Last month President Obama, facing increasingly violent Occupy Wall Street protests nationwide, announced executive action to help alleviate the heavy burden of student debt faced by many of the young, unemployed protesters. Although many of the protesters are blaming private banks and corporate "fat cats" for the financial pickle they're in, the president thought he'd calm them down by easing the terms of repayment and forgiveness. What Obama didn't tell them is that it's really the federal government they should blame.
A year ago, the president signed legislation ending subsidies for private banks giving federally guaranteed student loans—making the federal government, not banks, the lender of choice for most students. You can still get private bank loans for your college education, but since they no longer are backed by the U.S. government, private loans aren't as good a deal anymore; most are variable rate loans that require a co-signer and are difficult to qualify for. So it doesn't take a rocket scientist to see why most kids take out federal student loans from the Department of Education now, and leave the bank loans as a last resort.
Back in the mid-1980s when I went to college, there was a $2,500 limit on the amount of federal student loans you could take out in a year. I graduated with $10,000 of debt and worked three jobs to pay it off. That's all changed. The limit on federal loans for most students is now $31,000 for four years. These days, the average college senior who had loans graduates with $25,250 in student debt, a new record, with some high-tuition colleges averaging double that, at over $55,000 per student. Unemployment has hit a new high among young people, and their median incomes are falling. Many of them are having trouble finding a job and making their loan payments. A whole generation of middle-class students is being crushed by student debt.
It all goes back to two well-intentioned federal goals: first, that a college education should be within the reach of every American, and second, that if students borrow money from the federal government, they should repay it. Most of us would agree that both are noble goals. But the consequences of both have been stunning.
As a result of the first, the money began to flow; over the last 30 years, inflation-adjusted federal financial aid has quadrupled. Total student debt has now reached the $1 trillion mark, more than the credit card debt of every American combined. The federal deficit in the recently ended fiscal year totaled $1.3 trillion; the debt load carried by college grads now stands at more than two thirds of our nation's massive budget shortfall. According to the College Board, over half of all full-time undergrads at public colleges and universities are now full-time borrowers. At private nonprofit schools, a whopping two thirds have loans.
The more money the federal government pumps into financial aid, the more money the colleges charge for tuition. Inflation-adjusted tuition and fees have tripled over those same 30 years while aid quadrupled; the aid is going up faster than the tuition. Thanks to the federal government, massive sums of money are available to pay for massive tuitions.
This has nothing to do with costs. According to Neal McCluskey's research at the Cato Institute, it costs roughly $8,000 a year to educate an undergraduate at an average residential college. Yet the average college bill—including room and board—charged at a private four-year university is $37,000, and $16,000 at a public one. For a long time, college tuition has been rising faster than the inflation rate, which certainly has hurt middle-class families. Colleges can raise tuition with impunity because colleges know they'll get paid no matter what.
That brings us to that second well-intentioned federal goal, that all student loans must be repaid. In 1976 federal law was changed to state that student loans would no longer be "dischargeable," or covered by bankruptcy. Along the way, the federal government also removed the requirement that college students have parents or grandparents co-sign for federal loans, making young students solely responsible for payment in full.
This means that if you owe the government money for college and don't pay it back, filing bankruptcy isn't going to help you. You will still owe the government. All you can do is default on the loan or seek early forgiveness. And that's exactly what's happening. According to the Department of Education, the national default rate has increased every year for the last four years, and has nearly doubled since 2005. As the administration forgives more loans and defaults keep climbing, the cost to taxpayers keeps going up.
It's not crazy to talk about making student loans dischargeable again, or even capping the number of federally guaranteed loans so that private banks can compete for more borrowers. But the bigger challenge is reducing the cost of tuition in the first place. Tuitions are artificially high directly because of federal financial aid. "It's a vicious cycle," McCluskey recently explained in a speech. "Students tell the politicians, 'We don't want to pay this much for college,' and politicians respond by throwing more money at them, and colleges respond by increasing costs."
While critics charge that gradually cutting back on federal financial aid is "heartless," doing so would actually be one of the most compassionate things we can do in the long run for middle-class families. Going to college is a big part of the American Dream for many young people, but well-meaning "help" from the federal government is driving up costs, creating massive debt, and, in some cases, ruining lives.
- Read how average student debt has reached an all-time high.
- Read about 7 groups with reason to protest.
- Read about the president's new student loan rules.