The student debt crisis isn’t just about the burden of student debt, it’s about how we got here in the first place. In recent years, parents, students, and policymakers advocating for free college or loan forgiveness have become more common, as people are increasingly frustrated with the state of the system. This week, a group of consumer advocates presented their case for stronger borrower protections in front of the U.S. House Financial Services Committee and debated various ways in which the $1.61 trillion student debt crisis can be addressed.
The College Tuition Crisis
While statistics about the state of student debt in the U.S. and its impact on borrowers make headlines, commentary on the rise of college tuition is rare. The price of college is increasing almost eight times faster than wages, and shows no signs of slowing down. A recent article in Inside Higher Ed profiled how Columbia, Stanford, and the University of Chicago Law Schools will charge more than $100,000 per year. Students would not be so reliant on debt to finance their education if tuition was not increasing at this rate.
The government has been involved with financing college for decades, but in 1972, their role in higher education financing changed. In 1972, the Higher Education Act — the legislation responsible for overseeing most of the higher education system — was reauthorized, and included a variety of changes to help people access capital who wanted to attend college. This act made the government’s role permanent in guaranteeing bank loans to students, and created Sallie Mae, which could borrow money from the Treasury to buy loans from banks so they could issue loans. After this point, more capital was available for students interested in attending college — they could go to a bank and get a loan because the government guaranteed the bank money if the student did not pay the money they owed.
Universities and colleges recognized this change, and started to increase tuition. The government was more responsible for financing higher education and students were paying less tuition out of pocket. Therefore, universities and colleges could afford to increase their tuition knowing that people would continue to attend their institution. As schools started to increase tuition, the federal government would expand access to more financing options for students — and the cycle continued. The government would give students more money, colleges would increase their tuition, and the government would then increase the amount of money students could raise. Today, we have a higher education financing system, the result of decades of patchwork proposals based on the belief that the problem was how to expand access to college. Legislation merely increased the federal government’s role in education financing, and failed to address the basic question: why was college getting so expensive in the first place?
Why is Tuition so High?
During the House Financial Services Committee’s hearing, Representative Alexandria Ocasio-Cortez announced that she had around $20,000 in outstanding student loans — less than average, but still a substantial sum. The hearing demonstrated that policymakers are aware of the student debt crisis, but their approaches to solving it do not take the correct approach. Proposals such as debt forgiveness do not address the underlying problems that caused college tuition to increase. Indeed, loan forgiveness would only give colleges more reason to increase their tuition — students have no debt, so they can afford to take out more loans. Although the prospects of a reauthorization bill for the Higher Education Act appear slim, the problem of rising tuition needs to be addressed.
The federal student loan portfolio is worth around $1.5 trillion, and most student loans are issued by the government. When someone decides to go to college, they can apply for financial aid and may have access to dozens of different loans, grants, and scholarships which they can use to finance their education. The problem is that the costs do not appear to be immediate. Taking out a student loan has no instant effect on your finances — those effects are only realized years down the line. For this reason, many people have adopted the view that taking out a loan is an acceptable part of going to college because the costs are not immediate, and they believe they will be able to pay back their student loan when they have a degree.
Universities often produce inconsistent outcomes for students. Some students will become successful after graduation and will be able to afford all of their student loan payments. Others will not be as successful and may struggle to pay off their loans. Some students will not even graduate, and will be saddled with debt that they have almost no chance of paying off. Most people are not aware of these facts, and retain the belief that a college degree is the key to higher earnings and more job security. Indeed, college still pays off for most students, but for others, college is a bad investment that could change the outcome of their life. People with outstanding student loans are less likely to purchase a house, and more likely to delay starting a family, and make fewer contributions toward their retirement plans.
This raises the question: how can we effectively create a system where colleges are incentivized to lower their cost of tuition, without having an impact on quality? While there are many answers to this question — eliminating sports teams and most administrators, introducing risk-sharing models, et cetera — the best place to start would be in giving consumers more information about the true cost of their education. The Higher Education Act may not be reauthorized in the near future, but this problem can be addressed easily by lawmakers independently from that legislation.
Addressing the Tuition Crisis
Policymakers need to make it easier for students to figure out how much they will pay in order to attend the college of their choice.This sounds like a simple task— after all, the student is going to have to pay for college at some point. But college admissions departments are often reluctant to share the full price of college upfront, and offer letters use different ways of calculating the amount students will pay.
Help Students Calculate Net Costs
A 2018 study by New America discovered that only 40 percent of offer letters calculated what students would need to pay, and the 194 institutions who included a figure used 23 different ways of calculating the remaining costs of college. Further, more than one-third of the letters analyzed did not include any information that showed students how the aid would be used. Thus, even if students are eligible for financial support, it is often unclear as to how far that money will go — how much of their education the aid would cover. This creates a system where students cannot properly evaluate how much they will pay out of pocket, and leads to people making ill-informed decisions about their education.
In March, the bipartisan Net Price Calculator Improvement Act was proposed which aims to address this problem. The act would require colleges and universities to place a net cost calculator on their website, so that students can efficiently find out how much they are expected to pay for college. Such a calculator would force colleges to be more transparent about the true cost of their educational offerings, which may encourage them to lower their tuition as they aim to attract more students.
Educate Students on Graduate Outcomes
Students need to be aware of how much they can expect to make after they graduate. Colleges and universities are in a good position to gather data about student outcomes, and the average salaries of students from particular majors. They should be required to present that information clearly to students, in addition to how their expected earnings may impact their ability to repay their student loans. Providing students with information about average salaries after graduation can help them make a more informed decision about their education, and evaluate whether or not college is worth it.
Many colleges already have access to this data and survey their alumni to find out about their progress after graduation. This means it should be easy for colleges to start sharing this information — they will not need to develop new processes or tools to gather these outcomes. If this information is published, schools would have an incentive to improve the quality of every major they offer — they would not be able to prioritize the ones which make the most money for the school. Students would be able to make the distinction about how outcomes for history students vary from mathematic students — a good next step in improving transparency in college costs.
Help Students Calculate Repayments After Graduation
Future legislation also needs to help students evaluate how much they should expect to pay after they graduate. Taking out a student loan seems very abstract because the cost of doing so is deferred until you graduate or leave school. Therefore, students are often more willing to borrow money that they may not be able to afford because the effects will take years for them to realize. According to the 2018 National Financial Capability Study, 51 percent of people who had outstanding loans in the study did not estimate monthly payments before getting a loan. Students are borrowing large sums of money from the federal government and private lenders without knowing exactly how much they will need to pay after they finish school.
Colleges and universities should be forced to disclose more information about how much students can expect to pay after graduation. This could be done by providing more information about the long-term ramifications of taking out a specific student loan, and being more transparent about how much students can expect to pay. The Know Before You Owe Federal Student Loan Act aims to address this problem by improving the student loan counseling process to ensure that students do not borrow more than they need. Before taking out a loan, students would be asked how much money they need, and will be presented with estimates on how much they can expect to pay after graduation based on their likely monthly income.
Colleges Need More Accountability for Tuition Costs
There is already some legislation working to address these problems, but there is a long way to go. Improving transparency in higher education financing and college costs is a good place to start. If universities spend more time gathering and disclosing outcomes data and information about the cost of their educational offerings, students will be able to make better decisions about how they should finance their education. Doing so would ensure that students do not take out debt that they will not be able to repay in the future, and would allow students to make healthier financial decisions that account for the expected value of the major they have chosen.
Increased transparency in tuition prices would also act as a good source of accountability for colleges. At present, high price tags have been seen by many as a sign of quality. But now that school is becoming so expensive, that sentiment is starting to change. If universities start to publish more data about the true cost of their offerings, prospective students may pressure them to lower tuition and improve the quality of their programs. Indeed, some schools that charge more and have poor student outcomes would be under serious pressure to change their offerings. Perhaps some schools would have to shut down.
Going to college is a big step. It is a step toward gaining full independence, and gives people the opportunity to immerse themselves in an environment where everyone is dedicated to learning. Prospective students should not have to worry about taking out thousands — or tens of thousands — of dollars in loans to attend college which they may not even be able to pay back. Rather, students should be given more information about the true cost of college, and learn about how much they can expect to earn based on the major they have chosen.
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