What Drives Student Debt

Graduate students walking across the word debt
Graduate students walking across the word debt

Student debt is one of the most pressing problems facing the United States today. What might appear to be mainly a challenge for young people and their families actually has a more far-reaching effect on the national economy.

Study after study has shown that indebted students are more likely to postpone starting businesses, buying homes or cars, or consider other major purchases. Nearly half of graduates aged 24 and younger reported living at home with at least one family member.

According to the Consumer Financial Protection Bureau, student debt topped $1 trillion in 2013. Just two years later, it stands at $1.2 trillion - nearly four times what it was a decade ago. Of that $1.2 trillion, $1 trillion is in federal student loans - amazingly translating into 6 percent of the $16.7 trillion national debt.

What's fueling this national debt crisis? There are a number of factors, but none loom as large as the massive increase in tuition, fees and room and board costs from American colleges and universities over the last several decades. According to Bloomberg report in 2013, tuition jumped 538 percent from 1985 to 2013. In the decade from 2002-2003 to 2012-2013, prices for college jumped 39 percent for public universities and 27 percent for private non-profit schools, once adjusting for inflation.

Colleges and universities point to myriad reasons for their tuition and fee increases, including the demand for classroom slots, their need to catch up on deferred maintenance projects and the building boom of luxury residence halls, sports complexes and other state-of-the-art facilities to compete with other schools. For public schools, the decrease of state aid is also a critical factor (addressed later in this report).

But another reason institutions of higher education are sending tuition rates into the stratosphere is simple, if not nearly as well known - because they can. They can because student loans are easy to get, regardless of income or credit history. This incentivizes students and families to borrow for college, rather than save. And since the vast majority of loans are publicly-backed, colleges know they will get paid, regardless if the student defaults. The colleges and universities are, in essence, incentivized to keep charging more.

For the 2014-2015 school year, the average cost of a private, non-profit four-year college is $42,419, and the average cost of a public, four-year school is $18,943. Seven of 10 graduates from public colleges and universities will graduate with debt, averaging $28,400. The average borrowers from the class of 2015 - including both public and private schools - will start their professional careers with more than $35,000 of student debt.

Faced with years of repayments as they join the workforce at the entry level - likely with a commensurate salary - recent graduates may face defaulting on their loans. A recent report pegged the default rate for student borrowers at 27 percent.

While some generous income-based repayment programs exist - where borrowers can pay as little as 10 percent of their income and have the loan be forgiven in 20 years - they do not benefit families who have taken out loans to help fund their children's education. Further, such programs do not reach students who are so debt averse they eschew college (or drop out before finishing) in the first place.

It is just that - using loans as a financial aid tool - which has enabled, even empowered, colleges and universities to keep driving costs further and further. The ease with which the loans can be secured by students and their families telegraphs to the schools that they will have a protected revenue stream for years to come.