ON DECEMBER 22, 2021, President Joe Biden announced an extension to the pause of payments and interest on federal student loans. This was met with positive remarks from both sides of the political spectrum, as the looming February 1, 2022, date for the resumption of payments was pushed back to May 1. This provides relief for millions of Americans still trying to get back on their feet after struggling with record-breaking inflation and the second economic recession in less than a decade. But why is pausing federal student loan payments such a big deal?
THE STUDENT DEBT CRISIS
As of 2021, the Federal Reserve estimates that Americans hold a record-breaking $1.73 trillion in student loan debt. This is to be expected as federal and state assistance becomes more widely available, and more students make the decision to seek out a college degree. While shockingly high, this number should not be of great concern as college graduates tend to have higher salaries than those with only a high-school diploma. In 2019, APLU reported that college graduates between the ages of 22-27, those most likely to be feeling the impact of student loan payments, made 46% more than those with only a high school diploma. The solution to this so-called crisis should be simple; you took out a loan, you need to pay it back, and you can do so because you make more money than you otherwise would have.
Unfortunately for Millenials and Gen Z, the equation is not that simple. Subject to decades of inflation in annual tuition costs and wage stagnation, today’s college graduates are not only coming out of school in significantly more debt than previous generations but are also making less money compared to those graduating 50 years ago.
In 1970, the average cost of annual tuition for a public university in the United States was $755, or $5,141 adjusted for inflation. That same year, the average salary for a graduate with a bachelor’s degree was $9,951, or $58,650 adjusted for inflation. If we compare those figures to 2020, the reality of the student debt crisis becomes abundantly clear.
In 2020, the average cost of annual tuition for a public university was $9,349 while the average salary of a graduate with a bachelor’s degree was $55,260. Over the course of 50 years, adjusted for inflation, the cost of a four-year degree increased by 55% while the average salary earned by that degree decreased by 6.1%.
In theory, this is a problem that would correct itself, if not for another factor compounding this problem.
DEGREE INFLATION
If the cost of college tuition is increasing while the salary earned by degree holders is decreasing, this should lead to fewer people going to college. This decrease in demand would drive tuition costs back down as universities find ways to adapt or go out of business. However, the effects of something known as “degree inflation” have prevented this correction from taking place.
Degree inflation is the decrease in value of a college degree. Essentially, a job that in 1970 could have been filled by someone with a high school diploma now requires that the employee have a college degree. Similarly, jobs that had historically required a bachelor’s degree could now require a master’s degree.
Degree inflation has been brought about due to the increased number of Americans earning college degrees. In 1970, 10.7% of American adults held a college degree. In 2020, that number had increased to 37.5%. This can be attributed to two factors: the first being the ease of access to funding, which allows more people to attend college. The second is the societal expectation that students go on to seek a two-year degree, at a minimum, if they wish to be successful.
HOW CAN WE SOLVE THE STUDENT DEBT CRISIS
First, one must pinpoint the primary cause. The crisis exists because college graduates must pay more for a degree while earning less than previous generations. This is the cause of the crisis, but this reality was brought about by degree inflation, which in turn was caused by an ever-increasing demand for college degrees.
Student loans made it possible for more people to have access to college than ever before. Meanwhile, societal expectations of students’ “need” for a college degree to succeed has created pressure on those with little interest in attending college. As more people earn degrees, the value of those degrees in the job market goes down as employers raise their standards. This results in students needing to earn higher degrees, thus perpetuating the cycle of degree inflation.
This cycle of increasing demand has been exploited by colleges as they have rapidly increased the price of tuition over the past 50 years. As colleges do not need to worry about a decrease in attendance due to an increase in tuition, they have been free to increase their prices with near impunity, solely to the detriment of students.
Many different solutions have been proposed to solve this crisis, one of the more popular being a requirement that colleges cosign student loans. The belief is that this would prevent colleges from issuing degrees with little-to-no job market, such as gender studies or Egyptology. While they may still offer those courses, colleges would be unwilling to cosign on loans for those degrees, meaning that students who require loans to attend college would be pushed toward degrees for which there is an active job market.
The problem with this solution is that it only addresses the minor causes and symptoms of the student debt crisis. Undoubtedly, students graduating with unusable degrees are bringing down the average salary mentioned above, and debt is overtaking Americans who aren’t able to utilize their degrees to land a job that will help pay off said debt. However, this is far from the majority of college graduates.
To truly solve the student debt crisis, two things need to happen. Current student debt needs to be reduced, and the higher education system needs to be reformed. How to achieve the first objective is a difficult question, as wiping out $1.73 trillion of debt would have untold consequences for the economy. It would result in increased inflation in an economy already struggling with that very problem. More moderate loan forgiveness problems have been proposed but have not made progress in congress. The most likely solution to this first objective would be to eliminate interest on all existing federal loans; however, this is a solution that has minority bi-partisan support.
As for the second objective, America needs to tackle the problem of degree inflation. Societal expectations surrounding college have already begun to shift as more people are voicing their opposition to the need for a college degree. This changing attitude could result in a shift toward trade schools, certifications and an emphasis on experience over education. This would cause college enrollment to drop and tuition prices along with it.
Another way to combat degree inflation is the creation of specialist schools. Using accounting as an example, there is no reason an accountant needs 12 hours of theology and three hours of philosophy classes to complete a tax return. Instead, an accounting student should be able to attend a specialist school focused on business, which would allow them to earn their degree in half the time. Colleges could still offer accounting degrees for those who wish to broaden their knowledge base by taking those theology and philosophy classes, but by making the specialist school an option, it creates competition for universities, which could help drive the price of tuition down.
While not an easy task, the student debt crisis is not impossible to solve, and the need to implement a solution increases with each passing year. As two “once-in-a-lifetime” economic crises have increased the likelihood of defaulting on student debt, the threat caused by the student debt crisis continues to increase. Mass defaults could mean yet another economic crash in the United States and the complete collapse of the higher-education industry.
Fortunately, this is not a problem that has gone unnoticed, and as awareness of this crisis continues to spread and various solutions gain traction, it is possible that the United States could see the start of a resolution before the end of the decade.