NCPA - National Center for Policy Analysis

Repairing America's Unhealthy Relationship with Student Debt

June 28, 2013

While household debt comes in many forms, only student debt grew during the Great Recession. Federal policy has encouraged this habit. In the two years following the financial crisis, spending on student loans grew 19 percent and 18 percent, respectively, says Judah Bellin of the Manhattan Institute.

The student debt problem has been mounting for decades. However, recent debates over the value of a college degree have inspired a new focus.

Total student loan debt has grown dramatically in the past decade:

  • From 2007 to 2012, total student debt nearly doubled, from $548 billion to $966 billion.
  • Recent graduates hold the most debt: the total loan debt of individuals under the age of 30 increased from $220 billion to $322 billion from 2007 to 2012, and their average loan balances increased from $16,425 to $21,402.
  • One recent study suggests that the average student debt for graduates in the class of 2011 was $26,500, a 5 percent rise from the previous year.

Default rates are also growing.

  • The Department of Education reported that in 2011-2012, two-year cohort default rates (CDR) for borrowers of student loans grew in both public and private nonprofit schools, and while they decreased in for-profit institutions, these schools still have the highest default rates.
  • When the department calculated the three-year CDR, they found that students at private nonprofit institutions had a 7.5 default rate; at public nonprofits, 11 percent; and at for-profit institutions, 22.7 percent.

Student debt continues to climb despite these negative consequences, partly because Americans place such a high value on a college education. Even in a poor financial climate, students and their families continue to compile large college debts. Furthermore, federal policy encourages them to do so. In the wake of the financial crisis, the government dramatically increased its spending on federal loans. Federal expenditures and student debt patterns are symptomatic of a larger disease: the unimpeded growth of college tuition, which calls for greater borrowing.

By insulating colleges from competitive pressure, student loans distort the incentives of colleges and universities. The problem of growing student loan debt cannot be addressed without rethinking our federal loan program.

Source: Judah Bellin, "College Credit: Repairing America's Unhealthy Relationship with Student Debt," Manhattan Institute, June 24, 2013.


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