The average student leaves college with a loan debt that varies from $28,000 to $39,000 and this type of debt is climbing fast. Three out of four Gen Y's obtained their own credit cards while in college, often pushed by overzealous banks and loan companies. As a consequence, Gen Y's will leave college with between $3,000 and $7,500 in credit card debt. It is not surprising that thirty to forty cents of every dollar earned after graduation will go to service their debt. This will get worse, not better, as one in nine high school students have credit cards co-signed by a parent. Chase bank actually will give a high school student $50 if they sign up for their debit card. However being in debt is no longer a process consumers are willing to accept and since the financial crisis of 2008 people are struggling to get back to living within their means. As long as one in four workers is either unemployed or under-employed this trend will continue,
Most families in America are in a financial crises and this includes students and their parents and believe it or not colleges and universities. With unemployment soaring and now 43.6 million living in poverty sending a child to college is out of the question for millions of families. America is now in ninth place in college attainment the world and dropping fast. But do college and university presidents care? Their business model encourages students and families to go into debt and they have pushed for an increase in federal loans and grants to continue its extraordinary growth: a 60 percent increase in two years or $48 billion. The Federal government heavily subsidizes colleges and universities. Parents fill out FAFSA forms and FAFSA produces a formula that determines how much they should pay. The difference is made up by a combination of Pell Grants, State grants, private scholarships and loans and of course the pervasive federally guaranteed loans.
Based on an analysis of the Presidents FY2011 budget, in FY2009 there were a total of $605.6 billion in federal education loans outstanding, comprised of $149.4 billion in the Direct Loan program and $456.2 billion in the FFEL program. The projected totals for FY2010 are $672.0 billion and for FY2011 are $745.5 billion. Each year more than $100 billion in federal education loans and $10 billion in private student loans are originated. At this rate the total student debt in America will approach a trillion dollars. In 2010 student loan debt exceeded total credit card debt. Consider this, if the projected default rate continues to grow by 2012 it could reach 56 percent for non-profit graduates and 70 to 90 percent of the for-profits. By the end of 2012 the amount of defaulted loans will be between $600 billion and $800 billion. Most of these defaulted loans are government backed, meaning the tax payers will pick up the tab. In 2010 gross public debt in America was $14 trillion, or over 95% of GDP. Over the next 10 years this public debt which includes student loans is expected to grow adding over $10 trillion to outstanding federal debt. A small percentage of these defaulted loans are private bank loans, which means that the loan insurers and collection agencies (a major growth industry) will chase after students for years while piling on penalties and fees.
A similar situation existed in the 1960's when hippy/counterculture students failed to repay loans. When Bella Abzug a New York Congresswoman suggested that the government should forgive the loans the default rate in NYC and Boston jumped through the roof. But there may be another reason why government loan forgiveness may not be a bad idea.
Consider how this extraordinary default rate can damage the economy. In 2011 with the default rate climbing and credit scores or ratings for a majority of college graduates in the dumpster, it will have a profound impact on the economy, not only the outstanding debt , but the ability of these grads to buy condos, houses, cars, or even have a credit card. For the first time in American history, a significant portion of an entire generation, perhaps more than half will be considered a credit risk. In addition parents who signed or cosigned for these loans will have their credit ruined and those who have children planning to take out college loans in the future will be rejected. This will take its toll in the not only for colleges and universities that need loan backing to attract students but for the entire economy.
France offers a more appealing model, it has 82 universities and 1.5 million students and tuition is free and undergraduate enrollment charges are a tiny --165 annually. No student debt, no lives ruined and no millionaire administrators and high priced coaches. All employees are civil servants.
So how will colleges, universities and public officials respond when a significant proportion of the American population is priced out of higher education? They will continue the hopeless process of spiraling debt and tell young people to "Go to college, it does not matter if you cannot afford it there is plenty of money available." Recently, U.S. Secretary of Education Arne Duncan said just that, on a visit to a high school she spoke to students and encouraged them to load up on college loans.... "Please apply for our financial aid. We want to give you money. There's lots of money out there for you." Snyder (2010) wonders where Arne Duncan will be when those students find themselves locked into decades of suffocating student loan debt repayments.
Like the housing bubble when people were encouraged to take out mortgages they could not afford we see the same thing with student loans. As the cost of obtaining a degree from these brick and mortar institutions rises faster than any institution or commodity in America, eighteen year olds are encouraged to keep them alive by going into major debt. This is outrageous and will hasten the demise of these institutions. Does anyone smell "bailout" here; we have to keep those games alive and there too big to fail.
References
Arum, R. and Roksa, J. (2011) Academically Adrift: Limited Learning on College Campuses. University of Chicago Press. Asimov, A. (2011) UC regents hand out incentive pay a day after cuts. Retrieved 1/21/11 from: http://www.sfgate.com/cgi-bin/article.cgi?f=%2Fc%2Fa%2F2011%2F01%2F20%2FMN0O1HC6RT.DTLSan Francisco Chronicle January 21, 2011 04:00 AM Copyright San Francisco Chronicle. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Coutts. S. (2009) Real Student Default Rates Much Higher Than Previously Known. Retrieved 12/19/09 from: http://www.propublica.org/article/real-student-default-rates-much-higher-than-previously-known-1216
Fain, P. (2010) Airplanes of the Southeastern Conference
The Chronicle of Higher Education
Retrieved from: http://chronicle.com/article/Airplanes-of-the-SEC/125362/
Fox Garrity, B.K., Garrison, M.J., and Fiedler, R.C. (2008)
Access for Whom, Access to What? The Role of the "Disadvantaged Student"Market in the Rise of For-profit Higher Education in the United States. Journal for Critical Education Policy Studies, vol.8. no.1. Retrieved from: http://www.jceps.com/PDFs/08-1-08.pdf
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