From my days in middle school, I remember these charts that show just how much money you can expect to make for each level of education completed. The teachers would post them on the walls of different classrooms among the world maps and inspirational posters. As a perpetually bored middleschooler, I came to a few conclusions after having stared at these charts for more hours than I care to admit.
The first is that graduating high school is definitely worth it. I mean, the average high school graduate makes 50% more than his buddies that flunked out of school! The second is that “some college” is a pretty big rip off until you get yourself a degree. A two year degree lands you another eight thousand bucks, and from there on out the income earned increases exponentially. The logical conclusion from this chart is that you should get yourself a professional degree and then buy yourself a new yacht every year. That’s how it works, right? It’s great that the education system teaches kids how to get rich.
One growing problem that is left off of this chart is that college is no longer as affordable as it once was. In 1970 it cost less than $400 in tuition every year to attend a high ranking public university. When calculated for inflation, that is equivalent today to about $2,400—or $1,200 per semester. At this cost, any student could afford to move out, get a part time job, and pay for his own schooling. One summer of full time work and saving alone could float that expense. In fact, that is what most people did.
In the past ten years, the average four-year university tuition cost has once again managed to double in price. Are degrees twice as valuable now? Did the schools double the amount of material taught? Or do prices just naturally double every so often for no reason? There is much that has been said and written about the value of a four-year degree or a graduate degree when half of graduates fail to get a job. I don’t intend to fully address that issue here. Instead, I want to explore why Universities are charging double during the post-2009 Great Recession.
Historically, banks tried hard to avoid lending to most students because there is an incredibly high chance of a student never paying back. In the early 60s, a student could expect to pay as much as 30% annual interest on a student loan. Due to this reality, most students paid for school out-of-pocket or received help from parents. Since tuition was so cheap, the focus was less on money and more on grades. Before the age of the internet, in which knowledge is readily available, people went to the Universities to learn.
In 1965, the government decided to make school more affordable to a greater number of young people by subsidizing the bank loans. Congress didn’t have money for student loans, so what they did instead was share the risk of the student defaulting with the bank. This allowed banks to charge much lower interest rates, making it a more attractive option over the next thirty years.
During the 1980s, banks one again began to charge higher interest rates and reap in enormous profits from high-risk loans while shifting many of the losses to the American taxpayers. The 80s saw a much larger generation flooding in than the 70s, so tuition prices increased to meet the supply. By the time Bill Clinton came to office in 1992, the program of lending to students through banks (the guarantee program) was proving to be incredibly costly. In 1993, the government began a pilot program for direct student loans. This was supposed to be cheaper for taxpayers because students would no longer need to work through middlemen and pay high interest rates to get loans for school. Instead of paying 20-30% interest, you could expect a rate closer to 10%.
Public schools had been promoting the benefits of receiving a college degree since the 80s, so it should be no surprise that record amounts of students began filling out applications a decade later. The unprecedented amount of students coupled with a seemingly infinite supply of easy money allowed universities to raise their tuition dramatically without seeing any apparent consequences to themselves. The new money available from higher tuition and federal grants allowed for many schools to expand their facilities to accommodate as many as two to three times the amount of students as they had in 1984, ten years earlier.
Universities found new and more creative ways to spend the federal money as each prosperous year rolled by. New stadiums were built, the amount of women’s teams grew exponentially, older buildings were updated, and entire city blocks were bought and converted into new buildings and departments. Liberal Arts degrees became much more common and the roaring economy of 90s seemed to have a job for anyone that was savvy enough to earn a degree. Overall, the direct loan program was considered a great success for everyone involved.
Every child is taught to go to college so that he can be successful. One of the results is that many more young adults are continuing to pursue four-year degrees. The problem is that the same job market has changed and schools are still lapping up easy money from the federal government. Without grants, scholarships, or student loans, it is very difficult to afford school. The average student debt at graduation now is over $30,000 for a four year degree. It is impossible to bankrupt yourself out of that debt. Many Americans well into their forties are still haunted with interest only payments on their debt. The total amount of debt belonging to students under federal programs now surpasses one trillion dollars.
Schools have every incentive to keep tuition prices high, or even raise them. Many students don’t hesitate to go into debt because they are confident that they will be able to pay it off later. The government wins by making about $34 billion a year in revenue from student loan payments. The biggest losers are the students who a mere two generations ago could easily pay for school on their own and afford it. Rather than having entire generations graduate into debt slavery, the government should pull itself out of the student loan business.
If easy access to money were taken away from students, schools would be forced to dramatically lower tuition and cut ridiculous expenses. The alternative for school administrators would be to have near-empty campuses. The transition could be done in a three-year phase-out period where the government lends less money every year. This would give students and schools time to adjust. If the current program continues, tuition prices will keep skyrocketing and the debt problem will only worsen until it inevitably collapses. Private lenders are already treating student loan debt with caution. As of 2013, Chase bank no longer makes student loans. If banks aren’t willing to make the loans due to incredible risk, then the government shouldn’t either.