There is little doubt that education has always been, and will always be, the great equalizer. As my father instilled into me throughout my youth, the ultimate fact of life is that knowledge is power. Nobody can take that power away from you; once you know something, that knowledge is yours to command. The government, your neighbors, or whoever the opposition force may be, can always take away your property, your money, and even your freedom — but they can never take away your knowledge.
Civilizations throughout history have always strived to educate their population because the investment in education pays huge dividends over time through better wages, higher levels of entrepreneurialism, a more engaged electorate, and a myriad of other tangible and intangible benefits.
Presently, however, there are many high school graduates looking towards their future and raising concerns as to whether or not attending university is a rational, intelligent investment. Falling wages, rising tuition, and a seemingly glum economic forecast is creating doubts amongst students and parents alike over the value of a post-secondary degree. Increasingly, the data is showing that jobs are becoming more difficult to find regardless of educational attainment. Furthermore, the $1 trillion aggregate American student loan debt bubble that is continually expanding is becoming increasingly unstable; upwards of 11 percent of student are already “severely delinquent or already in default” on their student loans. Even more frighteningly, if you open up the criteria to include any student who has missed a payment, the number skyrockets to 43 percent of the roughly 22 million Americans who have student loan payments delinquent by at least a month or they have entered into a deferment plan due to some sort of financial hardship, such as unemployment.
This has all been a recent adventure as well. In 2003, the aggregate outstanding student loan debt stood at just about $200 billion; by 2010, aggregate outstanding student loan debt hit $800 billion — surpassing car loan debt, credit card debt, and revolving home-equity loan debt. How is this possible?
The first thing we need to contend with is the ever-increasing price tag of college. Accounting for inflation, in 1974, the average cost of tuition, fees, and room/board at a public four-year university was about $8,500. Today, the cost is above $20,000. Even looking back just a few years, in 2003 the price for college was about $15,000 — spiking $5,000. Is there a marketable difference between the education that one received in 2003 versus 2016? Is the 2016 degree valued $5,000 more than the 2003 degree? Of course not. So what then is the cause of this influx in price?
One of the main drivers of the rising tuition is the shrinking state aid for public institutions. In 2003, the money that college made off tuition was 29 percent of their entire budget, while state and local government appropriations made up 39 percent with the federal government chipping in 32 percent. A decade later, in 2013, the numbers were 41 percent for tuition (+twelve percent), 30 percent for state and local appropriations (-9 percent), and 29 percent for federal government appropriations (-3 percent). Though the trend of de-monetizing public institutions has been ongoing for some time, the Great Recession of 2008 exacerbated the problem as states across the nation were facing massive budget shortfalls. From 2000 to 2012, state revenue being appropriated to higher education institutions fell by 37 percent. Meanwhile, the number of students enrolling at post-secondary education institutions ballooned by 45 percent. Much of the lost revenue was made up by increasing tuition prices, as we have discovered above.
However, before we rally the pitchforks and head to our state capitols, we should have a degree of sympathy for our state lawmakers — they faced tough decisions when the recession hit. The Brookings Institute found that states lost 27 percent of their personal income tax revenues in 2009 as millions of Americans struggled with the downward-turning economy and fell out of the tax base. On average, from their peak collection right before the Great Recession to the bottom in 2009, states lost 13 percent of their taxable revenue. Virginia, specifically, went from peak collections in 2007 of $5.5 billion per quarter to a bottom in 2010 of $4.5 billion per quarter — a stark 19 percent loss in revenue.
However, even as state revenues return to and surpass pre-recession numbers, the aid for higher education, generally, is still lacking a comeback. Virginia’s spending on higher education since 2008 is down 22.5 percent. In fact, with the exceptions of Montana, Wisconsin, Wyoming, and North Dakota, every state in the union is spending less per student on higher education since 2008. In lieu of state funds, students have borne the cost difference, primarily through federal loan programs.
What is rarely mentioned in this debate, however, is the Bennett Hypothesis, termed after the former Secretary of Education William Bennett. The Bennett Hypothesis, which has now been confirmed by the New York Federal Reserve Bank as well as other scholarly research, states that as financial aid increases, there will be a positive correlation with a rise in tuition prices. The New York Fed’s study claims that, for every extra dollar made available to a student via federal student loan maximum limit increases, the “pass through effect” (i.e. the amount of money the university takes from it) is about 60 cents for federally subsidized loans. For unsubsidized federal loans, there’s a smaller, but still positive, correlation for limit increases.
In explicative terms, universities do not feel the actual market effects of stagnating wages, economic disparity, and the slow growth that has been characteristic of the American economy over the past decade. They are insulated from the market pressures to lower tuition, due to the easily accessible federal loans for students. Again, there may be nothing wrong with this in theory, but when you have a third of students defaulting on their loans and another third delinquent, a serious and sober conversation needs to be had about the societal benefit of this program.
Conceptually, this governmental policy is similar to the policies that instigated the mortgage crisis that sparked the 2008 financial collapse. Millions of Americans were told that real estate is the safest economic bet possible, it’s the “American Dream” to own a home, and government directives to banks that encouraged low down payment loans and little oversight only exacerbated the problem. In today’s world, it seems like getting that “4-year college experience” has been glorified as a ticket to the middle class, it serves as the new “American Dream” for millennials, and again the government is encouraging individuals to take out tens of thousands of dollars in loans to attend a university without thoroughly thinking the process out.
I myself am a recipient of such “aid,” and it is truly a streamlined, simple process to receive tens of thousands of dollars without having to put any collateral down. Perhaps that explains why college student loan debt is over a trillion dollars.
In the real world, this is what happened. As states’ slashed funding for higher education while the demand for that product was still high, the federal government, under the direction of President George Bush, made post-secondary educational attainment a monetary priority — adding more money to the pot via the Higher Education Reconciliation Act of 2005. When the recession hit, his successor, President Barack Obama, similarly added more monies to the federal education pot through the American Recovery and Reinvestment Act, which allocated an additional $17 billion for Pell Grants and increased educational tax credits. Seemingly, making it easier for people to go back to university would be a good idea; however, what policymakers have failed to take into account is that excessive credit supply will drive inflation up and create a bubble as ill-advised creditors take on debts they likely will never be able to pay off.
The heart of the question, then, is who is benefitting from this financial aid? The student getting the education? The university who can charge more in tuition now? Or the states, who can get away with not funding state universities thanks to the federal loans and student debt? Certainly, the students are getting the intangible benefit of education — which, as a pointed out at the beginning of this piece, is permanent and something no one can take away from you (even in bankruptcy, I might add).
The universities are getting the added bonus of being able to charge higher tuitions, and there may be a case to be made about ballooning dean and administrative salaries at institutions, but I don’t believe that is a causal link. The states, however, have made out very well. As their higher education budgets shrink, the number of the population who is attending their universities have swelled thanks to the federal loan programs and other external forces.
It appears that our community needs to make a series of fundamental decisions soon. What is the role of higher education in America? Should it be something that the federal government should subsidize through a loan program? Should there be a cap on tuition rates? Should college be free? Politicians and scholars alike have debated these questions in the ivory towers of universities and the marble hallways of Washington for decades, but the time for idle conversation has passed. The Trump administration and the states of the Union need to come to a collective decision on how America should progress into the 21st century in regards to our higher education system, for if we don’t, we are sure to face a calamity as the bubble bursts.
Mercer May is a J.D. Candidate at the University of Richmond and has worked in numerous public policy and legislative rolls - including the Virginia House of Delegates, the Senate of Virginia, and the Office of the Attorney General of Virginia.