High repayments, outstanding loans, rising interest rates: How the debt crisis is crushing American students

Creator: Andra Mihali. Creative Commons License LogoThis image is licensed under Creative Commons License.

Young students at UC Berkeley, one of the best state universities in the US, paid a $300 administration fee in the 1950s and not one penny in tuition fees.[i] Nowadays, a Californian resident pays $13,500 and $27,000 a year for out-of-state students.[ii] This isn't an uncommon amount among American universities. The United States leads international comparisons when it comes to private university spending and is far behind when public education investments are measured. A data analysis by the OECD (Organization for Economic Cooperation) shows the differences (see chart 1 and 2).

Household spending on tertiary education. Creator: OECD (2017). Creative Commons License LogoThis image is licensed under Creative Commons License.Public spending on tertiary education. Creator: OECD (2017). Creative Commons License LogoThis image is licensed under Creative Commons License.

44 million former and current American students have debt, 8 million alumni are in arrears with their payment.[iii] On average, students complete their studies with a student loan of $37,000, an amount based on the respective degree and university.[iv] At public universities, medical and law students have by far the highest loans at up to $162,000, while private, for-profit universities still require much higher study fees.[v]

Chart 3: 20 Years of Tuition Growth at private and public Universities. Creator: Travis Mitchell. Public Domain."To be honest, I don't know how much I owe at this point. I think it's about $100,000." Former graduate student Rachel (25) [1] now lives in Washington DC and works for an NGO. She received her bachelor’s degree from a public university in North Carolina, and went to the prestigious Georgetown University, a private institution, for her master’s degree:

During my undergraduate studies, I worked up to 25 hours a week to earn as much money as possible. When I started studying, the tuition fees were about $5,500 a year. In my fourth year, they climbed up to $8,000. Undergraduates are only allowed to borrow a maximum of $30,000 in loans, which wasn't easy for me. Later on, I decided to study at the private university in Georgetown because it is the best school for master programs in the field of international relations. While I received a merit-based scholarship covering half my tuition fees, $22,000 per year remained, plus additional costs for accommodation and other living expenses.

Nowadays, a Californian resident pays $13,500, an out-of-state student $27,000 a year at Berkeley University (pictured above). Creator: Charlie Nguyen. Creative Commons License LogoThis image is licensed under Creative Commons License.

Since Rachel is now working for a non-governmental organization, she hopes to get a major portion of her debt forgiven by the state. The so-called "Public Service Loan Forgiveness (PSLF)" is a program which, after 120 monthly payments (10 years), abates the remaining debt of all qualifying graduates in the public sector (including some non-governmental organizations).[vi] President Trump's budget wants to abolish the program. As this year marks the first time that debt will be forgiven since President G.W. Bush started the program 2007, the rage among former graduates is huge. Prior to this, former students went to court to sue against misleading qualification requirements of the program.[vii] 26-year-old Sarah decided to continue working in the public sector as a result of this program. Right now, she works for two different non-profits, both part-time:

For me, it was never an option to study at a private -or out-of-state university. I couldn't afford it. If I had known that I could have done my master studies abroad, it would have definitely been an option for me. However, I studied in Germany for one year during my undergraduate studies. The exchange program required me to continue to pay my tuition fees, so that a German student could study for free in the states (as tuition is free in Germany). Currently, I earn so little that I don’t have to pay anything right now. All I have left at the end of the month goes to the state. Living near the poverty line for the next few years is not an appealing future.

How much a university graduate has to pay per month depends on the respective student loan and their payment plan. Many take up a new loan each semester and thus do not have an overview of the actual sum, nor the applicable interest rate. In addition, an 18-year-old student is unaware of what to pay attention to and how these decisions affect later life.

To learn more about other students' experiences, click here.

Lack of private investment and an unbalanced labor market

With 44 million people affected, the debt crisis has a serious impact on society and the economy.[viii] A scientific paper of the Social Science Research Network (SSRN) recognized a negative connection between the increase in tuition fees and business formations. The Federal Reserve Bank also found that fewer 30-year-olds are buying houses. Although the economic crisis in 2008/9 has generally decreased real-estate investments, the number of home buyers among Americans with student loans is very low.

Mortgages are now replaced by student loans. Parts of the monthly salary, once saved for a car, a house, a trip or a new TV now goes into debt repayment. Furthermore, the labor market is changing. Scientists from the University of California and Princeton University  discovered that possession of a student loan significantly influenced career choices. Graduates with high loans are therefore more likely to choose a job in the private sector, such as investment banker or consultant, than in the public sector. Conversely, graduates with lower amounts of debt are more likely to choose low-paid professions, such as teachers or other professions, in non-profit sectors. But finding a well-paid job in a competitive labor market is not always easy. Many well-educated people will accept any job to get rid of their debt. A small but sizeable group also includes those who did not finish their studies but still took out a loan. Without a university degree, this group faces even more difficulty meeting their monthly payments.[ix]

A lack of private investment in the economy and an unbalanced labor market are therefore two profound consequences of the crisis. But demographic changes are crucial as well. Starting a family is also an investment, oftentimes a life-long one. If post-graduates are struggling to pay their rent because a large proportion of their salary goes into paying off their loans, family planning is left behind.

Experts agree on the negative effects on the economy and society.[x] However, the fact that rising fees and interest creates a fragile credit bubble that will burst in the near future is a position that is controversial.[xi]

How to avoid the crisis

With 1.4 trillion of outstanding loans, this is a problem that cannot be swept under the carpet by politicians. During the election campaign in 2016, at least every candidate voiced an opinion on the student loan debt crisis. Bernie Sanders, particularly popular among young people and students, called for the abolition of tuition fees at state universities across the country. He also criticized the rising interest rates on student loans. "It makes no sense that you can get an auto loan today with an interest rate of 2.5%, but millions of college graduates are forced to pay interest rates of 5-7% or more for decades." His $75 billion investment plan, financed annually by a tax on Wall Street of 1%, would increasingly support low-income students.[xii] Hillary Clinton had similar plans. Families with an annual income below $125,000 should not have to pay any tuition fees at public universities. Charitable and non-profit work in certain fields would also have resulted in debt reduction.[xiii] Donald Trump on the other hand, criticized the "profit-making" of the government at the expense of the students during the election campaign. At the same time however, his "Trump University" made negative headlines when former students of the university went to court. The complaints were “alleg[ed] consumer violations and a federal class-action racketeering case,” which were ultimately settled with a sum of 25 million dollars.[xiv] Together with the Head of the Department of Education Betsy DeVos, President Trump is currently planning to reduce public scholarships for families in need and reduce investments in education.

Shifting the focus from national to the state level, the situation seems a little bit more hopeful.

In the state of New York, for example, a policy of state-run universities not charging tuition fees for students whose families do not earn more than $ 100,000 a year will be implemented this year. Next year the income limit will rise to $110,000 and in 2019 to $129,000. That's $6,470 less per year for all applicable, says CNN.[xv] The cost of accommodation, books and other expenses is not included. Prerequisites for the scholarship are 30 credits a year, good grades and the requirement to live and work in New York for the same amount of time that was spent studying there.

Time to set priorities

Rising tuition, helpless students and trillions of dollars in debt are shaping the higher-education landscape in the United States. Even though there are proposals for change from the progressive spectrum of politics, there seem to be no solutions to improve the current situation of the millions of students affected. Even if more effort and financial means are invested in tertiary education at the state level, positive examples remain an exception. The proposal to abolish tuition fees is described as revolutionary and impossible by its critics, even if it has long been practiced in other Western countries and was the norm decades ago in this country. While it is a step in the right direction to talk about ways to guarantee access to higher education for low-income families, this is not a long-term and all-encompassing solution (see rising income limit). Like Rachel and Sarah, many Americans believe it is time to discuss the importance of tertiary education and its access for all Americans. To what extent state regulations are necessary and if and how the state should invest in higher education differs on the lines of partisanship. All in all, 2/3 of Americans favor nationwide free colleges for low –and middle income families. [xvi]  Should education be income related? A society benefits from well-educated people- indeed, it rises and falls with them. This crisis could be the beginning of changing the United States into a country where anyone can truly be whoever they aspire to be.

[1] All names have been changed for privacy reasons
[i] Green, Harlan: “What Happened to Tuition-Free College?”, in http://www.huffingtonpost.com/harlan-green/what-happened-to-tuition_b_10240514.html (last opened: 07/24/17)
[ii] ibid.
[iii] Foroohar, Rana: “The US college debt bubble is becoming dangerous”, in: https://www.ft.com/content/a272ee4c-1b83-11e7-bcac-6d03d067f81f (last opened: 07/24/17)
[iv]  Friedman, Zack: “Student Loan Debt In 2017: A $1.3 Trillion Crisis”, in: http://money.cnn.com/2017/05/18/pf/college/betsy-devos-public-service-loan-forgiveness/index.html (last opened: 07/24/17)
[v][v] Dynarski, Susan: “The Rise of Student Debt for Those Who Get Degrees:, in: https://www.nytimes.com/2015/06/17/upshot/the-rise-of-student-debt-for-those-who-get-degrees.html (last opened: 07/24/17)
[vi] Douglas-Gabriel, Danielle: “On track for Public Service Loan Forgiveness? Good news, you’re not in danger from Trump’s budget.”, in: https://www.washingtonpost.com/news/grade-point/wp/2017/05/23/on-track-for-public-service-loan-forgiveness-good-news-youre-not-in-danger-from-trumps-budget/?utm_term=.339eb4167f20 (last opened: 07/24/17)
[vii]  Lobosko, Katie: “400,000 were promised student loan forgiveness. Now they are panicking”, in:  http://money.cnn.com/2017/05/18/pf/college/betsy-devos-public-service-loan-forgiveness/index.html (last opened: 07/24/17)
[viii] Friedman, Zack: “Student Loan Debt In 2017: A $1.3 Trillion Crisis”, in:  https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/#37a171945dab (last opened: 07/24/17)
[ix] Tompor, Susan: „ College student's nightmare: Loan debt and no degree”, in: https://www.usatoday.com/story/money/columnist/tompor/tompor/2015/06/07/student-loans-repay-delinquency-federal-reserve/28562447/ (last opened: 07/24/17)
[x] Wang, Marian: „ Another Way Student Loans Are Like Mortgages: Subpar Servicing”, in: https://www.propublica.org/article/another-way-student-loans-are-like-mortgages-subpar-servicing (last opened: 07/24/17)
[xi] Schlesinger, Jill: „Looking for the next debt bubble”, in: http://www.chicagotribune.com/business/sns-201608241800--tms--retiresmctnrs-a20160824-20160824-story.html (last opened: 07/24/17)
[xii]  Bernie Sanders: “It’s Time to Make College Tuition Free and Debt Free”, in: https://berniesanders.com/issues/its-time-to-make-college-tuition-free-and-debt-free/  (last opened: 07/24/17)
[xiii] Hillary Clinton: “Making college debt-free and taking on student debt”, in: https://www.hillaryclinton.com/issues/college/ (last opened: 07/24/17)
[xiv] Clark, Kim; Daugherty, Greg  and Mulhere, Kaitlin: “What to Know About the Trump University Lawsuit “, in: http://time.com/money/4573705/trump-university-lawsuit/  (last opened: 07/24/17)
[xv] Lobosko, Katie: “New York just OK'd tuition-free college for middle class”, in: http://money.cnn.com/2017/04/08/pf/college/new-york-free-tuition/index.html (last opened: 07/24/17)
[xvi] Public Agenda: “Public Opinion on higher education”, in: https://publicagenda.org/pages/public-opinion-higher-education-2016#finding1 (last opened: 07/24/17)
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