The Economist December 24, 2005
Out of the mouths of babes; Student loans
Prepare to deal with some fairly surly young people
A SURF through the "Student Debt Yearbook" on the Student Debt Alert website reveals plenty of hard-luck stories. Lauren at Arizona State University expects to graduate in 2007, $60,000 in debt. Asked what she is most looking forward to then, she replies: "Law school and more debt." Sarah graduated from Columbia University this year owing $90,000, while Jason will leave Los Angeles City College in 2008 some $10,000 in the red.
The whingeing student is a feature of political life the world over: in America, despite rising tuition fees, they have been relatively quiet. That may change now that Congress has agreed to slash their subsidised loans. A deal reached on December 18th means that, if the current budget package gets through Congress, student-loan programmes will suffer a net cut of $12.7 billion over the next five years—the biggest cut in university funding since the Higher Education Act was initiated in 1965.
The package is a complicated mixture of savings, spending increases and accounting gimmicks. The Republicans point out that the bill generously provides $3.75 billion in new grants for disadvantaged students studying mathematics, science and foreign languages; that they have spent $1.5 billion raising loan limits for students; and that they have tried to cut subsidies for lenders, not for students. But $15 billion of the gross savings of $21 billion in the bill come from higher fixed interest rates and fees for borrowers.
The Democrats are predictably grousing that the Republicans are driving poor people away from college just to dole out tax cuts to the rich. Student PIRGs, the group behind the debt website, claims that more than 60% of undergraduates finish with some federal debt; and nearly 40% of these borrowers contend with "unmanageable" debt levels, meaning their payments are more than 8% of their monthly incomes. And those who do a stint in graduate school end up even more in debt.
Much of this is grandstanding. For the vast majority of Americans, a college education is a good investment: their post-university incomes are considerably higher (even allowing for their debts). But there are some legitimate worries.
Tuition fees have been rising fast: they are now four times higher in real terms than they were in 1975, according to the latest annual report from the College Board, a group of higher-education institutions. If you add in various necessities, such as books and room and board, private-college students (around 16% of the total) fork out $29,026 a year, while their peers on four-year courses at public colleges pay $12,127. Many states have cut the money they give public universities, pushing more of the costs on to the students. And with ever more Americans wanting to go to university, colleges have been able to hike prices.
Rising demand is certainly a sign of health, but high fees present a challenge for poor Americans. Costs put off 48% of qualified high-school graduates from attending a four-year institution, and 22% from attending any college at all, according to a study by the Advisory Committee on Student Financial Assistance in 2002.
The level of Pell grants, the main programme for low-income students, has been frozen at a maximum of $4,050 for the past four years; and its eligibility guidelines were changed last year—with the effect of excluding 81,000 young people and reducing grant money for another 1.9m. The new $3.75 billion for maths, science and language students will help, but critics say the conditions are too strict.
Another group with a legitimate gripe are students who go on to low-paid professional work in the public sector. Careers in social work, education and the worthier sorts of law all normally involve several levels of tertiary education, but the typical salary for graduates entering such public interest professions was just $36,000 in 2002. A recent survey of over 300 juvenile-dependency attorneys in 43 states by the Children's Law Centre of Los Angeles, found that more than half of the lawyers owe at least $50,000 in student loans, and nearly a third owe $75,000.
The Republicans have indeed clamped down on subsidies for private lenders, which provide around 75% of student loans. Banks have done extremely well, thanks to a fixed formula for profits and a guarantee that the government will cover 98% of a student's debts. One particularly egregious subsidy, dating back to the 1980s, allows banks a return of 9.5%—well above current interest rates. This loophole will now be closed, saving the government $1.8 billion over the next five years.
Lest you feel too sorry for the banks, many other subsidies remain. Indeed, some of the cuts in earlier versions of the bill did not make it into the final language. Cynics note that last year the Chronicle of Higher Education traced nearly $1m in campaign contributions from the student-loan industry to members of the House education committee.