The Negative Impact of Student Debt to Our Economy

In the years of 1970 and 1971, both public and private schools of higher education began raising the price of their tuition; a trend that has continually persisted since. Due to inflation, tuition at these universities had to triple the price of tuition of fees. Today, the average private, non-profit institution’s price of tuition is $31,231, while public institutions average around $9,139 per year. Neither number includes housing fees. Price of tuition has multiplied nearly 17 times since the 1970’s.

These drastic increases in price have given rise to America’s second largest financial burden: student loan debt.

Through the defunding of higher education by the federal government, negligent employers using college degrees as a precursor for employment, and unforgivable loan payments, have all led to the massive burden of debt on our new generations. This massive amount of debt is reducing consumer spending and is overall unproductive and harmful to the American economy.

As of 2015, the national student debt was $1.3 trillion U.S. dollars, spread among 44 million borrowers of student loans.

This is second only to mortgage in terms of consumer debt. Just recently, the class of 2016 graduated with an average of $37,172. This is a six percent increase from 2015. Clearly there is a dangerous trend that has continued fluctuated since 1970. “In 2010, the amount of total student loan debt in America reached $830 Billion. This was the first year that another form of personal debt exceeded that of credit card debt, which was $825 Billion that year.

In 2013, that number has now grown to over $1 Trillion and will continue to do so at an estimated rate of 10 percent annually” (Sourmaidis).

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Startling statistics such as these, of which there many, have given rise to question of why it is happening, and whom is responsible.

Ironically, this crisis began through good intentions of the federal government. Higher education was originally a rare path for those looking for a career. The university was a place highly populated by middle to upper class white males. “Prevailing social norms and a limited federal role in higher education also served to keep higher education an exclusive domain before the 1960s” (Brock). This included women as well. In the mid 1960’s however, the federal government began enacting policies that allowed more access to higher education. As well as increased access, in 1965 need-based financial support was given to the public. “Federal student loans are made available to students regardless of financial history or characteristics that would be considered in other contexts by lenders extending credit” (Glater).

These factors, coupled with the increased demand for highly skilled laborers rapidly increased the number of consumers pursuing college degrees. These policies were enacted with two goals: that higher education should be within reach of everybody in America, and that all loans taken from the federal government should be repaid in full. But these goals, while well intentioned, have had very negative consequences.

From 1965 to today, federal aid for students has quadrupled. But at the same time, America’s student debt has reached the trillion-dollar mark. Borrowing student loans is at an all- time high. “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” (Cary).

As a consequence, the more money provided for student aid, the less money the federal government can provide for education. While students have access to federal aid regardless of financial status, the defunding of education has led tuition to rise to unprecedented heights. This trend has continued and grows with the number of consumers enrolled. During the baby boom, more young adults pursued higher education than any previous
generation. Because of this, universities have become a social norm in American society.

High school graduates are now expected to pursue more education after graduation. “The “open admissions” movement gained currency during this era, most famously with the 1970 decision by the City University of New York to allow all high school graduates to pursue college degrees regardless of academic preparation” (Brock). The sharp increase of college enrollment over the past 40 years have enabled and encouraged millions of students to take out loans every year.

But why is this considered a bad thing? More educated people should mean an overall stronger, economically healthy country. However, the equal opportunity to pursue education and obtain loans has directly siphoned from the subsidies used to fund public education. To make up for the loss of funding, universities have had to continuously raise tuition to remain stable. Rather than accomplishing the original goals, the federal government has now made college education more debt-inducing, cost-inefficient, and risky than before. This inadvertently has imposed one of America’s largest financial burdens on its future generations.

The defunding of higher education and the increase of federal financial aid to students has created a vicious cycle of overbearing debt. As more revenue is cut from funding to increase the amount of financial aid, schools are forced to raise tuition to make up the deficit. This in-turn creates more need for aid. This failing system has created an unbalance in the cash-flow of education.

“Federal student loans are the products of legislation: Congress created these programs and has set the terms of financial aid and of eligibility for students. Consequently, reforms that could restrict access to higher education opportunity are proper indeed, necessary subjects of legal scholarly analysis” (Glater).

One prime objective of increasing the access to higher education was the high demand for skilled-labor in the workforce. That is, educated workers who had earned some level of degree. This new level of expectation has standardized the pursuit of higher education and changed the meaning of the pursuit of knowledge. Post-secondary education used to be a path to take for people to grow and improve. But as college degrees became a precursor to employment, education has become one of the few ways to land a career in an ever-competitive work environment.

Thus, an oversupply of educated people without a means to use their degrees. Consequently, approximately half of U.S. college graduates today have jobs that do not even require a degree. “Yet colleges and universities continue to talk about their record enrollment and graduation rates, even though we’re not producing jobs in the economy to keep up with the supply” (Wunderlich). At the rate enrollment is increasing, it is predicted that America will produce 19 million more college graduates by 2020. It is also projected that only 7 million jobs requiring a college degree will be produced by that time.

The scarcity of employment projected for 2020 will further increase the number of students with no means to repay their loans. College graduates make roughly the same financially as those with the same career 35 years ago, but college tuition has quadrupled in that time. It is an economically harmful system that defies the economic rule of plasticity.

There is an oversupply of educated workers who cannot repay their debts. “Delinquency is currently twelve percent. The highest among all forms of credit [and] they’re only continuing to rise in the marketplace right now. This is a sign of underemployment and unemployment again, to an oversupply of college education” (Wunderlich). The amount of financial burden on unemployed and underemployed educated workers makes it difficult to expand economically; meaning the purchase of cars and homes, as well as not being able to save money.

Due to the low rate of home and auto ownership for college graduates, those who did not attend college typically have higher rates of home-ownership and better credit scores. It has essentially created an imbalance in the value of a degree. This is known as education arbitrage. For students, it is the disparity of value between the college degree and future earnings as a result. For employers, it is the difference of value between a college education, and the efficiency of the workplace.

The oversupply of college education poses a problem for future generations. If getting employed in a job that will allow a graduate student to put their major to use is becoming scarcer and more unrealistic, then it is troubling to think about how they are supposed to pay back their loans. “One in four student loan borrowers are either in delinquency or default on their student loans, according the Consumer Financial Protection Bureau” (Berman). Student loans are a dangerous investment because they are unforgivable, even when the borrower declares bankruptcy.

So, when putting the risk of unemployment into perspective, staying at a high school level of education seems like the best option. When put into perspective, it is a problem that imposes extremely difficult odds for future generations and burdens them with the second largest financial burden in the United States. With rising extremely expensive tuition and a very limited demand for college graduates, it seems like not much else could make matters worse. But unfortunately, the federal government requires all loans taken out to be repaid in full. As such, student debt remains tied to the borrower, even if they were to declare bankruptcy.

In very specific cases, students may receive some relief if they are financially burdened, yet a vast percentage of borrowers still struggle to repay their debt. “Student debt receives exceptional treatment under the Bankruptcy Code: borrowers must establish that they face “undue hardship” in order to receive relief. Debtors do not need to show “undue hardship” in order to discharge other types of debt” (Glater). Regardless of financial reprieve and grants, most graduates incur debt. The national average of debt per borrower is approximately $30,000 dollars.

With high amounts of debt and lower opportunities for employment, many people struggle to repay their debts. Discharge from this type of debt is possible, but it is extremely slow and difficult to achieve. Because of this, it seems illogical that student loans are privatized. However, it brings about an ethical dilemma: is higher education the right path for everybody? There is no easy answer for this question. It is the right of every human to have access to knowledge. But when looked at with the mind of economist, the crushing statistics would suggest that education is only for those who can truly afford it, without a crutch from the federal government.

The student debt crisis is a product of federal intervention, standardized education, and large amounts of defaulting borrowers. The national student debt has reached over $1 trillion. There are around 40 million student borrowers; seventy percent of bachelor’s degree recipients are burdened with debt, the average being roughly $30,000. The job market is overflowed with a surplus of educated workers, and not enough jobs to employ them. The debt acquired from student loans is unforgiveable until the most extreme cases. It can be surmised that the student debt crisis is very significant. Every person considering the pursuit of higher education should be well informed of the risk.

Unless actions are taken to start changing the failing system of higher education, the self- fueling financial black hole that is federal funding, the burden of graduate debt will persist to threaten the American economy. The American dream of success today is now just a dream. Young adults who have invested in education are commonly without ownership of a home or vehicle, and have virtually no history with credit. It has potential tank the American economy.

One obvious, but frankly unrealistic solution would be for the federal government to abolish the national student debt. This effectively would be the debt at zero and allow for immediate corrections in the educational system. Perhaps even a fresh start. Funding could be redirected to institutions with the highest enrollment, as well as the departments needed to distribute degrees with the highest demand. As a counter, less funding would go to smaller schools. This reform would effectively help to correct the issue of raising tuition. While pardoning all student debt has potential, it would be very difficult to enact and may create other problems in the future.

Another potential solution to help reduce the burden of student debt has to do with employers. As college education has become universal, a college degree has become a precursor for employment. Instead, employers should use personal traits such as integrity, motivation, mental ability, and so forth to predict the level of productivity a worker will provide for the workplace. This reform would potentially reinvent the path to financial success. One that would not require the burden of debt.

The higher education system is broken and inefficient. The sheer number of graduates in unforgivable debt is a threat to the American way of life. If left alone, the student debt crisis will continue to have a massive negative impact the United States’ economy. While a clear solution is not easily obtained, the system is in a dire need for reformation.