In this post, Hedda associate Martina Vukasovic examines some of the puzzling features of the student loan system in the USA, highlighting the issues the system has been facing. Martina currently works at the Faculty of Education in Oslo where she is writing her doctoral dissertation on flagship universities in the Western Balkans. On 12 May 2012 the New York Times website launched a series of articles, editorials, interactive graphs and video contributions called “Degrees of debt”, dedicated to “implications of soaring college costs and the indebtedness of students and their families” in the US. According to the series, nowadays about two thirds of bachelor level graduates borrow from public or private sources for their higher education, compared to approx. 45% in the early 90s. The average debt nationally is around 23,000 USD, but 10% of all borrowers owe more than 54,000 USD and 3% owe more than 100,000 USD.
The series includes portraits of 16 students from Ohio whose debt ranges from 15,000 to 100,000 USD, an article focusing on work as well as working conditions (salary, travel expenses, severance benefits) of the president of the Ohio State University whose graduates have on average more than 20,000 USD of debt, an editorial focusing on transparency of financial aid schemes, and an interactive graph focusing on average graduate debt and average cost of tuition and fees for a vast number of public and private higher education institutions across the US (for-profits and community colleges are not included, as well as a minor number of other institutions).
The latter is perhaps the feature most interesting to tinker with, especially since it offers a possibility to see changes from 2004 to 2010, select institutions based on their type (public or private), enrolment size, graduation rate, share of graduates with debt, and somewhat alien for a European – athletic conference. Through this tinkering, several interesting things come up:
- Not only has the average student debt increased from 2004 to 2010 (maximum average debt per institution, reached in 2009, was reported to be a bit less than 70,000 USD), but also the dispersion of institutions with respect to both annual costs and average student debt has increased. However, institutions seem to have become more different with respect to annual costs of tuition and fees than average graduate debt, i.e. the dispersion in fees and tuition increased more than dispersion in debt.
- High cost does not necessarily imply high graduate debt. The most costly institution in the sample (where annual tuition and fees is close to 42,000 USD) leaves its graduates with a bit more than 22,000 of debt, while the aforementioned maximum of almost 70,000 USD of average debt was recorded in an institution whose annual costs are a bit more than 20,000 USD.
- Institutions with higher average debt in general seem to have higher graduation rates. However, this is not a good argument for those in favour of increasing student debt through, for example, raising tuition fees, since the claim of causality between higher costs and higher effectiveness is spoiled by another piece of data: while the number of those borrowing and amounts borrowed increased from 1997 to 2003, so did the share of dropouts amongst the borrowers (from 23% to 30%).
- The graduates of 10 highest ranked institutions (according to ARWU 2012 ranking) in US are not amongst those with the highest average graduate debt (see table). Most of these institutions have approx. 50% of their graduates with some debt, while some have only 25% and with rather low average debt (at least compared to the others).
These “peculiarities” are first and foremost an indication of significant complexity with regards to funding of higher education in the US. This complexity is, amongst other, a result of (a) differences in terms of size of endowments for private institutions (e.g. Princeton University which has the lowest percentage of debt amongst the 10 highest ranked universities has reported an endowment of 17 billion USD in 2011, Harvard 32 billion USD, Stanford 16.5 billion USD), (b) state investment into public higher education (share of public funds per institution varies significantly between and within states), (c) availability of various forms of direct and indirect financial aid, from both public and private sources**, both need and merit based, and (d) outcomes of a complex process of student recruitment (or choice, depending on the perspective) in which affordability also plays an important role. When it comes to the latter, it is important to stress that there seems to be a substantial lack of transparency of financial aid information, making it extremely difficult for prospective students and their parents to successfully estimate how much they are likely to be in debt upon completion. This has led to a high level initiative spearheaded by US Vice President Joe Biden and a number of colleges and universities (including SUNY, U of Texas and U of North Carolina at Chapel Hill) to create first of all “user-friendly financial aid letters” as of 2013/2014, but also a national scorecard rating colleges on value and affordability. Although this is seen as ensuring “basic transparency” (as Secretary of Education Arne Duncan put it), there is also an expectation that “colleges are unlikely to embrace this forthright approach to pricing unless the federal government makes it mandatory”.
The “peculiarities” continue in terms of student loans being a rather profitable business. They are generating profits for all involved (apart from students and their families) thanks to high interest and lifting of bankruptcy protection. It is also interesting to see a rather developed student loan industry, with a number of publicly traded corporations (such as Sallie Mae and Nelnet) some of which were initially non-profit agencies but turned for-profit. Some of these companies have been at the centre of the so-called “9.5 scandal”, which started when a former researcher of the Department of Education Jon Oberg in 2003 (18 months before his retirement) uncovered that a total of nine student loan companies were systematically overcharging the federal government for 9.5% of subsidies for low-cost student loans by inflating the volume of loans eligible for the subsidy. It is estimated that the nine companies overcharged the US government for a total of 1 billion USD. It apparently took the Department of Education four years to react, with much of the time spent, as it seems, in discussing whether a congressional action is necessary or the Department can decide to stop the subsidies on its own. It took additional three years for the cases to get to the courts, where most of them ended in settlements in which the companies did not admit any wrongdoing, were expected to pay fines much lower than the amount they supposedly overcharged (in the case of Nelnet who supposedly overcharged more than 400 million USD, the settlement was 55 million) and will not be in the future eligible for the same subsidy.
In sum, the issue of increasing student debt goes beyond the discussion of why costs of higher education have increased 4 to 6 times more than the consumer price index from late 70s until 2010**. It also touches upon the questions of general affordability and accessibility of higher education, but also of whether it actually pays off to get higher education under such conditions if, in particular during an economic downturn, one is forced to work in several low-skilled jobs to pay off one’s debt. Finally, it also brings back the issue of steering mechanisms in higher education back on the table. If student debt and expanding student loan industry are perceived to be policy problems – and they are, at least by the current administration in Washington, the borrowers themselves (naturally) but also some of the higher education institutions – whose task is it to tackle the problem and with what policy instruments?
** For an excellent overview of different types of aid see Franke, R. and W. Purdy (in press). Student Financial Aid in the United States: Instruments, effects and policy implications. In Vukasović et al. (Eds.) Effects of Higher Education Reforms: Focus on change dynamics. Sense Publishers