Help is not on the way

Financial aid has been lagging behind for families in need of help. Federal grants have not kept pace with tuition growth. "While the maximum Pell Grant [which makes it possible for thousands of low-income students to attend college every year] covered 51 percent of the cost of tuition, fees, room and board at a public four-year college during the 1986-1987 school year, it covered only 35 percent of those costs in 2004-2005." As a result, more students are taking out loans to pay for college, leaving them to shoulder a larger debt burden than ever before.

From 1997-2002, the average undergraduate debt rose 66 percent [PDF]. By another measure, "The average amount of federal student loan debt upon graduation has increased from $8,946 in 1992-1993 to $17,400 in 2003-2004." The debt that students are shouldering is increasingly limiting their career choices. An April 2006 report by the State PIRG's Higher Education Project shows that 37 percent [PDF] of public four-year college graduates have too much debt to manage as a starting social worker, and 38 percent of private four-year college students would face an unmanageable debt burden as a starting teacher. Furthermore, reports show that students are delaying buying a home and putting off marriage due to educational debt.

One solution advocated by the Center for American Progress is to increase funding for the Pell Grant program so that it covers as much as it did two decades ago -- 50 percent [PDF] of the average tuition, fees, room and board at four-year, public universities. The funding can be partially obtained by shifting student loans from bank-subsidizing programs to more cost-effective ones.


The expanding achievement gap

The gap in enrollment rates between low-income and high-income groups is distressing. The graduation rate for high-income students is 60 percent higher than the rate for low-income students. It is estimated that between 2001 and 2010, 4.4 million low- and moderate-income [PDF] academically-qualified students will opt not to enroll in a four-year university, and 2 million of them will forgo college entirely -- all because the cost of a college education is beyond their reach.

American Progress Senior Fellow Gene Sperling has advocated addressing the growing achievement gap by promoting a nationwide educational early-intervention effort through partnerships between private and state universities and local communities. Part of the universities' commitment to long-term early intervention programs would entail offering free tuition to any qualified student admitted from a participating program. In addition, schools should be rewarded with cash bonuses for improving the performance of their disadvantaged students.

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