Debt crunch

Debt crunch

The Great Recession is wreaking havoc with students who are piling up debt in pursuit of college degrees that keep rising in cost.

It is the height of the Occupy movement last fall, and some 200 demonstrators are marching into Boston’s Financial District chanting slogans such as, “If we don’t get no jobs, you don’t get no peace.” As the group stops to demonstrate in front of the Bank of America building on Federal Street, a woman yells that she is “terrified” to have $80,000 in student loans. Another student screams that “it sucks” to owe $160,000. Several stories up in a nearby building, a portly, mustached, middle-aged man puts up his own message on a whiteboard and displays it in the window. It reads: “Get a job.”

The exchange illustrates a growing disconnect about education in Massachusetts and across America. Students, along with their parents, are racking up enormous debt in the pursuit of college degrees that keep rising in cost. The students are operating on the assumption that good-paying jobs will be there when they graduate to help them pay off the debt and establish a middle-class standard of living. But the Great Recession has thrown that calculus into doubt, with joblessness leaving many college graduates with big debts and no easy way of paying them off.

Student loan debt and defaults are increasing. The Fed­eral Reserve Bank of New York estimates that outstanding student loan debt will hit $1 trillion later this year, more than what American consumers owe on their credit cards. Nearly 9 percent of students who started repaying their federal loans in 2009 had defaulted by the end of 2010, up from 7 percent the year before.

Massachusetts students are in more trouble than most. New Englanders carry some of the country’s highest average student debt loads, thanks to the region’s high concentration of expensive private colleges and universities. The Project on Student Debt, a nonprofit research and advocacy organization, estimates that two-thirds of US college students in the Class of 2010 graduated with student debt. Average debt for a Class of 2010 graduate in the Bay State is $25,541, the 12th highest in the country, according to the organization. New Hampshire ranks No. 1 at $31,048. The national average is $25,250, which a separate study found was nearly as much as the median starting salary of 2010 graduates—$33,150 for men and $28,000 for women.

In most industries, soaring prices and unhappy customers would add up to wholesale change. But that’s not likely in the world of academia. University degrees still carry tangible value in the employment marketplace, so students keep lining up at the doors of colleges, giving the institutions little incentive to change the way they operate. As a result, prices keep rising, students keep applying, and debt keeps piling up.

Stephanie Beal, the first person in her family to attend college, is buried in debt. She expects to graduate next year from Boston University with about $100,000 in loan debt. Her financial situation may be extreme, brought about in part by illnesses and bad luck. But she says her likely future after school—heading back to Maine to live with her parents—doesn’t look all that different from other graduates.
“Even if they can find jobs, their funds will be tied up paying student loans. They’re not going to be able to buy a house or rent an apartment or do the things that we’re all taught that were supposed to be doing after we get out of college and enter the real world,” she says. “I don’t feel that it’s been worth it going to school.”

Sticker shock


Occupy demonstrators last fall protesting soaring student debt.
Photos by Gabrielle Gurley and J. Cappuccio

Shortly after taking office last year, Tufts University Presi­dent Anthony Monaco sent out a letter to alumni in which he raised a concern that is on everyone’s mind. “Our economy continues to struggle, and employment prospects for young adults are currently dim, yet tuition and research costs are still rising,” he wrote. “Some argue that higher education is our economy’s next great bubble.”

College costs do seem to defy economic reality. Since 1999, the overall Consumer Price Index has risen 31 percent while the CPI for college costs has grown 100 percent, an even bigger increase than the one for medical care. Tuition at Boston University increased 79 percent between 1999 and 2012, while tuition and fees at the University of Massachusetts Amherst soared 141 percent over that 13-year period.

There’s been a lot of debate about what keeps driving costs higher. Some say colleges are locked in an “arms race” for students, paying top dollar for “name” professors and state-of-the-art research facilities while also shelling out funds for luxurious residence halls, spacious athletic centers, and food court-style dining. Robert Caret, the new president of the University of Massachu­setts, which has embarked on a $3.4 billion building program on its five campuses, argues that colleges have to keep in mind that students want “high quality” amenities. “It’s part of doing business,” he says.

Salaries of college presidents also keep rising, raising questions about equity when students are hurting. In 2009, five Massachusetts private universities paid their leaders salaries of more than $1 million (up from just one in 2008). The five were Brandeis University, Suffolk Univer­sity, Western New England University, Boston University, and Northeastern University. UMass itself is under the microscope for concurrently paying $425,000 salaries to both Caret and his predecessor, Jack Wilson, who is on a one-year sabbatical until he takes a teaching position at UMass Lowell.

The recession, which has put a spotlight on skyrocketing college costs and student debt, exacerbated the cost problem. As endowment investments and major gift-giving took hits, private institutions decided to pay for higher spending by dipping into students’ pockets. According to a Delta Cost Project report, funded by the Lumina Foundation, private institutions that grant bachelor’s degrees relied on tuition to pay for up to 70 percent of education and related costs in 2009, up from 62.2 percent in 1999.

UMass was forced to up its tuition and fees when aid from the state remained stagnant while the university’s costs and enrollment increased. The state currently pays 45 percent of the system’s general education budget, while tuition covers 55 percent. Ten years ago the state covered 63 percent of that spending. To get to a 50-50 split, which Caret says is the norm for state universities nationwide, the Legislature would need to boost aid next year by $84 million, which would bring the total appropriation to UMass to $512 million.

Robert Archibald and David Feldman, economics professors at the College of William and Mary in Virginia and the authors of Why Does College Cost So Much?, argue that administrative overhead and waste need to be pared back but are not the chief drivers of rising costs on college campuses. They say higher education costs rise faster than prices in general because higher education is at heart a personnel-intensive business that revolves around the interaction of an instructor and his or her students. Productivity gains in manufacturing may drive down the cost of a car or a cell phone, but those same productivity gains do not apply in the lecture hall or in the give and take with students. Moreover, college professors are highly educated and highly skilled, two traits that command high salaries in today’s economy.

A decent value

Many economic transactions are governed by price sensitivity. As the cost of something goes up, consumers ratchet down their purchasing of that product or service. Higher education has, until now, been remarkably immune to those laws of economics. In fact, despite rising tuition costs, heavy student debt loads, and job uncertainty for degree-holders, there has been an increase in the demand for higher education.

College enrollment increased 38 percent nationwide between 1999 and 2009. In the fall of 2011, undergraduate en­rollment at Massachusetts public colleges and universities rose to an all-time high of about 196,000, an increase of 23 percent since 2001.

Students are flocking to colleges because a college degree has replaced a high school diploma as the minimum requirement for a good job with a good salary. Nearly half of all Massachusetts residents have at least a two-year college degree, and the state Board of Higher Education estimates that by 2018, 68 percent of the state’s jobs will require some training beyond high school.

Employment data also make a convincing case for the economic return on a college education. The unemployment rate among college graduates in November of last year was 4.4 percent, half of the rate for those with only a high school diploma. The most recent US Bureau of Labor Statistics data for people in their early 20s are just as lopsided: In 2010, those with a college degree had an unemployment rate of 9.1 percent, less than half the 20.4 percent rate for people with just a high school diploma. According to 2010 Census data, the difference in annual income between a person with a college degree and a person with a high school diploma is $19,550.

“Unfortunately, you can’t get a de­cent job with a high school education,” says Ira Rubenzahl, president of Spring­field Technical Community College. “Employers are demanding more.”

A new U?

Higher education affordability and rising student loan debt may have landed on the public’s radar, but there is little agreement on what should be done about the issues. Some Occupy protesters have popularized the idea that calamity will force the country to address the crisis. They say the education-debt bubble is going to burst and bring down the economy with it.


An Occupy Boston protester along the Rose Fitzgerald Kennedy Greenway.
Photo by J. Cappuccio.

Such a doomsday scenario, how­ever, appears highly unlikely. Cristian Deritis, director of credit analytics for Moody’s Analytics, says the volume of outstanding education loans may be approaching $1 trillion, but that’s still one-tenth the size of the residential mortgage sector. He points out that the federal government guarantees roughly 90 percent of all student loans and he says private lending to students, where interest rates are more volatile, is also tightening up. “Even though there might be trouble in the student loan market, we don’t see that it will spread as widely to the financial system as we saw for subprime,” says Deritis.

The Occupy movement is calling for a payment strike by people with student loans. Organizers announced a goal of gathering pledges from 1 million people who would agree, once the target is reached, to together stop paying off their student loans.

“The time has come to refuse this debt load. Debt distorts our educational priorities and severely limits our life options,” reads the Debtors’ Pledge of Refusal. “Edu­ca­tion is not a commodity and it should not be a vehicle for generating debt, or profit for banks. We believe the federal government should cover the cost of tuition at public colleges and universities.”

Only 2,808 people had signed the pledge as of mid-December, however, just 98 of them from Massa­chusetts.

Archibald and Feldman, the College of William and Mary economists, say any dramatic shake-up of the higher education system would have negative consequences. “Our story of rising cost is devoid of bad people making bad decisions,” they said in a 2010 Forbes article. “This means that there are no simple fixes, like price controls, that would not also reduce the quality of the education we offer.”  

The two economists say it would be better to focus on financial aid, making it simpler to understand and easier to get. That hasn’t happened yet, despite some limited efforts in Washington to address the student debt problem. President Obama, for example, recently accelerated some previously approved loan forgiveness provisions for students who have taken out federal loans since 2008. The measures reduce monthly loan payments from 15 percent to 10 percent of discretionary income and forgive loan balances after 10 years for people working in public service or the military and after 20 years for workers in the private sector.

What the federal government gives with one hand, however, it takes away on the other. In December, Con­gress approved the elimination of a six-month grace period on interest payments for certain loans after graduation and raised the interest rate from 3.4 percent to 6.8 percent. Congress also changed the eligibility standards for the Pell Grant program, which targets low- and middle-income students. The changes lowered the family income ceiling for grants from $30,000 to $23,000 and limited them to students in college for six years or less.

Congress isn’t developing any broader legislation dealing with student loans and debt, although US Rep. Hansen Clarke, a Detroit Democrat, is pushing a bill that would restore the rights of people to eliminate their student debt through a bankruptcy filing.

Some schools are trying on their own to make college more affordable. Elite institutions such as Harvard and Wellesley have already moved toward linking family income to tuition. They say their life-changing product is worth the money. “If you want a piece of paper, then no, I don’t think you should pay $200,000 for this experience over four years,” says Audrey Yale Smith, the associate vice president for enrollment at Smith College. “But if you want education that has the potential to transform you, that’s a very different kind of question.”

In the fall, the University of California-Berkeley, the crown jewel of the California public university system, will cap tuition at 15 percent of household income for California and out-of-state families earning between $80,000 and $140,000 annually, the first public university to make the move. To finance the program, Berkeley plans to depend on private gifts and increase the number of higher-paying out-of-state students.

Mark Taylor, a Columbia University religion professor and author of Crisis on Campus, says a radical change of course in higher education is needed. Colleges and universities are watching their endowments decline, their non-education costs rise, and their heavily mortgaged graduates end up in poor jobs, he says. But they aren’t doing anything to change those troubling trends. He recommends doing away with tenure, experimenting with online teaching, and reorienting instruction to better prepare students for real-world jobs.

But Taylor warns that change won’t come quickly. He says universities are “more conservative than the Catholic Church” and filled with faculty members who can outlast any reform-minded president. “The combination between tenure and faculty governance makes it almost impossible to effect significant change,” he says.

Changes are more likely to occur quickly in the way parents and their children invest in education. As costs continue to rise, many analysts expect customers to ratchet down their expectations and choose more affordable options that do not break the bank. New tools mandated by Congress in 2008 will help families to calculate the net price of tuition after factoring in financial aid, grants, and scholarships.

A four-year private “dream school” that forces a student to bulk up on loans may get crossed off in favor of a state university, where the majority of college students get their degrees at a fraction of the price. If the four-year state school is too expensive, a community college might fit the bill. Or a student could split the difference by completing a two-year associate’s degree at a community college and transferring to a four-year institution to complete a bachelor’s degree.

Meet the Author

Gabrielle Gurley

Senior Associate Editor, CommonWealth

About Gabrielle Gurley

Gabrielle covers several beats, including mass transit, municipal government, child welfare, and energy and the environment. Her recent articles have explored municipal hiring practices in Pittsfield, public defender pay, and medical marijuana, and she has won several national journalism awards for her work. Prior to coming to CommonWealth in 2005, Gabrielle wrote for the State House News Service, The Boston Globe, and other publications. She launched her media career in broadcast journalism with C-SPAN in Washington, DC. The Philadelphia native holds degrees from Boston College and Georgetown University.

About Gabrielle Gurley

Gabrielle covers several beats, including mass transit, municipal government, child welfare, and energy and the environment. Her recent articles have explored municipal hiring practices in Pittsfield, public defender pay, and medical marijuana, and she has won several national journalism awards for her work. Prior to coming to CommonWealth in 2005, Gabrielle wrote for the State House News Service, The Boston Globe, and other publications. She launched her media career in broadcast journalism with C-SPAN in Washington, DC. The Philadelphia native holds degrees from Boston College and Georgetown University.

“That’s a smart strategy especially if they are challenged financially or if they are not sure what they want to do,” says Rubenzahl, the Springfield Technical Community College president.

Illustration by James Yang.