The federal government has released a report blaming private lenders and risky borrowers for the nation’s college debt spike, which hit a record high of $1 trillion outstanding this year.
A report published last week by the Consumer Financial Protection Bureau and U.S. Department of Education concluded lax underwriting practices and borrowers trapped by the market’s natural rise and fall are the root causes of spiraling college debt.
Taxpayers are on the hook for the vast majority of this: $864 billion of loans outstanding are from federal aid, and $150 billion is from private lenders. That figure leads researchers to conclude government is the problem, said Jay Greene, a University of Arkansas professor who has studied college cost inflation.
“We don’t have a properly functioning market for higher education, and that is the heart of the problem,” he said. “The government is providing very large subsidies in multiple forms, including the overly generous provision of credit in a way that no private creditor would do.”
Infinitely available government funds fuel rising tuition and flagrantly unnecessary expenditures, he said.
The congressionally mandated study notes most students do not understand the debt they will incur and its consequences.
Meddling with the Market
The average graduating senior’s debt is approximately $27,000, a generally manageable figure lost in hype about college loans that top $100,000 for a tiny minority, said Jenna Robinson, the campus outreach coordinator for the John W. Pope Center for Higher Education Policy.
“That amount you can borrow easily just from federal loans,” she said. “So for most students private loans are not a problem.”
The federal government nationalized formerly subsidized student loans in 2010, and has imposed significant regulations on private loans. One disallows discharging student loans in bankruptcy, something Robinson says exacerbates the problem.
“Lenders have no incentive to be responsible with whom they lend to, whether they are a bad risk,” she said. “With student lending, you don’t have normal market signals to the student about the loan.”
Less government aid would allow a more competitive loan environment for students, said Jonathan Robe, administrative director of the Center for College Affordability and Productivity.
Encouraging Debt, High Costs
A stagnant job market also means most students don’t have a realistic picture of their post-graduation financial prospects, causing them to borrow irrationally, Robinson said.
Federal Stafford Loans and Pell Grants to low- and middle-class students encourage them to finance education through debt and some to pursue college at the expense of better-fitting options because they are easily available regardless of a student’s ability to get through college or make money using their degree upon graduation, Robe said.
“Their basic idea behind the report is that these government loans are the best thing that have been devised and it’s a very terrific way for paying for college, but the reality is, the opposite might be true,” he said. “Federal loan programs make college costs rise faster and more than they normally would.”
Out of Control Costs
College costs have increased more than 400 percent in the past 40 years—faster than healthcare. Government programs contribute to that increase by making more money available for colleges to capture by raising prices, Robe said.
Colleges know exactly how much money families have because most send them the federal Free Application for Federal Student Aid, Robinson noted.
Colleges lavish the extra money on nonacademic amenities such as fitness centers and student entertainment, Greene said.
“The more the government tries to subsidize education to make it more affordable, the more these institutions capture it for their own benefit, so it provides virtually no relief for consumers but drives up the cost to society,” he said.
Big Picture Solutions
The report recommends “commonsense” approaches such as better informing borrowers and having lenders work closely with schools’ financial aid offices.
Universities should be “more transparent about student job prospects” so students can make more informed decisions, Robinson said.
“This won’t go on forever,” Greene said. “The federal government can print money to solve its problems, but there are consequences to that, and we’re starting to hit real limits.”
Image by Penn State.