Student Debt: Onerous for the young, a drag on society – and a major future problem
Summary: While the nation focuses on the concerns of old white people (which dominated the election), our young — our future — have different problems. Such as rising inequality of wealth & income. Starting different children at different rungs of the ladder generates positive feedback (like a pebble thrown down a rocky hillside, with the avalanche growing as it rolls down). Today we have the crack analysts of the Liscio Report look a rapidly worsening aspect of this national illness: rising student debt. Rising education costs block many from even getting on the opportunity ladder; large student loans will keep many on the lower rungs.
- “Student Debt: Onerous, and a Drag”
- About the Liscio Report
- More about student loans
- For More Information
(1) “Student Debt: Onerous, and a Drag”
From The Liscio Report, 20 May 2012.
Reposted here with their generous permission.
We have heard from a number of sources that researchers at the New York Federal Reserve Bank are worried that without some form of mortgage debt relief we may face a crisis in a couple of years that eclipses the one that took place in 2008. In line with such worries, the New York Fed has started collecting previously unavailable data on student debt, a form of indebtedness that’s a major burden on the young, and also more of a macroeconomic drag than many analysts realize. Here are some details on all that.
The rise in college tuition has been relentless, far outpacing the famous rise in the cost of health care (see graph, below). Since 1980, the overall CPI is up 194%. Its medical care component is up 436%, more than twice as much. But its college tuition component is up 829%, more than four times as much.
It’s hard to put a finger on just what drives educational inflation. No particular category of spending is rising out of line with the averages, though contacts at a number of institutions point to a great fondness for building fancy new buildings, many of them financed with bonds secured by supposedly ever-rising student tuition and fees. This is how NYU, with its relatively small endowment, is financing its grand expansion plans in lower Manhattan. Faculties of both the business school and economics department have filed objections, citing a fearsome growth in leverage. Similar things are going on in public systems, like the University of California’s, despite continued reduction in state financing.
Instructional budgets have remained at a stable 33% of spending for the last decade, even as student/teacher ratios have fallen. The reason that those ratios could fall while the instructional share of budgets has been stable is that universities have squeezed on labor costs. To start with, the composition of faculties has changed markedly — from nearly 80% full-time in 1970 to about 50% today. Over the last decade, student enrollment is up 38%; full-time faculty is up 23%, and part-time is up 63%. But the full-time faculty haven’t been raking it in. Tuition and fees have risen 82% faster than the salaries of full-time faculty since the early 1990s at private institutions, and 149% faster at public ones.
Burdens Shifting to Individuals
At the same time costs have been rising, state governments have cut back their support of public universities and colleges. Some major state universities now get less than 10% of their income from state budgets. As the graph below shows, the personal share of higher ed spending surpassed the state and local share about ten years ago, and the two lines continue to get farther apart. (This data, drawn from the national income accounts, stops in 2010. Given budget cutbacks since then, the gap has undoubtedly gotten wider.) The feds have kicked up their share, but nowhere near enough to offset the decline in the state and local share.
Of course, because of aid, not everyone pays the full published prices. According to the College Board, net costs of public institutions in 2008 were around 44% of household income for the poorest quartile of the population, 26% for the next-poorest, 19% for the second-richest, and 10% for the best off. That’s a lot of money. And more of the aid, at least until very recently, has been coming in the form of loans rather than grants. In the 1970s, loans were 21% of aid; lately, the share has been 47%. Pell Grants, the major federal program, covered 45% of the average public university tuition bill in 1990; in 2011, it covered 32%.
The Great Recession had a major effect on college choice and financing. According to a Sallie Mae – Ipsos Public Affairs survey, college costs—actually paid, not sticker prices — came down in the 2010–2011 school year, especially for higher-income families. (It rose for the poorest quartile, though.) Students traded down, looking for cheaper options (many — at all income levels — shifted from four-year public to two-year public institutions), and grants and scholarships increased (led by increases in Pell Grants from the federal government).
More middle-income families applied for financial aid — the product, no doubt, of the recession’s lingering hit to income and balance sheets. Middle- and high-income families increased their use of grants and scholarships, with both dollar levels and shares of costs paid rising over the last couple of years. More middle-income families are applying for aid, and they’re still plenty worried about rising costs.
But a lot of college funds have to be borrowed. According to Sallie Mae/Ipsos, poor families paid 25% of expenses with borrowed funds in the 2010–2011 year. The share declines as you go up the ladder, but not as much as you might think: 22% for the middle ranks, and 17% for the best off. And the trend is towards increasing reliance on loans. In 1992, 32% of undergrads borrowed; in 2007, 53% did.
Heavy Debt Loads
The result has been a relentless increase in education debt. (See graph, below, for a yearly flow picture.) We don’t know exactly how much it’s risen, since there are no official sources of the stock of loans outstanding. A private researcher, Mark Kantrowitz, proprietor of a website called finaid.org, estimates that total student debt has risen from about $200 billion in 2000 to $1 trillion today, but he’s stingy about disclosing his sources and techniques. While the trajectory is probably more or less right, we don’t know for sure.
More recently, the New York Fed, using data gathered from the credit rating agency Equifax, has been publishing estimates of student debt, which are the closest to definitive we now have. The numbers are staggering. They estimate that as of the third quarter of 2011, total student debt was about $870 billion — more than credit card balances ($693 billion) and auto loans ($730 billion).
Just over 15% of adults have student debt balances. The mean balance is $23,300 — but that is pulled up, as most debt aggregates are, but a minority who are deep in debt. The median is only about half the mean: $12,800. A quarter owe more than $28,000, and 10% owe more than 54%.
Although almost all age groups owe student debt, the profile skews young: 40% of people in their 20s are on the hook, compared with just 7% of those over 40. But the numbers don’t go to 0 with age: 5% of over-60s owe student debt.
And since the young have relatively low incomes — on which more in a moment — there’s a lot of distress among the indebted. On the surface, about 10% of those with student debts are in arrears, roughly in line with credit card debt. But since many borrowers are still in school or just out, they’re not yet expected to begin servicing their debts. Adjusting for that, the New York Fed estimates that more than a quarter — 27% — of borrowers have past-due balances.
That level of distress, combined with a still-lousy job market, means that today’s young are having a hard time getting on their feet. A just-released survey of recent grads by the Heldrich Center for Workforce Development at Rutgers shows unrelated to their fields of study, and having a hard time making ends meet. Median student debt of recent grads is $20,000 — higher than the New York Fed’s figure, no doubt because of the increasing prominence of debt finance.
And it’s pinching their spending sharply: 40% have delayed the purchase of a house or car, 28% have put off additional education, 27% have moved back in with their parents, and 14% have delayed marriage.
And they have generally gloomy views of their future — personally and especially for their generation as a whole.
A Nonflattering Profile
One of the more established facts in economics is that people’s incomes tend to rise with age to a peak around their early 50s, then decline into retirement and beyond. As with many established facts, recent economic history is challenging this pattern.
Graphed below is average household income in constant dollars by age of household head. In 2010, households headed by someone aged 15–24 had an income of $28,322, 15% less than their counterparts in 1970. All other age groups were better off than their predecessors 40 years earlier, though in general, the younger the cohort, the lesser the advantage. The 65+ set, though, was almost 80% better off than their 1970s counterparts. Today’s young are about 20% worse off than those of 2000. Most other groups are 10–15% worse off than their counterparts at the century’s turn.
That’s not to say that older households are doing swimmingly. In fact, the 35–44s and 45–54s are also worse off than their 1990s ancestors. And economic progress over time is looking to have stalled for the middle ranks. While the 25–34 set in 2010 had incomes 42% above the 15–24 group ten years earlier (presumably, that is, mostly the same people), the 45–54 group was 8% worse off than that cohort was when they were 35–44, and the 55–64 group was worse off.
Only the elderly have been exempt from this stagnation/downward mobility. They’re the only group whose incomes have risen consistently. But before one concludes that they’re rolling in it, the average income of this cohort was $31,408 in 2010, 36% below the national average.
Amid shifting trends and uncertainty, one thing doesn’t change: our young adults are our country’s future. It’s a good thing the NY Fed is paying attention to the burdens are best hopes are carrying.
(2) About the Liscio Report
— From their About page:
Here at The Liscio Report we do all our own research and writing, do not manage other people’s money or receive any form of commission, and are beholden to no one but our subscribers and ourselves. We bring fresh perspectives to the data we analyze and are confident taking positions contrary to consensus when our proprietary data tells us to do so.
Our insights are regularly picked up in Barron’s, CNBC, and other publications. Additionally, we make occasional television appearances (most recently on CNBC and Bill Moyers), and were ranked by MSN Money in the top five of their annual “Best of the Best” Awards.
John Liscio founded the Report in 1992. Philippa Dunne and Douglas Henwood were John Liscio’s closest associates and, since John’s untimely death in 2000, are honored to be carrying on the research techniques he pioneered.
Other notes at Liscio Report’s blog:
- “Recent work on income disparity”, 28 March 2012
(3) About student laons
(a) Student Loan Debt History, Federal Reserve Bank of New York
Student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008. Balances of student loans have eclipsed both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages. Student loan borrowing and delinquency rates vary among age groups and over time. These interactive charts provides information by age group.
(b) “Grading Student Loans“, Federal Reserve Bank of New York, 5 March 2012 — “To inform the public and policymakers, we devote this post to some new findings obtained from the FRBNY Consumer Credit Panel, a unique and nationally representative data set sourced from Equifax credit reports.”
(4) For more information
(a) About the problems of American higher education:
- College education in America, another broken business model, 3 July 2009
- The secret about our universities (seldom even whispered among Professors), 5 July 2009
- Women dominating the ranks of college graduates – What’s the effect on America?, 7 July 2009
- A better answer to “why women outperform men in college?”, 8 July 2009
- Is a college education worth a million dollars?, 10 July 2009
- What should a student learn from college? Why go to college?, 1 November 2009
- News You Can Use to understand the New America, 14 March 2012
(b) Posts about inequality and social mobility: once our strengths, now our weaknesses:
- A sad picture of America, but important for us to understand, 3 November 2008 — Our low social mobility.
- America’s elites reluctantly impose a client-patron system, 5 November 2008
- Inequality in the USA, 7 January 2009
- A great, brief analysis of problem with America’s society – a model to follow when looking at other problems, 4 June 2009
- The latest figures on income inequality in the USA, 9 October 2009
- Graph of the decade, a hidden fracture in the American political regime, 7 March 2010
- America, the land of limited opportunity. We must open our eyes to the truth., 31 March 2010
- Modern America seen in pictures. Graphs, not photos. Facts, not impressions., 13 June 2010
- A pity party for America’s rich and powerful, 8 September 2010
- Why Americans should love Tolkien’s Lord of the Rings – we live there, 13 December 2011
- News You Can Use to understand the New America, 14 March 2012 — Articles about rising inequality
- The new American economy: concentrating business power to suit an unequal society, 27 April 2012
- Jared Bernstein examines the economic impact of raising taxes on high-income households, 30 April 2012
- Should we despair, giving up on America?, 5 May 2012