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Student-loan debt

It’s hard not to notice one of the prevailing narratives coming out of the Occupy Wall Street protests: the weight of student debt. As one scholar summed up the grievances at the “We are the 99 percent” blog through a computer-scripted textual analysis: “Free us from the bondage of our debts and give us a basic ability to survive.”

The current amount of borrowing and student debt has prompted a national conversation over whether these burdened students brought their misfortunes among themselves through poor decision-making or whether they are victims of a system that has failed to deliver on the promise of higher education as a surefire means to a stable, decently paying job. Others still are questioning the notion that obtaining a college degree is even worth the cost at all.

Just how pervasive and burdensome has student debt become in recent years? Here are five things to know:

1. Tuition is rising – fast.  

College tuition across the country has been steadily climbing in the past few years. The average cost of tuition and fees for colleges across the country has grown by more than 400 percent between 1985 and 2005, with costs doubling over the last decade. The rise in tuition has greatly outpaced the rate of inflation as well as medical, energy and housing costs, according to a study by Moody’s Analytics (pdf). In one of the starker examples of tuition hikes over the years, author Michael Lewis notes in his new book, “Boomerang,” that “in 1980 a [University of California] student paid $776 a year in tuition; in 2011 he pays $13,218.”

Exactly why tuition has been increasing at such great speed depends on a variety of factors. Four-year universities generally receive income from a number of sources: state and federal appropriations, alumni giving, endowments and, of course, student tuition. As the recession caused state budgets and university endowments to shrink (university endowments on average reached their lowest point since the Depression in 2010, reports BusinessWeek), colleges have had to make up the cost elsewhere. Moreover, high-profile schools often face pressures to attract and retain top talent by expanding their campuses, building state-of-the-art facilities and increasing services, leaving students to help foot the bill where endowments and other funding fall short. In the high-demand world of education, there are no market forces that compel colleges to push down costs.

Colleges also use student tuition to fund financial aid for financially disadvantaged students, which theoretically creates a bit of a vicious cycle: If schools with funding shortages want to attract bright students with financial need, they need to raise tuition higher yet to cover the cost of providing for these students. Recently, however, reports are revealing that many universities are now putting a stronger emphasis on admitting students who can pay for themselves.

2. While most consumer borrowing has slowed, student loan borrowing continues to grow.

Shrinking funds and limited grants are prompting students nationwide to borrow more and more to get through their education. The aggregate amount of all student loan debt in the country is likely to clear $1 trillion in the coming months. Student loan balances are highest in California and the Northeast, but are rapidly rising in regions like the Southwest. Moody’s Analytics’ July 2011 report found that while aggregate consumer lending balances have gone into decline since 2009, student loan balances continue to grow at a steady rate of more than 10 percent per year. The report also estimates that the pool of borrowers will likely continue to grow at a rate of 2 percent per year.

The economics behind a push for borrowing and obtaining higher education are fairly simple: In tough economic times, the conventional wisdom for those facing unemployment or underemployment is to go back to school, wait until the wave passes, and hopefully graduate with extra skills and credentials that give them an edge in finding employment as recovery begins to pick up. But if long-term economic prospects are dim, as they are proving to be in the current economic downturn, graduates emerge from school with a heavy debt load and few means of paying it off.

So exactly how many students get saddled with debt after graduation, and by how much? Studies from the Project on Student Debt show that 67 percent of students graduating from four-year colleges in 2008 had student loan debt, a 27 percent increase from four years prior. The graduating class of 2011 alone had the highest estimated average student debt at $22,900, according to Mark Kantrowitz of and – an 8 percent growth from last year and an inflation-adjusted 47 percent increase from just ten years ago.

Not surprisingly, the combination of high student debt and low job prospects has resulted in a spike in federal student loan defaults, with the default rate reaching 8.8 percent in 2010 – the highest rate in more than a decade.

3. Private loans and for-profit colleges are the riskiest choices — but they too are growing.

Loans are typically divided into two categories: federal loans and private loans. Federal educational loans are capped, and interest rates are fixed anywhere from 3.4 to 7.9 percent, depending on the type of loan. However, there is no set limit on the amount of private loans one can take out, or on the interest rates banks can charge for them — and interest rates can change over the years. Private loans are by far the riskiest option a student borrower can make, but private loan borrowing has increased significantly among college undergraduates in recent years. According to the Project on Student Debt, 14 percent of undergraduates took out private loans in the 2007-2008 academic year, up from just 5 percent four years prior. African-American undergraduates were the most likely group to take out private loans, comprising 17 percent of all private student loan borrowers that year.

One of the primary problems with private loans is that it is notoriously difficult to shed once a person has it. In 2005, Congress passed the Bankruptcy Reform Act, which exempted private student loans from being discharged when a person declares bankruptcy. Last year, Representative Steve Cohen (D-Tenn.) introduced to Congress HR 5043 – the Private Student Loan Bankruptcy Fairness Act. The Act would allow private student loans to return to their pre-2005 status, eligible to be discharged in bankruptcy alongside other types of consumer debt. The Act, however, has not yet passed a vote in Congress.

Congress has also been working to enact protections for students at for-profit colleges, where more than half of student loan defaults originate. Critics have accused these schools of targeting low-income and minority students for recruitment to bring in funding from financial aid but have few job prospects upon graduation. Attendance at for-profit schools has exploded in recent years — Moody’s notes that though for-profit enrollment still makes up less than 10 percent of the total, the for-profit enrollment volume has tripled over the past 10 years.

In recent years, the Obama administration has passed several regulations that restrict schools from paying recruiters based on the number of students they enroll, and place a higher mandate for states to monitor these schools’ practices. Most recently, it enacted a rule that restricts federal aid for institutions where less than 35 percent of former students are making loan payments each month and where estimated annual loan payments exceed 12 percent of students’ earnings after graduation. The so-called “gainful employment” rule goes into effect July 2012.

4. Community college students face debt problems of their own.

Of course, high-profile, expensive four-year colleges that can require heavy debt burdens are not the only means by which students can get an education. State schools and community colleges are generally more affordable ways to obtain a college degree and competitive skills for the job market. The age of austerity begs the question: “Why end up with tens of thousands of dollars of debt for a brand-name school when you can get the same degree at half the price?”

For middle-class students looking to find ways to cut costs, community colleges are a thrifty option. But for low-income students who generally make up the bulk of the community college population, educational finances are still a problem. Students at community colleges are just as likely to need financial aid as students at other institutions, but have many fewer options to obtain it. A report from The Institute for College Access & Success (pdf) found that while community college students are more likely to receive federal Pell grants, reserved for financially needy students, they are less likely to receive institutional grants, work-study opportunities or state grants. The report states that community college students are less likely to take out federal loans to fund their education, either because they are hesitant to borrow, do not know that they are eligible for federal financial aid, or because some schools do not participate in federal loan programs. In many cases, students who are eligible for federal student loans end up taking out riskier private loans instead.

5. A higher education bubble on the horizon?

With soaring tuition, borrowing and default, fear of a bubble in higher education spending has proven to be “one of the year’s most fashionable ideas.” The idea that an education bubble could burst in the same manner as the housing market did made headlines earlier this year when businessman Peter Thiel, co-founder of PayPal, established the Thiel Fellowship to offer a select group of young adults $100,000 each not to go to college and start companies instead. In an interview with the National Review, Thiel said:

[The education bubble] is, to my mind, in some ways worse than the housing bubble. There are a few things that make it worse. One is that when people make a mistake in taking on an education loan, they’re legally much more difficult to get out of than housing loans. With housing, typically they’re non-recourse — you can just walk out of the house. With education, they’re recourse, and they typically survive bankruptcy. If you borrowed money and went to a college where the education didn’t create any value, that is potentially a really big mistake …

In response to Thiel’s ideas, Slate’s Annie Lowrey scoffed at the idea that current trends in educational borrowing are similar to the subprime mortgage crisis:

It could be that Thiel is right, that college students, en masse, are overpaying for their educations. But it seems more likely that some college students attending certain types of schools are overpaying. If you want to be an aerospace engineer and have the chops to get into Caltech, the quality of the education, contacts, and fellow students on offer might really be worth $200,000 to you. A diploma from the school practically guarantees a good salary.

That is not true for many other institutions—particularly not for online, for-profit schools, the worst of which egregiously overcharge for worthless degrees … But that marketplace is rapidly changing. The federal government is cracking down. Share prices for such companies have plummeted. Students have gotten savvier. Low-cost, high-quality competitors have entered the market. It might take some time. But tuition should drop too.

But what of the loan bubble, the outstanding pool of nearly $1 trillion in debt students have racked up paying those spiraling tuitions? It is worrisome, but mostly for the individuals on the hook for ballooning payments, not for the whole financial system, as with mortgage-backed debt.

While the debate rages on over whether an educational bubble is really on the brink of bursting, it may be much clearer to see how trends in debt and educational payoff are causing major shifts in the idea of education in American culture. Far from yesterday’s assumption that all education is valuable education, and that paying a premium for a degree from a prestigious university is a safe investment for a secure, well-paying job, today’s resounding advice is much different: choose your field of study carefully, consider affordable options above prestige and don’t make the assumption that a degree from a high-profile institution will grant significant employment advantages.