The Real Cause of The Student Debt Crisis

And How To Fix It

Photo by Honey Yanibel Minaya Cruz on Unsplash

The Student Loan Debt Problem

There has been no shortage of media coverage on the student debt problem in America but let’s quickly review the numbers.

  • 7 out of 10 college students graduate with student loan debt
  • The average student loan balance is more than $37,000
  • Total student debt is more than $1.5 Trillion
  • The delinquency rate (meaning 90 days late on payments) is at 11%

Starting your career with $37,000 or more in student debt is like carrying around a mini mortgage. Which is making it even more difficult for younger people to get an actual mortgage and own their own homes. The stress that comes with high levels of student debt is a contributing factor to why some are calling millennials the burnout generation.

Tuition Has Skyrocketed

Student debt has increased simply because the cost of tuition has increased.

  • In 1988, the annual tuition for a 4-year public institution was $3,190.
  • In 2018, the annual tuition for a 4-year public institution was $9,970.

That is a 212% increase.

  • In 1988, the annual tuition for a 4-year private institution was $15,160.
  • In 2018, the annual tuition for a 4-year private institution was $34,740.

That is a 129% increase.

And yes, these numbers are adjusted for inflation.

Ok, so tuition has increased and that has caused student loan debt to increase.

But what has caused the cost of tuition to increase so rapidly?

Demand for College Degrees Outstripping Supply

It comes down to economics 101. When the demand for a good (college) increases at a faster rate than the available supply, prices will increase.

According to the National Center for Education Statistics:

  • U.S Colleges admitted 20.4 million students in the fall semester of 2017
  • Admission is up from 15.3 million students in the fall semester of 2000

That is a 33% increase in the number of college students between 2000–2017.

While colleges are admitting more students than they have in the past, the actual number of new public and private institutions have not increased at the same rate as demand.

Even with the increase in cost, the demand for post-secondary education is only likely to increase going forward.

  • The unemployment rate for high school grads is twice as high as that of college grads.
  • Men with bachelor’s degrees earn $900,000 more over the course of their lifetime, compared to men with high school degrees.
  • Women with bachelor’s degrees earn $635,000 more over the course of their lifetime, compared to men with high school degrees.
  • Men with Graduate degrees earn $1.5 million more over the course of their lifetime, compared to men with high school degrees.
  • Women with Graduate degrees earn $1.1 million more over the course of their lifetime, compared to men with high school degrees.

The Simple Solution to Lower Tuition Fees

The problem is clear, we do not have enough colleges to keep up with the demand for post-secondary education. The solution is simple; we need to increase the supply of post-secondary education.

Increasing the supply will bring down the price of any good as illustrated below.

A shift to the right of the supply curve of post-secondary education will reduce the price of tuition at all levels of demand.

In this case, an increase in the number of post-secondary education options will create more competition for students which will lead to lower tuition costs.

Building new 4-year colleges with large campuses and dormitories are incredibly expensive. What we really need is an increase in the supply of post-secondary “education”, not necessarily post-secondary “institutions”.

Not everyone needs a degree from a 4-year college. If more emphasis were put on attending trade schools and technical schools, it would go along way to addressing tuition costs. The world needs more electricians and plumbers, it does not need any more philosophy majors (no offense philosophy majors).

For those that do want a 4-year bachelor’s degree who says that must be done in a physical classroom? If we want to get serious about addressing tuition costs, the stigma of obtaining an online degree needs to disappear.

If employers gave similar weight to online degrees as “traditional” degrees, we could dramatically increase the supply of post-secondary education for a very small price tag (relatively speaking).

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.