One of the features of the modern era is the rise and rise of student debt. Regular readers will be aware of my view that it is one of the contradictions of the modern era that whilst we are told we are much better off we are apparently unable to fund university education in the way that we used too. For example for the benefit of younger readers when I went to the London School of Economics my fees were paid (by my local authority) and I got a grant for living-expenses although I was in the period where they were cut heavily. If I recall correctly I got in my final year the same amount as I received in my first term.
There has been some new research on the state of play so let us take a look firstly at the position in the United States.
White House Council of Economic Advisers
This published a report on the subject so let us start with some facts.
As of 2015, outstanding student debt had grown to $1.3 trillion, due in large part to rising enrollments and a larger share of students borrowing. While the average loan size has also increased, the average undergraduate borrower owes $17,900 in debt.
What is the individual experience?
Increases in per-borrower debt have also contributed to the expanding student loan portfolio, with average outstanding balances adjusted for inflation increasing by roughly 25 to 30 percent between fiscal years 2009 and 2015 alone.
The total number of those holding student debt has also risen.
In 2004, roughly 23 million individuals held student debt (FRBNY), and this number grew to over 40 million individuals in 2015.
The WHCEA is very bullish on the consequences of this.
Typically, that investment pays off, with bachelor’s degree recipients earning $1 million more in their lifetime and associate’s degree recipients earning $360,000 more, compared to high school graduates.
In fact according to it everyones a winner.
Society also benefits from these investments through such mechanisms as higher tax revenues, improvements in health, higher rates of volunteering and voting, and lower levels of criminal behavior.
The report has a fair bit of cheerleading in it but cannot avoid the fact that some do not do so well.
In particular, evidence suggests that the relatively low returns at for-profit colleges are increasingly becoming a cause for concern, especially given the high rates of borrowing by students at those schools.
More people went to university in the period 2010/11 in response to what is called the Great Recession and outcomes for them look less rosy than what is presented here.
The impact of the debt
The Demos think tank did some work on the implications of student debt by comparing households with a degree both with and without it.
It finds that, over a lifetime of employment and saving, $53,000 in education debt leads to a wealth loss of nearly $208,000.
We can generalize this result to predict that the $1 trillion in outstanding student loan debt will lead to total lifetime wealth loss of $4 trillion for indebted households, not even accounting for the heavy impact of defaults.
Some care is needed as some of the wealth loss is via the fact that those in debt are assumed to make lower pension payments. But even the White House Advisory Council was unable to avoid pointing out that the share of income spent on student debt has risen from 3% to 9%.
What does the debt cost?
According to the US Federal Student program there are fixed interest-rates of 3.76% for undergraduates and either 5.31% or 6.31% for post-graduates. There are also fees of the order of 1% for the former and 4% for the latter.
It seems that for poorer income groups there is more of a problem for several reasons. They tend to go to not so good colleges and more drop out from higher education. Should you fall behind then this is what happens according to Bloomberg.
It’s 9 p.m. and your phone chimes. You’re among the one in eight Americans carrying a student loan—debts that collectively total nearly $1.4 trillion—and you’ve started to fall behind on your payments.
You know the drill: round-the-clock robocalls demanding immediate payment. You wince and pick up.
The UK experience
For those unaware of the UK situation the Tony Blair and John Major governments set out to increase the number of students in higher education substantially. The Intergenerational Foundation sums the changes up thus.
This middle cohort now forms the post-1992 group of rebranded colleges that mushroomed in the 1990s and has led to the current situation where almost 50% of young people go on to university higher education. This amounts to a near quadrupling of the number of graduates of 3+-year courses with more careers, such as police or nursing, now requiring a degree.
It compares with the 1980s when the number of people going onto university higher education was more like 13%.
Doubts about the benefits
Back in the days when many fewer people went onto higher education it seemed clear that there were gains from it. From the Intergenerational Foundation.
On Friday 15 November 2002 the then higher education minister Margaret Hodge………. claimed that graduates earned £400,000 more than non-graduates over a lifetime, but their education is subsidised by 35% (twice as much as in the US).
If we move onto 2011 you will not be surprised to learn that becoming a doctor or dentist led to large “graduate premiums”
70.1% for men and 91.7% for women.
However the expansion of tertiary education was a lot less positive for many.
But many degree subjects regularly yield little or no premium at all, such as creative arts, design, sports science, and hospitality.
The overall situation is summarised thus.
Today, the average figures quoted for the graduate premium have fallen even further to around the £100,000 mark. Note that £100,000 spread over a 45 year career is worth only £2,222 per year, before taxes and National Insurance which is not high enough to cover even the interest that will accrue on the average loan – hardly a sound financial justification for taking on the debt.
On the other side of the ledger fees have risen as potential gains have fallen. Back in 1998 UK undergraduate tuition fees were introduced at a level of £1000 per annum whereas now in England they are increasingly £9000 per annum.
There is no one single interest-rate but much of the payments will now ( as of 2012) be at the Retail Price index plus 3%.
There is much to consider here and the opening salvo comes from the establishment which tells us not only that a university education is good but that it is so good that an ever rising debt burden does not matter. There are an increasing number of questions about the statement as we note that areas where it is true ( doctors & dentists) are being added to by areas where it is not true. If we stay within the arena of medicine what will happen to nurses troubles me. From Which.
Update July 2016: The government have confirmed plans to replace bursaries with loans for all nursing and midwifery students beginning their studies in September 2017.
So ever more debt but for what gain? How can nurses ever repay this? Also if it is so good why does the Bank of England omit it from the monthly money and credit report?
We move onto the next problem which is that ever more of this debt will never be repaid which poses the question of what is the point of it? It feels ever more like a rentier society where someone collects all the interest and the takes the loan capital but we then forget that. Another type of borrowing from the future.
We need to have a good think about what jobs actually require a university type education and which do not. Perhaps we could have more vocational types of higher education and maybe we might like to call them colleges and polytechnics.
Meanwhile I note that the UK establishment which spends so much time trying to discredit the “not a national statistic” RPI measure of inflation finds that like Lazarus it can leap from its claimed grave when required to inflate and raise revenues.
And it’s very far away
But it’s growing day by day
And it’s all right, baby, it’s all right
They can tell you what to do
But they’ll make a fool of you
And it’s all right, baby, it’s all right
We’re on a road to nowhere