The Causes of Student Debt: By the Numbers

This past week, an opinion column was published in the Wall Street Journal titled “Obama’s Student-Loan Fiasco.” which I believe highlights the disconnect between the mainstream debate over the problems of student debt and its underlying causes. The article attempts to raise alarm over the willful softening of student loan repayment figures by the Obama administration and their use of selective statistics to justify punitive regulations of for-profit colleges. The article focuses its concerns on the unanticipated costs of income-based repayment and federal loan forgiveness programs with a suggestion that the Department of Education be audited in order to fully inform the public of such programs costs. This all, however, misses the point of what is truly driving our mounting student debt crisis.

Over the past 25 years, the average cost of public tuition in 2016 dollars has increased by 160% with private tuition increasing by 93%. Inflation through the same period has been only 71% while wages of college graduates have only increased by 7% in real dollars. Conspicuously absent from discussions of student debt is the question of how the cost of education has managed to outpace both inflation and wages by such a wide margin. Even more confusing is how the increased costs have seemingly not been mitigated in any way by the efficiency provided by advances in information technology or the 51% increase in full time enrollment which should presumably reduce the average share of a university’s fixed costs per student. One simple explanation for the runaway increase in the cost of education is that federal loans enable students to cover their entire cost of attendance. Free of any federal oversight, universities are incentivized to raise their costs and students in turn are able to borrow as much as they need to cover the added expenses. Corroborating this is the 130% increase in real annual student borrowing between 1996 and 2016.

An additional cause for the increased debt apart from universities are the interest and fees associated with federal loans. On a typical PLUS loan, the type of federal loan which parents borrow for undergrads or graduate students for themselves, the interest rate is 6.31% in addition to an initial origination fee of 4.276%. Should a student be fortunate enough to qualify for Stafford loans, they are still charged 3.76% and 5.31% depending on whether they are a undergrad or graduate student. Additionally, Stafford loans have annual caps which force students to take out PLUS loans to fill the cost of attendance gap. These rates and fees all seem to add insult to injury given that the loans are guaranteed by the government and theoretically risk free for lenders. If a graduate student were to borrow say $50,000 dollars in a year, a maximum of $20,500 may be borrowed as Stafford loans with the remaining $29,500 only available as PLUS loans. The origination fee for Stafford loans is 1.069% and PLUS 4.276%. The total fee for the Stafford and PLUS loans is $219 and $1,261 respectively. So before a student has even begun to accrue interest on his loans, he must pay $1,480 up front just to receive them. One year’s interest on his Stafford and PLUS loans totals $1,089 and $1,861 respectively or $2,950 for the year. The interest on the origination fees alone is $91 a year. If interest on these risk free loans was lowered to match inflation (2.1% for 2016) and the fees eliminated, the first year cost of these loans would fall from $4,430 to $1,050 and decrease the annual interest cost by $1900 a year.

These costs do add up and are fueling the mounting student debt crisis. The annual interest on the $124.7 billion in PLUS loans alone is $7.87 billion with up to another possible $5 billion of the debt resulting exclusively from origination fees. This is to say nothing of the interest and fees from the $1.1 trillion in federal student debt from other loan programs. If we conservatively estimate all such debt to be low interest Stafford loans then the annual interest for that debt is between $41– 59 billion annually with a possible $12 billion of the debt resulting exclusively from loan fees. This means that in total a rough conservative estimate of annual interest on student debt is around $50 billion with up to another possible $20 billion in fees. If loan repayments matched disbursements and there was no increase or decrease in federal loan principals overall, the debt would double itself in around twenty years via interest alone.

Student debt is not the fault of students. It is the fault of universities who have increased their costs well beyond inflation for decades in tandem with a federal loan system which charges students exorbitant fees and interest despite there being no risk of such loans being discharged through bankruptcy. Income based repayment and loan forgiveness programs have in effect become an entitlement, no different than medicare or social security. Getting rid of or limiting such programs will not increase loan repayment so much as increase defaults. The government would have its time better spent auditing and revising its relationship with the universities to whom all this loan money was actually paid to. In any case, if the government can spend $2 trillion on the war in Iraq and lend $4.6 trillion to bail out the banks after they tanked the economy before I even started college, it should be able to handle a few hundred billion or so of forgiven student debt in the years to come. We at least stand to see a return on that expense.