The Future of Higher Education is in Affordability

Smiling Graduate Holding up DiplomaBy KC

America places such an emphasis on the necessity of a college degree, yet the price to attain a degree is so high – and it’s only increasing. CourseSmart, an e-textbook provider, created a graphic that lays out in simple terms the details of current college tuition. Over the last 30 years, tuition has increased 1,120 percent. By comparison, even the skyrocketing cost of health care only rose 600 percent and housing costs 375 percent. With such inflated tuition prices, students rely on loans to attend college and attain a degree, yet the interest rates on these debts are causing problems of their own.

Once students have graduated, they are left with debts that average $27,000, but for many this debt exceeds $100,000, and they are forced to pay above-market interest rates. The non-profit Project on Student Debt reported that America’s student loan debt was growing at a rate of $2,853.88 per second in June 2010. The College Board, an American college-readiness association, reported rates on unsubsidized Stafford Loans, which accrue interest while the student is in school, are 6.8 percent and 7.9 percent for parental PLUS loans. On July 1, 2013, rates on subsidized Stafford Loans, which do not accrue interest until graduation, jumped from the current 3.4 percent back to 6.8 percent. These 6.8 percent interest rates earn the government an estimated 36 percent profit margin. And, to top it off, students pay these high interest rates on loans they get from the government, while the government gets to borrow for ten years paying less than 2 percent interest on U.S. Treasury notes.

Today’s students will spend so much time and pay so much interest trying to get out of student loan debt that most will never be able to afford to buy a home because the government demands twice the rate of a mortgage on student loan debt. To make it even more problematic, there is no way to default on these student loans. The College Board released reports that state one in ten students default within two years of starting repayment. People have learned that five to six million people are in default for more than $90 billion dollars in student loans, and that an even greater number have deferred their loans because they cannot meet payments. These loans are not discharged in bankruptcy either, and will follow these students until the government docks their Social Security payments for outstanding loan balances.

Eleven years ago, on Feb. 8, 2002, President Bush signed legislation changing the interest rates on education loans from variable rates to fixed rates for new loans issued after July 1, 2006. Before the student loan repayment formula was changed, the student loan interest rate changed every July 1st, based on the Treasury bill auction rate set at the end of May, rounded up to the next quarter percent. Under the old rules, each student had a one-time chance to lock in the repayment rate for the life of the loan. If the old formula were still in effect, students would save on interest and could go on to put their education to more productive use for them and the economy. Instead, as it stands past $1 trillion, there is more student loan debt outstanding than credit card debt.

Wall Street Journal Reporters Douglas Belkin and Caroline Porter quoted a college student that said, “Without a degree, you’re very limited. It’s a way of getting out and moving up.” And its true – graduates face a job market that increasingly demands post-secondary credentials. However, while post-secondary credentials are in high demand, attaining these credentials are becoming less affordable and are not increasing the job availability by much anymore.

High unemployment makes it harder for graduate students to pay back these growing loans. With so many young adults facing burdens from unbearable debt, limited prospective careers, and therefore long-term financial insecurity, it is inevitable that the national economy will be significantly and negatively impacted. With a large monthly student loan bill, many graduates will likely be less inclined to take the entrepreneurial route. While corporate jobs are already difficult to obtain, small businesses create jobs as well; so a lack of entrepreneurship would only further the negative economic impact.

How much value does a college degree have? The intangible value has to do with character, integration of faith and knowledge, developmental maturity, critical thinking skills, etc. The tangible value has to do with what job skills and employment results from a college degree. A college degree already has an established value, but it has to be affordable as well. In other words, affordable relates both to the economic capacity of the buyer and the value the marketplace puts on the particular degree and institution that awards it. Higher education in the United States needs to be heading to a future where learning and employment outcomes will be factored in to the price of a university education. Affordable means that we will see variable pricing on degrees and schools based on learning outcomes, as well as employment earnings outcomes. The market will more quickly punish, in the future, those schools that do not have the right equilibrium between the intangible and tangible benefits of their university education. The future of higher education is in affordability.

The student loan crisis and the rising cost of college tuition are complex problems that will require a coordinated effort and preparation. We are already seeing innovation happening on the education front with alternative options, such as online or virtual classrooms, vocational studies, and students studying internationally, but there also needs to be change in how to pay for college. Student loans are an unsustainable solution, not only because it hinders economic growth, but also because there may simply be none of it left for the next generation to pay for college. With more savings accumulated and less loans withdrawn, graduating students will be free from heavy financial burdens, allowing them to focus on their career goals. After all, that is the point of higher education, is it not?

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