Rethinking the Purposes of American Education
Is the success of higher education in the United States dependent on debt?
April 11, 2012
For quite a few years now, people abroad have viewed a U.S. college education as something akin to the global gold standard. While other institutions, especially in Europe, were hard pressed to live up to their previous glory, their U.S. counterparts seemed to have it all.
Students were paying handsome tuition fees — and donors, enriched by the stock market and/or looking to secure their legacy at the end of a very remunerative career in business, were keen to supplement the students’ tuition fees.
The foreigners’ effusiveness appeared to be borne out by international rankings, where U.S. names time and again were found to take virtually all places worth having, save for a few British institutions.
The ever more pressing question, however, is whether the future of U.S. universities is going to be anywhere near as bright as the recent past is heralded to be. And is there any prospect that Europe’s fate — a rather listless university sector with few options to dynamize things — may become that of the United States as well?
Looking at costs for tuition, room and board, one could certainly be inclined to think so. They have risen from an annual amount in 1985 of $3,900 at public-sector four-year colleges to $17,100 these days — an increase of 340%.
The rate of increase is similar at private-sector institutions — even though the costs are far more staggering indeed. What cost $9,200 a year in 1985 now requires funds of $38,600 a year, representing an increase of 320%.
Just how do American families cope with such sharp increases — especially considering that college costs have risen more than twice as fast as family incomes?
The answer, alas, is a familiar one — rising levels of debt. In the 2010-11 academic year, U.S. families borrowed $112 billion through federal and nonfederal loan programs (along with about $6 billion from private lenders). According to a recent study by the Federal Reserve Bank of New York, Americans now owe more in student loans ($870 billion) than they do for auto loans ($730 billion) or credit cards ($693 billion).
Yet taking on so much debt has been — and still is — viewed as a wise investment, considering that recent college graduates will have a life earnings potential that exceeds that of high-school graduates by $800,000.
Despite these impressive-sounding numbers, two serious questions arise: What does it mean for the careers and incomes of today’s students to have to contend with a mountain of personal debt for the privilege of attending college or graduate school?
Barack Obama and his wife Michelle recently sought to underscore the fact that they are regular folks when they announced that they had only recently — in their mid-40s — paid off their student debt.
Of course, not everyone is as successful professionally as the Obamas. Starting out one’s career with an average student debt of almost $23,000 does not exactly enhance one’s ability to pursue their dreams. On average, it takes ten years to pay back that debt.
Greater tolerance for debt?
But while more and more American families ask aloud whether the apparent principal purpose of getting an education is to amass a sizable debt, another question is taking shape. Could it be that the ability of U.S. academe to sustain healthy spending increases was primarily related to a greater national tolerance for debt?
That hypothesis is bound to face a real-life test in the very near future, as a sizable number of private-sector lenders have exited the field of offering tuition finance in the wake of the sub-prime scandal.
Indeed, since the financial crisis of 2008, U.S. students have been losing access to education loans, as private lenders have left the market due to capital constraints.
These exits aside, one has to wonder what a straightforward credit assessment of rising university costs would yield for today’s generation of students.
One important fact to consider in that regard is that, on an aggregate level, the current generation of U.S. retirees is the first one that will not be succeeded by workers with better education levels — not exactly a prescription for future income gains.
In addition, the prospects of enhanced future earnings power are dimming for another reason. Much tougher global competition no longer automatically translates into an earnings advantage for today’s generation of Americans, something young Europeans have already felt for some time.
And even if bankers were to be satisfied with their loan assessments in terms of repayment potential and probability, the question of a downward trend in personal motivation remains.
The times are long gone when it was “just” future U.S. lawyers and medical doctors who took out loans to finance their graduate-level studies in expectation of high returns from their investments.
These days, plenty of students with very average earnings expectations at the undergraduate level — are financing college through loans, credit cards and the like.
All of that may be unavoidable. But one has to worry that the sizable academic price-level inflation was a debt-financed phenomenon.
If so, as in the housing sector, U.S. academe may be in for a double whammy: Fewer students may have access to funds — and the success of the sector’s recent past may have been based on an unsustainable debt-financed phenomenon akin to that which is now hounding the U.S. housing sector.
Debt, it seems, is a merciless equalizer — and destroyer of long-cherished dreams.
Starting out one's career with an average student debt of $23,000 does not exactly enhance one's ability to pursue their dreams.
Could it be that the ability of U.S. academe to sustain healthy spending increases was primarily related to a greater national tolerance for debt?
Much tougher global competition no longer automatically translates into an earnings advantage for today's generation of Americans.
The times are gone when it was "just" future U.S. lawyers and medical doctors who took out loans to finance graduate-level studies.