My son will be a high school junior this year, so I’ve started paying closer attention to college costs. I’m not talking about the real cost of education at public schools, which has been remarkably stable, but about the share of it that parents and students are expected to pay, which has been soaring.
I’ve been saving since my son was born and have accumulated about 130% of our current household annual gross income in a 529 college savings plan—I’m hoping that will be enough for us to avoid having to take out loans, even if he spends many years in grad school as I did. Most families do not live as far within their means as we do (not having a car helps, as does having scrimped for years to pay off the mortgage on a small house bought before the housing bubble), and most do not put such a high value on education, so few families will have saved as much of their income as we have for college expenses. But low-cost college options are disappearing as states defund public colleges (which some see as a successful attempt kill off universities and turn them into training mills and job security for middle managers), so more families are going into debt to pay for college.
For the past 3 months I’ve been collecting articles about student debt, starting with a story from the NY Times by Andrew Martin and Andrew W. Lehren: Student Loans Weighing Down a Generation With Heavy Debt – NYTimes.com and Cost of College’s commentary on that article. The story can be boiled down to a sentence: Student debt has gotten huge and will be a major economic problem in coming years.
Student loan debt is not just a problem for youngsters just out of college. More and more older people are still paying off student loans for themselves or their children, interfering with saving for retirement (which will affect a lot of baby boomers, as pension funds were often woefully underfunded, relying on the huge investment returns of the 1990s that have now evaporated). Some people are even having their Social Security payments reduced to pay off student debt, making retirement even more precarious.
Much has been made of student debt now having gotten larger than credit card debt. The crossover happened around the beginning of 2010, as credit-card debt dropped from its peak around the beginning of 2009 to still high, but more rational levels of 2003. The article Student Debt bubble delinquencies surge shows graphs of the linear growth of total student debt from $200 billion in 2003 to $900 billion in 2012. It also shows increases in the dropout rate and particularly high dropout rates in the for-profit colleges, which are the main pushers of enormous student debt. It also plots delinquencies, which have been edging upward, though still not as high as for credit cards.
The NY Fed has some very nice graphs of Household debt by type, including some that show differences in per capita debt for different states. California stands out as having the highest per capita debt, but that is almost entirely due to the high mortgages and home equity loans in California. Student loan debt is much higher in states that defunded public universities sooner (like Michigan and Pennsylvania). Auto loan and credit card debts are more uniform across states (except Texas, where car loans per capita are double elsewhere, being even bigger than student loans). Collateral-backed debt (mortgages, home equity loans, and automobile loans) are still vast majority of consumer debt in the US, but student loan debt has been growing from a negligible amount to more important than credit card debt.
The Consumer Financial Protection Bureau issued a 132-page report on private student loans on 2012 July 20, though the private student loan bubble seems to have already collapsed along with the subprime mortgage market (both were fueled by the same securitization of low-quality debt). The market was $5 billion in 2001, $20 billion in 2008, $6 billion in 2011—that refers to loan origination, though, and most of the debt has been accumulating. The private student loan market has been particularly lucrative for the for-profit colleges, but private student loans make up less then 15% of outstanding student debt, which is dominated by Federal student loans. One interesting observation is that many students taking out private student loans had not exhausted the Federal loans (particularly unsubsidized Stafford loans) available to them, despite the generally better terms of the Federal loans. The report attributes this in part to marketing by the lenders that blurred the distinction between Federal and private loans, despite some major differences (like fixed interest rates for Federal loans but adjustable rates for most private loans—or fixed rates that are much higher than the rates for Federal loans). Fixed rates for private student loans varied from 3.4% to 14% and variable rates from 3% to 19%, while Federal Stafford loans had a fixed 3.4% rate for subsidized and 6.8% for unsubsidized loans. For the past couple of years, the unusually low interest rate environment has made the average adjustable rate loan slightly cheaper than the Stafford unsubsidized loan, though looking over a longer time period, only the most creditworthy borrowers could have gotten an adjustable rate that was better than the fixed Federal rate. I’ve not read the entire report, but it seems to be implying that the private student loan market is predatory and needs some consumer-protection regulation, particularly for the vulnerable students at for-profit colleges (who I would argue have already been selected for extreme gullibility by the fact that they registered at a for-profit college). The for-profit colleges are a growing part of college enrollment, though, as public colleges get slashed by legislators (thanks in part to lobbyists for for-profit colleges) and larger fractions of college-age students enroll in college.
The Chronicle of Higher Education summarized the report and subsequent Congressional hearings as calling for making the private student loan market more consumer friendly. Undoubtedly a good idea, but kind of closing the barn door after the horses have been stolen.
In order to get grant aid or student loans (often misleading called “financial aid” though the loans more often hurt the students than help them, by encouraging them to pay more for college than they can afford), students’ families usually need to fill out the Free Application for Federal Student Aid form. All students going to college are advised to fill out this form, unless their families are multi-millionaires (Mitt Romney probably wouldn’t fill out the form, since it requires disclosing information from income tax returns). Even if students aren’t eligible for federal aid, many colleges use “Expected Family Contribution” computed from FAFSA data to figure out how much other aid to give—even so-called “merit aid” is usually based in part on whether the college thinks that the student can afford to attend. About 80% of families with dependent undergrad students fill out the FAFSA (and probably 95% or more should do so). Different high schools have very different fractions of their students completing FAFSA forms, either from differences in fraction of students going on to college or differences in the quality of college guidance at the high schools. The US Department of Education provides summary information about FAFSA completion by high school—you can look up the high school your student attends, or do whatever computations you can convince spreadsheet programs to do, since the data is released as spreadsheets.
Too many parents, though, are urging their kids to “think big” and are not paying enough attention to the real price. One approach to making college financial aid less confusing (and students less likely to fall victim to predatory lenders) is to simplify and standardize the statements colleges make about their prices. The Obama administration has proposed a standardized “shopping sheet” that most colleges will probably use (since they have to for students with military benefits). These may make college financing a little less confusing, though the high-tuition/high-aid model being pushed for the past decade or two and rapidly rising tuition rates have made it almost impossible for a parent to know how much a student’s education is going to cost at any given school.
The Cost of College blog post The twin problems of rising debt and falling wages for college graduates discusses the further problem that students with large debts are not finding jobs good enough to pay off the debt. The problem is no limited to those students bilked by for-profit colleges into borrowing huge amounts for low-quality education in useless “business” or “communications” programs—even students with high-quality degrees in STEM (Science, Technology, Engineering, and Math) fields from good universities have difficulty.
The problem of finding jobs for STEM students has been discussed in various forums read by scientists: Helping students turn degrees into jobs — ScienceMag and The Commission on Pathways through Graduate School and into Careers. A big part of the problem is that industry stopped hiring (indeed laid off) many scientists, and the pipeline for production of PhDs and postdocs is set to produce many more scientists than the remaining job market can absorb. This is particularly a problem in biology, as NIH has favored funding postdocs and temporary soft-money research positions for decades, destabilizing academic and research employment for biologists and creating a huge cadre of trained biologists with no permanent positions for them to be employed in. (The pharmaceutical and biotech industry has not helped by rapidly reducing their investment in research and development.)
One bright spot is that my son is thinking of majoring in computer science and their graduates are still in demand both in industry and academia, though computer science seems to go through roller coaster rides in popularity, with more extreme fluctuations than almost any other field. If we are near a peak in popularity now, we’ll probably be at a trough when my son get out of grad school. He’s doing it for the intellectual interest, not the job market, though, so that is not a concern for him. Also, I suspect he’ll be among the top 1% of CS students, so I’m not too worried about his employment opportunities even if the job market is down.