There is no shortage of noise surrounding the dramatic rise in college tuition over the past decade. Both former presidents and our current one have addressed the issue. I even wrote a piece about how to lower college tuition about a year ago. There has been less noise, however, about the rapidly growing burden of student debt. Student debt is growing too rapidly and actually poses a greater threat to Americans than the high sticker price of college.
Student debt is rising with blistering pace. In 2004, the total student loan burden was under $0.4 trillion; today it stands at more than $1.2 trillion. The increase is not confined to one age demographic. All age brackets – from under 30 to over 60 – have experienced similar percentage increases in amount of debt held. Across the board, student debt is rising. Why?
The impulse is to blame rising tuition costs. With higher prices on education, students must borrow more. But while actual sticker prices of college educations are rising, net prices, or the actual costs to students, are remaining stable, making if difficult to blame rising costs.
It is true that more people are attending college, but this can only account for a fraction of the rise in debt. Between 2000 and 2014, undergraduate enrollment jumped thirty-one percent. Over a shorter timeframe (from 2004 to 2014) student loan debt rose by almost 200 percent. Higher enrollment accounts for part of the answer, but not all of it.
Debt is not rising in other areas of the economy. Credit card debt has declined since the financial crisis and mortgage debt has stabilized over the past five years. The debt craze is confined to education.
Student loans have all the makings of a bubble. Bubbles in the economy occur when people over-invest in over-priced assets. When prices tumble down to reality, the economy suffers.
Given the lack of external factors driving up student loan needs, it’s plausible that people are over-investing in education. Education, while it is currently more valuable than ever, also shows signs of beginning to decline in value. College has become as ubiquitous as high school, but this is possibly herding students into college irrationally. Students go to college to satisfy social norms, not because it projects a brighter future. With the value of education declining, this could wreak havoc on the U.S. economy.
The havoc, however, will likely be mild compared to the housing bubble. Even now, years after the housing bubble collapsed, mortgage debt still dwarfs student loan debt. If the student loan bubble bursts and countless individuals default on their loans, the mess will not be nearly as drastic as 2008.
Borrowers and lenders will still get hurt though. Luckily, there is time before this bubble will become too stressed, and there are many tools schools and governments can use to deflate the bubble.
First, local and federal governments can encourage parents and students to save for college so students borrow less. This could take many forms from the tentative – a public ad campaign – to the aggressive – matching parents’ educational savings.
Increasing savings is a long-term option, but active steps must be taken for the present as well. The government must make loans less available. Increased loans led schools to raise sticker prices, but left net prices unchanged. The opposite ought to have the same effect; sticker prices will adjust to fewer available loans and leave net prices stable while lowering student loan debt.
For this to work, schools and governments must seek to alter the widely held social assumption that quality of education automatically declines with a price decrease. Schools must find ways to demonstrate to prospective students that tuition prices are falling – which ought to excite students – while the quality of education remains sterling.
Finally, the government could shift funding they offer for four-year institution loans to loans and incentives for trade school. By incentivizing trade school, the government will diversify the labor force. With diversity in labor, the benefits of a college degree will fall less rapidly, thus inhibiting the bubble. Further, diversifying the asset in a bubble can deflate the bubble without bursting it, shown famously through the Magic The Gathering card game.
Rising college tuition prices pose a threat to students who want to attend school; the vast increase in student loan debt poses a threat to the entire US economy. Luckily, we have tools available to fight this impending problem, but we must address the issue instead of ignoring it to fester in the corner.
