Editor’s note: This is the first of several installments dealing with the increasingly burdensome cost of higher education in America. We first will sum up the current tuition and student loan crisis across the US. We then will detail Notre Dame’s tuition and student loan practices and propose a leadership role for Notre Dame in dealing with the crisis.
In this installment we will deal principally with the following topics:
- The extent and delinquency level of student loan debt nationally and the negative consequences thereof;
- The two primary causes of increasing student loan debt, its ready availability and increases in tuition and fees; and
- The moral issues raised by borrowing by students who know or should know that the debt is and will be beyond their repayment capacity and by universities that aid and abet those borrowing levels.
The National Picture – Student Loan Debt
“If the costs [of college] keep on rising, especially at a time when family incomes are hurting, college will become increasingly unaffordable for the middle class.” – Federal Education Secretary Arne Duncan, June, 2012.
“Upon graduation, a college degree today is more likely to guarantee you debt than a well-paying job.” – Bennett and Wilezol, Is College Worth It? 2013, viii.
For too many students, American universities are unaffordable out of their own or their families’ assets or earnings. If higher education were affordable without borrowing, there would not be such massive student loan debt. Let’s look at the following 10 sets of facts relating to the unaffordability:
- America has in the range of 39 to 40 million student loan borrowers (Huffington Post, Jan. 22, 2014; Watchdog.org, Feb. 10, 2014).
- Student loan debt is at an all-time high, over one trillion dollars, when one includes capitalized interest, that is, unpaid interest added to principal (FinAid.org, Apr. 23, 2014; Credit.com, Mar. 14, 2013; Bennett and Wilezol, xi). The student loan crisis is likely to get worse, not better, with the administration’s latest initiative, to cap monthly student-loan payments and forgive unpaid balances after 20 years (10 years for government and non-profit employees) (The Latest Student-Loan Charade, Wall Street Journal, June 10, 2014). The risk of that revised Pay As You Earn program is that it will simply incentivize more student-loan borrowing and concomitant tuition increases taking advantage of the increased funding, all at the expense of the students and the taxpayers. The problem would be compounded by any initiative of the Obama administration to make borrowing easier for financially-disadvantaged parents.
- Student loan debt has increased more than 500 percent since 1999, while the average salary for young people has decreased 10 percent (Huffington Post, Jan. 22, 2014).
- Student loan debt exceeds America’s credit card debt (FinAid.org., Apr. 23, 2014; Credit.com, Mar. 14, 2013; Bennett and Wilezol, 4). It is the single largest form of household consumer debt outside of home loans (Huffington Post, Jan. 22, 2014).
- Student loans are doled out without regard to creditworthiness or an assessment of the borrowers’ ability to handle college level work (Heritage Foundation, Apr. 27, 2012). The federal government ignores simple, sound banking principles (Bennett and Wilezol, 27).
- The average level of undergraduate student loan debt in 2014 was $33,000 (Wall Street Journal, May 17, 2014). The median amount of debt for an MA is about $25,000, for a Ph.D. $52,000 and for a law degree somewhere between $128,000 and $150,000 (Bennett and Wilezol, citing FinAid.org, 9; Wall Street Journal, Apr. 24, 2014). More than three million households owed at least $50,000 in student loans in 2012 (Wall Street Journal, Aug. 8, 2012).
- A striking 68 percent of undergraduates have student loans (Bank of America, Stories of Student Debt, October 1, 2014). Over two-thirds of all undergraduate borrowers took out the maximum ($12,500) per year in 2011-12 (Wall Street Journal, Mar. 2, 2014).
- The impact of student loan debt falls not only on relatively recent graduates. According to the Federal Reserve Bank of New York, 6.8 million Americans age 50 and older account for over $149 billion of the debt and two million aged 60 and over owe $43 billion of that amount. The likelihood is that a portion of the debt is derived from co-signing by parents and grandparents. And, sadly, the financial pain and burden of the debt falls harder on the poor and underprivileged (New York Times, Sept. 13, 2014; Credit.com, Mar. 14, 2013; Bennett and Wilezol, xvi).
- Payments are not being made for various reasons on 44 percent of federal student loans (Wall Street Journal, Oct. 2, 2014, citing the Federal Reserve Bank of New York). Nearly 11 percent of aggregate student loan debt is at least 90 days delinquent or in default (The Daily Signal, Aug. 19, 2014). And the effective delinquency rate on student loans is now as high as it was on subprime mortgages at the height of the housing crisis (Kelly, A Real Education Market, National Review, Oct. 20, 2014).
- In a 2012 analysis by the Associated Press of college graduates 25 and younger 50 percent were either unemployed or in jobs that didn’t require a college degree. According to the National Student Clearinghouse Research Center, more than 40 percent of full-time students at four-year universities fail to graduate in 6 years. Those students don’t have degrees but they often still have debt (Reynolds, What’s Really Immoral About Student Loans, Wall Street Journal online, July 28, 2013).
The negative consequences of student loan debt are manifold:
- It produces cash-strapped younger generations unable to afford homes, cars and other amenities, thereby impacting their standard of living and the U.S. economy (Wall Street Journal, Apr. 24, 2014; Consumer Financial Protection Bureau, June, 2013).
- It can produce a negative impact on the borrowers’ credit ratings and creditworthiness, especially when default occurs (Credit.com, Mar. 14, 2013).
- It can cause borrowers to postpone the starting of families or to limit family size (Huffington Post, Jan. 22, 2014; Bennett and Wilezol, 18).
- Tragically, student loan debt also can promote prostitution in search of repayment funds (Bennett and Wilezol, 6).
Notably, student loans, whether federal or private, are not dischargeable in bankruptcy, in the absence of “undue hardship,” a difficult standard to meet (Credit.com, Mar. 14, 2013).
To summarize, student loan debt is massive and growing. Non-payments continue to be a problem. The consequences are detrimental to the students, their families and the economy. And the extent of the debt demonstrates that higher education today is unaffordable to a significant percentage of students and their families.
Notwithstanding the volume of criticism of today’s student loan debt, only a fraction of which is cited above, contrary views do exist. One such view is represented in the Bank of America Stories of Student Loan Debt, dated Oct. 1, 2014. B of A gains optimism from statistics that show the new issue volume of student loan debt declining (although cumulative debt is increasing by virtue of more students with debt, longer borrowings and permitted delay in payments), a decline in default rates, a slowing of growth in net tuition (which includes the benefit of grant aid and tax benefits) at public universities even though it has accelerated at private non-profit universities, and a decline in total debt liabilities of households in which the head is under 35. B of A, in addition, gains comfort from the fact that median education debt for under 35 year olds is only $17,200 compared to the mean of $29,900 in 2013 dollars, because “only” 19 percent of borrowers owe over $50,000, including only 6 percent over $100,000. One may more appropriately decry the fact that almost 20 percent of borrowers have $50,000 of student debt, a number that represents a big hill to climb that requires considerable discipline and the forsaking of other expenditures to facilitate debt repayment.
The National Picture – The Effect of Federal Student Aid on Tuitions
“Higher education subsidies through subsidized federal student loans and grants does nothing to put pressure on colleges to lower costs. In fact, access to easy money does the opposite, enabling universities to raise prices, knowing students can return to the federal trough for more financing.” – Heritage Foundation Blog, Aug. 19, 2013.
Student loan debt increases because it is readily available and because tuition and fees continue to rise.
In the period from 1991 to 2014-15, the sticker price, that is, the price before reduction for financial aid, of tuition at Notre Dame, for example, has increased 342 percent, while the consumer price index has risen only 71 percent. When tuitions rise, applications from low-income families fall dramatically because that cohort is extremely price sensitive. This reduces the percentage of students from low-income families attending college (Bennett and Wilezol, 36).
Pell grants (federal grants for the poorest students) increased 475 percent between 1980 and 2012, yet the cost of college increased 439 percent since 1982 (Heritage Foundation Blog, Apr. 27, 2012). Nonetheless, need-based grants have not kept pace with increases in college costs (FinAid.org, Apr. 13, 2014).
Numerous experts opine that the more the federal government loans or grants for higher education, the higher the universities’ tuition pricing (Meyer, Manhattan Institute for Policy Research, Ideas Changing Our World, Oct. 25, 2013; Merline, Student Loan Debt Shows High Cost of Federal Aid, Investors Business Daily, Oct. 28, 2011; Brokamp, Are Universities Immoral?, Getrichslowly.org, Personal Finance, Aug. 14, 2012). As early as 1987, Bill Bennett, who served as the federal Secretary of Education from 1985-88, articulated the Bennett Hypothesis that “the cost of college tuition will rise as long as the amount of money available in federal student-aid programs continues to increase with little or no accountability” (Bennett and Wilezol, 21). Bennett theorized that “increasingly student aid was insulating colleges from having to take market-driven cost-cutting measures, like improving productivity or efficiency” (Bennett and Wilezol, 22). “While we acknowledge,” says Bennett, “there is not a perfect correlation between financial aid and price increases on a year-to-year basis, the Bennett Hypothesis holds true in the aggregate” (Bennett and Wilezol, 31).
Moreover, higher tuition reduces college affordability, leading to calls for more financial aid, setting the vicious cycle in motion all over again” (Bennett and Wilezol, 32).
The point is clear: Colleges, as a rule, will try to charge as much as students are able to pay, and someone is able to pay more who has access to federal student loan funding (Gobry, Forbes.com).
The situation is exacerbated by the fact that the federal government now has a near monopoly on student loans, since banks and other intermediary lenders of federal student loans have been supplanted by Uncle Sam (Bennett and Wilezol, 25).
In addition to the ready availability of student loan debt, tuition and fees have continued to rise, in the case of state colleges and universities, because of cutbacks in state support (Hintze Foundation, February 1, 2012) and among many universities, including Notre Dame, because high tuition prices have become synonymous with prestigious and elite universities (Bennett and Wilezol, 23). As one observer opined, “because the quest for prestige is open-ended, public and nonprofit colleges will tend to seek never-ending increases in spending, financed by never-ending fundraising and never-ending increases in tuition” (Kelly, A Real Education Market, National Review, Oct. 20, 2014).
A number of experts also attribute the tuition and fee increases to the failure of university administrators to meaningfully cut or restrain costs. Subjects cited as potential sources of reduced spending are: administrative payrolls, irrelevant course offerings, student luxuries, needless duplication of programs with geographically close institutions, tenure, the construction of non-essential buildings, the growing time to graduation, and remedial coursework. We are informed that Notre Dame has made efforts to restrain spending, by reducing inefficiencies in its business processes (President’s Annual Address to the Faculty, Sept. 16, 2014). However, Notre Dame’s continued emphasis on construction over the years, which is projected well into the future, does raise questions about prioritization. In any event, it is beyond the scope of this piece to judge the extent that increases in tuitions and fees at Notre Dame could have been meaningfully restrained as a consequence of budget cuts.
Notre Dame does not appear to have contemplated freezing or cutting tuition and fees, but that is not a unique initiative in higher education. According to the website FastWeb, College Gold, 20 colleges have cut tuition, including William & Mary, and 65 have frozen tuition, including in recent years Maryland and Ohio State for in-state residents, Kansas, Princeton and the University of Oklahoma. In fact, in the bios circulated by the University announcing the recipients of honorary degrees at its 2014 graduation exercises, Notre Dame lauded University of Iowa President Sally Mason for having “successfully advocated for the first tuition freeze [at Iowa] in 30 years.”
And, in May, 2014, Purdue University’s Board of Trustees extended its tuition freeze a third year, through the 2015-16 school year. In addition, with recent reductions in student meal plan rates, the average cost of attendance at Purdue will be less in 2014 than it was in 2013 (Purdue Undergraduate Admissions, Tuition Freeze).
The Moral Issue
“Students saddled with college loans have called for student loan forgiveness. Yesterday’s Americans would have viewed it as morally corrupt and reprehensible to accumulate debt and then seek to avoid paying it. It’s nothing less than theft. What’s worse is there’s little condemnation of it by the rest of us.” – Walter Williams, The Erosion of Tradition and Shame, Cincinnati Enquirer, Aug. 5, 2012.
Walter Williams appears to be one of the few student loan observers to have addressed the morality of student loan borrowing, albeit from the vantage point of attempts to avoid repayment. There also is the question whether it is right to borrow at levels knowingly above the capacity of the borrower ever to repay.
The immorality issue arguably extends beyond the individual borrowers who run up student loan debt that far exceeds their potential repayment ability. One may indeed ask whether universities that cast a blind eye on excessive student borrowing are complicit in the student conduct. Are they not aiding and abetting the “theft,” to use Walter Williams’ word? The case is even stronger in situations where the universities up tuition based upon anticipated availability of student financial aid. Those universities aggrandize themselves by “not leaving money on the table” but drive up student loan borrowing to the financial disadvantage of many students, even though they may allocate some of the additional financial aid monies to tuition discounts or institutional aid (Bennett and Wilezol, 35).
Robert Brokamp in Are Universities Immoral? makes these comments:
The Ivory Tower Industrial Complex is succumbing to a conflict of interest, and not doing what’s in the students’ best interest. I think it’s unethical. I worked at a university for a year, and found the wasted money and inefficiencies appalling . . . They should stand up and say, ‘Enough is enough. We can’t, in good conscience, send these kids out into the world with tens of thousands of dollars in debt.’
A law school professor at the University of Texas, Glenn Harlan Reynolds, concurs in the accusation of immorality. After citing rising student loan debt and the default rate, Reynolds says:
Now here’s where the real immorality kicks in. The skyrocketing cost of a college education is a classic unintended consequence of government intervention. Colleges have responded to the availability of easy federal money by doing what subsidized industries generally do: Raising prices to capture the subsidy (Wall Street Journal Online, June 28, 2013).
In summary, university costs have long been rising disproportionately to family incomes and the cost of living. The increases have been driven significantly by the increased availability of student loan funding. Excessive student loan borrowing—borrowing well beyond the present or future capacity of the borrower to repay—raises serious moral questions regarding the borrower’s conduct as well as the complicity of the universities in raising tuition because of the availability of increasing student loan funding.
Edmund Adams is a 1963 Notre Dame Law School graduate, who formerly was the Managing Partner, and currently is a Retired Partner of the law firm of Frost Brown Todd in Cincinnati. He is a Fellow of the American College of Bankruptcy. He served nine years as a member of the Ohio Board of Regents, the coordinating organization for higher education in Ohio, including two years as Chairman. He also is the President and a Director of the Sycamore Trust but this series of articles is not written in those capacities or as a representative of the Sycamore Trust.