🔎 Market Mysteries

With federal student loan payments starting again next month, we’re diving deeper with Part 2 from last week’s evaluation of college as a good investment.

College tuition costs have ballooned over the past two decades far faster than most other living costs, driven by a societal shift in demand for bachelor’s degrees and numerous dynamics that have transferred more of the cost burden to the student. This education inflation has forced students into a generational debt crisis, prompting remedial action from the government to forgive student loans. While debt forgiveness acts as an imperfect treatment for the symptoms of the problem, it’s not yet clear whether a solution is coming.

College prices are a function of supply and demand, just like everything else. Higher demand for education sent tuition costs soaring. Society decided a bachelor’s degree was a necessity sometime in the last fifty years. In the 1970s, three out of four jobs required a high school diploma or less. By the 2010s, three in four required bachelor’s degrees. College enrollment tripled between 1970 and the peak in 2010. More students means more demand, which naturally leads to higher tuition fees.

Meanwhile, the supply remained limited. The necessary regulatory restrictions and funding required to form a new academic institution restrict the growth of alternative education sources. Also, schools have geographical market power. Many applicants are constrained to the school options in their area, limiting price competition for those schools.

School is getting fancier, driving up the price tag. Adjusting for currency inflation, college tuition costs have increased 8x in the past six decades and tripled since 1990. Has the quality of education advanced by the same magnitude? Much of the higher costs have come from the expanded experience and services provided to students. Over the past decade, spending on student services and administration has significantly outpaced spending on instructional staff. Colleges are spending less on full-time educators and more on specialized administrators, debt, and construction.

Local governments provide less funding for universities, causing students to pay more. Most states have reduced financial support for state universities over the past decade, dropping funding precipitously in 2008 by nearly 25%. Funding cuts have continued in the past few years, and students most often bear the consequences. For example, in Alabama, students now cover nearly 70% of public college system expenses, often by taking out loans. In 2008, it was closer to 40%.

The problem may also be compounding itself. The government subsidizes the cost of education for most Americans through direct grants or by covering your loan payments while you’re in school. However, there's a theory that these subsidies cause colleges to increase their tuition, knowing the government will cover the cost—a phenomenon called the Bennett Hypothesis. A report from the Federal Reserve Bank of New York found that for every dollar increase in subsidized loans, tuition increases by 60 cents.

Based on the above, it’s clear how we got here. Your service prices are bound to increase if you sell with limited competition to an enormous market of teenagers capable of borrowing immense amounts of money to pay whatever your service costs.

They get financial aid because incomes haven’t kept up with the cost of tuition - not even close. In 1970, you could work part-time during the year and full-time over the summer to cover the cost of tuition. Today, you would have to work 100 hours per week, year-round, to afford the cheapest tuition on minimum wage. That doesn’t include indirect costs of books, meal plans, boarding, and other things that magnify the total financial burden of college by 2-5x. In the past decade, over 80% of first-time, first-year undergraduate students have received some form of financial aid - loans, grants, or scholarships.

Student loan debt has become a massive problem in America within just two decades. Nearly 45 million Americans owe over $1.6 trillion in federal student loan debt, which accounts for almost all education debt. The highest share (38%) of student debt is held by those with post-bachelor's degrees, those with the highest income opportunities. Doctors and lawyers take out big loans to pay for several school years and then earn high incomes with the best chance of paying down those loans. However, the number of borrowers skews more towards the lower-middle income bracket. A quarter of college graduates will take at least 20 years to earn an income premium that compensates them for the cost of college, while 16% will never make it back. Nearly 40% of Americans living below the poverty line went to college.

The better answer might be that most people can’t truly afford college. Nearly 40% of student loan borrowers failed to graduate. Financial distress is the most cited reason for not finishing. For borrowers able to complete their degree and earn the income premium of higher education, the ballooning loan amounts relative to income have made the repayment process more difficult. The majority of outstanding student loan balances exceed the original amount. Wage growth for the college-educated hasn’t kept up with student loan interest rates for the past decade. Now, rates are rising further.

It’s not clear yet. While some advocate that free college would be the better route to genuinely solving the tuition problem, the Biden Administration has taken aim at the student loan crisis. This may be more of a treatment for a symptom than a solution to the underlying problem, but it could relieve millions of Americans.

President Biden is still trying to forgive student loans. After the Supreme Court struck down an initial executive action last year, President Biden launched another plan to cancel up to $20,000 of debt for tens of millions of borrowers. This isn’t expected to come to fruition very soon.

There are other ways to find relief from your student loans:

• The Public Service Loan Forgiveness Program brings hope to those working in government or non-profit organizations. You could be in the clear if you've made 120 qualifying payments.

• The Teacher Loan Forgiveness Program is extended to full-time teachers who have completed five consecutive academic years in certain qualifying schools.

• Disability Discharge Program provides respite for those struggling with significant physical impairment or disease.

• Lastly, the Income-Driven Repayment Loan Forgiveness Program is designed to offer relief to those whose federal student loan debt is high compared to their income and family size. The new SAVE plan could end up wiping away your remaining loans.

In the end, the problem may cure itself. The high cost of college has younger generations seriously reconsidering the investment in a bachelor’s degree. College enrollment is down significantly in the past few years. High schoolers expecting to attend college dropped from 70% to 50% just one year after the pandemic. If demand falls, so too could the price of the service.

Keep fighting,

The Scoop Team