Summary:
Why did the Obama administration make changes to the federal student loan program? They are responding to the following concerns:
- The cost of going to college appears to be increasing by more than inflation for the last three decades;
- Despite the cost increase--going to college is still a good deal for most--but not as good as it used to be;
- Many students are taking out more in loans each year to attend college;
- Student loan default rates are up;
- The unemployment rate for recent college graduates is more than double the rate for all college graduates;
- Starting salaries for recent college graduates, adjusted for inflation, are down over the last decade;
- College students and their parents vote in elections;
- This is why college students and recent college graduates are Occupying Wall Street.
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President Obama announced some significant changes to the federal student loan program today. The major changes include:
- allowing an estimated 6 million people who hold both direct government student loans and government backed private loans the ability to consolidate these debts into one government loan--it is anticipated that this could result in the reduction of the annual interest paid on these loans by an average of 0.50%; and
- moving up the start date of a program already approved by Congress that caps monthly student-loan payments for borrowers with low incomes from 2014 to 2012. Existing rules allow borrowers to limit their loan payments to 15% of income, with all debt forgiven after 25 years of payment. The new rules would cap loan payments to 10% of income, with all debt forgiven after 20 years of payment. This new Pay As You Earn program could help 1.6 million existing students and recent graduates.
Also today the Department of Education and the Consumer Financial Protection Bureau announced that they were teaming up to launch a new "Know Before You Owe" project aimed at creating a financial aid shopping sheet which colleges and universities could use to better help students understand the type and amount of aid they qualify for and easily compare aid packages offered by different institutions. For an example of what this financial aid shopping sheet could look like go to:
http://www.consumerfinance.gov/static/students/disclosure.pdf
Why does the Obama administration believe these new programs and policies needed? Student loan debt and college tuition rates increase at rates much greater than inflation. Unemployment rates are up dramatically for recent college graduates. Many college graduates have taken whatever job is available to pay the bills --the business student as waitress and the law student as bartender. Not surprisingly, given the job situation for many recent graduates, student loan default rates are up quite a bit since 2007. Lastly, incomes are down on an inflation adjusted basis (unlike tuition) for recent college graduates. It is really quite simple--higher college costs and fewer, lower paying jobs makes paying back student loans difficult. This is why many young people are Occupying Wall Street.
This chart shows college tuition rising by by 7.45% a year from 1978 to 2011 compared to a 5.8% annual rise in medical care costs. As you can see from the new home data in the chart--the housing bubble's home price increases pale in comparison to the price increases in college and health care. However, it is important to remember that the housing industry, with housing being the single largest asset owned by most individuals, is a much more significant part of our economy than health care or universities and colleges.
Many point out that college tuition and fee rates that are published by colleges dramatically overstate the amount of tuition actually paid by students and graduates. Many who go to college receive Pell Grants and other scholarships that materially decrease the tuition sticker price. The sticker price is what a minority of students actually pay for college. These are valid points, however it doesn't negate the fact that the college tuition sticker price has nearly tripled, after adjusting for inflation, over the past 30 years. The fact that discounting off the sticker price exists doesn't prove that the net cost of going to college isn't increasing at a rate greater than overall inflation. Although I cannot prove that net college costs are increasing much quicker than other costs, I would venture that such an impression is held by most of our citizens. The Pew Research Center recently conducted a poll and asked if college is affordable today--only 22% agreed that is was (see:
http://www.pewsocialtrends.org/2011/05/15/is-college-worth-it/2/).
I believe that going to college is definitely worth the investment. I realize there is a debate that some want to have about the economic value of a college degree. It should not come as a surprise that this exact topic was also debated during the Great Depression in the 1930s. It is easy to question the economic value of a degree if you can't find a job when you graduate or if you are forced to take a job that does not require a college degree.
I very much agree that college is still a very good investment despite the increase in costs. The following charts below do a great job of proving the huge economic benefits to an individual of a college degree:
http://www.bls.gov/emp/ep_chart_001.htm
http://economix.blogs.nytimes.com/2011/06/25/why-college-brings-a-huge-return/
http://economix.blogs.nytimes.com/2011/06/25/why-college-brings-a-huge-return/
What do these chart tell us? Basically having a college degree will give you an opportunity to make much more income and greatly reduces the likelihood that you will become unemployed. The charts support the argument that an investment in higher education will pay back great returns over your working life time. In fact, the typical full-time worker with a four-year degree is earning 65% more a year than a high school graduate. Recent unemployment figures show that the unemployment rate for a college graduate is 4.2% versus and 9.7% for someone that has a high school degree. However, one of the problem with these statistics is that they include all adult college graduates over many decades. They really don't answer the question of what is likely to happen to a young person that is graduating from a four year college in 2012 or what has happened to someone who graduated during the Great Recession that began in 2007. What is likely to happen to them?
Many young people continue to take on new debt every year to pay for college. In fact the amount of student loans taken out each year has doubled over the past decade and exceeded $100 billion for the first time in 2010 (see the chart below). In 2011 the total amount of student loans outstanding is expected to exceed $1 trillion. In 2010 the amount of student loans outstanding exceeded credit card debt outstanding--historically student loan debt was a fraction of credit card debt.
The expectations of many undergraduates have changed dramatically since they started college. Let me tell you the story of one young man (let's call him Jack) that I know who is a senior today but started as a freshman a few weeks prior to the collapse of Lehman Brothers. Jack's economic deal was that his parents would cover 60% of his net tuition cost and he would pay 40%. But the Great Recession changed the deal. His father was in the construction industry. His parents for the first three years of college could only cover 40% of the tuition and in his senior year could not help at all. Instead of graduating with less than $40,000 in student loans he will likely have more than $80,000 in debt. Each year Jack's parents thought things would get better and that they would be able to contribute more--but that did not happen. I think there are many students in the Class of 2012 who had their "deal" changed. Parent, grandparents, uncles and aunts as a result of the Great Recession we not able to help out as much as they expected. And the summer jobs they hoped to get did not appear.
Every type of consumer debt outstanding is down since the Lehman Brother collapse except for student loans which are up over 25% since the fourth quarter of 2008. In 2009 the average college debt for a graduating senior with debt was $24,000 and the average graduating senior debt number had increase by approximately 6% a year since 2005 (according to the Project for Student Debt
http://projectonstudentdebt.org/files/pub/classof2009.pdf ).
In 2010 that the total amount of student loans outstanding exceeded the amount of credit card debt outstanding for the first time ever.
Student loan default rates have increased materially as a result of the Great Depression.
Students graduating with a college degrees since the Great Recession are finding it more difficult to find a job than they did prior to the Lehman Brothers failure. Don Peck, a features editor at
The Atlantic, in his recent book
"Pinched, How the Great Recession Has Narrowed Our Futures & What We Can Do About It" explains some of the problems faced by recent college graduates. He notes that "Young adults with college and graduate degrees are doing much better than those without; for 2010 as a whole, the unemployment rate among sixteen- to twenty-four-year-olds was 9.4 percent for four-year college graduates, 22.5 percent for those with only a high-school diploma, and 31.5 percent for high-school dropouts." The Wall Street Journal reports that the "unemployment rate for recent college graduates is grads is 10.7%." That article also notes that the current unemployment rate for all four year college graduates is 4.2%. That means that recent college graduates are 2.5 times more likely to be unemployed than all college graduates.
http://online.wsj.com/article/SB10001424052970204505304576654842642615166.html?mod=ITP_pageone_1
The recently graduated are having greater difficulty getting a job compared to other older college graduates in the work force. Don Peck also notes in his book that "According to the National Association of Colleges and Employers, job offers to graduating seniors declined by 21 percent in 2009. They rebounded by 5% in 2010 and are expected to rise again in 2011, but not by nearly as much as they've fallen."
Lastly, we know that when adjusted for inflation median incomes of recent graduates with a bachelor's degree has fallen by nearly 10% in the past decade, and so has the median income of all families headed by a person with a bachelors degree:
