Student Debt Distress

I spoke to 140 students at the University of Cincinnati on "Making Their Money Count After College" a few weeks ago.

During my talk I asked the students how many of them would graduate with student loan debt. Almost all of them raised their hands.

I told the students they were not alone. They join 45 million other Americans who owe money on student loan debt.

Total student loan debt is now $1.67 trillion.

Let's put that number in context.

That number is now higher than credit card and auto loans, combined, according to collegedebt.com

That number is greater than the entire GDP of Russia.

That number is also greater than the combined assets of financial giants Goldman Sachs ($957 billion) and Morgan Stanley ($866 billion).

Consider these numbers and then also consider political candidates telling young people that they are going to provide free college tuition or forgive student loans. If you think of it in practical terms, you cannot do one without the other. How can you forgive current student loans and not make college free going forward? How can you provide free college tuition prospectively but not wipe out student loans retroactively? In any form it would be a fiscal disaster that would spin out of control.

Beyond that, what about those people who scrimped and saved the money for their child's college education? What about those students who worked and saved the money to put themselves through college so they would not have to borrow? Shouldn't they be entitled to reparations if loans are forgiven or free college is given to others prospectively?

Underlying all of this is the fact that no segment of the economy has seen costs grow at a faster pace than tuition and fees for higher education over the last 30 years. College costs have increased at about twice the rate of health care over that period. Overall, college costs have grown at about four times the rate of inflation.

College costs could not go up without a supply of money to pay for it. Just as is the case with health care costs, college costs have become heavily dependent on the flow of federal money into the system.

Ironically, a program that was designed to assist students to afford college seems to be making it more unaffordable with each passing year. That is what occurs over and over when a well-intentioned "liberal" idea meets the real world. A desire to do good by government ends up being the undoing of the very people it was intended to help.

Fiscal watchdog OpentheBooks.com has recently completed a budget analysis of the U.S. Department of Education with a specific focus on the $120 billion in annual subsidies paid for higher education in the form of grants and student loans. Student loans make up 79% ($95 billion) of that annual amount.

One of the findings is how much the Ivy League is receiving in Department of Education funding despite the massive endowments these schools have.

For example, Harvard College got $154.1 million in federal subsidies for student education despite the fact that it has a $34 billion endowment.  Columbia received $263.2 million despite having a $9 billion endowment.

Why is the federal government funding grants and student loans for colleges with such large endowments? Why aren't schools with large endowments required to fund college loans for their own students? Why wouldn't loans to their own students not be considered a good investment for their endowment funds?

I wrote about the size of the Ivy endowments two years ago when in the aggregate they totaled $119 billion for the eight schools. At that time, those funds were sufficient to pay the tuition of every student at these colleges for the next 51 years without any further growth in the endowment!

When you consider that the universities also received the benefit of the charitable contribution tax subsidy as they received the donations that make up that endowment, the case is even stronger that reforms need to be made regarding federal student loans at schools with large endowments.

Subsidies to the Ivy Leagues pale in comparison to what is flowing to other schools, particularly large public university systems with lots of students.

Here is a list of the top 10 colleges by the amount they received in grants, direct payments and student loan monies for the most recent fiscal year.

The City University of New York received over $1.1 billion in federal education subsidies last year?

Source: OpentheBooks.com

Notice two of the schools on the list are for-profit colleges (University of Phoenix and Grand Canyon University). Combined, they got about $1.2 billion in federal funds.

What are the graduation rates at these two schools?

Phoenix  17%

Grand Canyon  31%

With graduation rates like that what chances do these students have to pay-off the loans they took to attend these schools? They have the debt but they don't have a degree.

Why should the taxpayers have to bear the cost of future defaults from these loans?

Why aren't these schools required to at least share some the default risk? They gained the dollar benefit upfront. Why should they not bear the financial risk if the loan goes unpaid?

A lot of people argue that more students should be going to junior colleges or community colleges for a couple years to keep college costs lower and to limit student loan debt. That generally sounds like a good idea.

However, look at the student subsidies paid to these schools and the graduation rates.

Source: OpentheBooks.com

As bad as all of this is, it actually gets worse when you consider the education money flowing to hair and beauty schools.

The largest school, Empire Beauty School, received $534 million in federal education subsidies between 2014 and 2017.

Empire charges students $14,000 in tuition per year to learn how to cut and style hair, apply makeup and give massages over a one to two year period required for graduation. Most students pay with federal student loans.

What is the average pay of their graduates? The New York Times did a study of regarding the economic outcomes of students from these types of schools. At age 34 the median income of Empire Beauty School graduates was $18,800 per year.

Does that sound like a good investment? Take on $14,000 in student debt to get a job that pays $19,000 per year?

None of this could occur but for the massive amount of federal government money made available to facilitate it.

That money is the root cause of why a college education (and beauty and barber schools) have become unaffordable.

The answer is not to throw even more money at it as liberal politicians so often want to do.

It is time to put more accountability on the educational institutions who reap the benefits by making them put more skin in the game.

That should be the first step to putting an end to the student debt crisis that is causing so much distress to so many.