With the combination of a weak job market and institutions of higher education raising tuition, more young people are finding little choice but to attend college with funds borrowed from student lenders. As a result of rising cost and demand, the amount of money owed by the average graduate and the total amount owed in student loans has soared to record high levels. Not only will this force many graduates to seek jobs they may not like, it also leaves recent grads with little disposable income with which to stimulate economic activity. Without significant and fundamental reform in to educational financing, these factors will continue to drain employment and consumer spending.
Federal backing of student loans was designed to open universities up to middle and working class families. For too long, a college degree was limited to those with relatively well-off parents, but an increasingly technical work environment demanded more well-educated employees. As the number of students who could afford higher education increases, the schools had to respond by expanding their own facilities and course offerings. Many times, these construction booms were funded by the school's own debt - and as the bills have come due, tuition has skyrocketed in response.
An increase in enrollment isn't the only cause of rising tuition, however. Some of the problem is price discrimination - a form of economic analysis that seeks to set the price of a good or product at the maximum level buyers can afford and are willing to pay. With loans readily available, students can afford quite a bit more than they used to, and tuition levels have certainly kept up with the maximum limits of student lending power. Public universities, long the last refuge of affordable higher education, are now faced with their own crisis as many state legislators seek to cut education funding in response to low tax revenues in a slow economy. Likewise, many of the foundations and charitable organizations involved with providing scholarships and grants have seen significant losses in their own investments, so the number of aid opportunities for students is slowly shrinking.
When a student graduates with a hefty loan burden, they don't have a lot of time to find themselves or experiment with dream-jobs that might not pay off immediately. Missing a few payments can lead to massive penalty fees and increased interest rates - so there is a huge incentive for the students to take any job they can get, as soon as they can get it. So as fewer recent grads are able to join start-ups or take a risk on their own business, this strengthens the feedback loop of declining jobs: fewer businesses have the stability and cash liquidity to make a salary offer that will satisfy both the lender's demands and the costs of living.
Unfortunately, the jobs that are available aren't particularly competitive when it comes to salary. Poor employment numbers have been a drag on wages for years now, so even though today's graduates have twice the debt of students a decade ago, they're struggling harder and facing more competition to get jobs that pay the same wage. As a result, recent college grads don't have a lot of spending power to support the consumer economy. Once again, this situation reinforces the feedback loop of economic deflation through declining demand and fewer jobs.
Toward a New Model of College Financing
With current funding models dragging down economic activity, the role of financing higher education is a great candidate for reform. The current system leaves the majority of responsibility with the student, and most of the actual financial assistance goes to the banks who own student loans in default. Models of reform that seem to be working elsewhere in the world include a more merit-based entitlement approach, where students who earn sufficiently impressive grades and test scores are guaranteed a basic college-level education. At the very least, this could be applied to critical-need majors like engineering and medicine. Society automatically gets paid back as college graduates earn more and pay more taxes over a lifetime, so there is a constant incentive to maximize the level of education in a population.
It will be difficult to reform educational financing, and it is unlikely that tuition prices will come back down now that schools have already invested heavily in expansion, but the benefits could be extensive in many areas of the economy. If instead, the price continues to rise and is fully funded by student lending, we may reach a point where many students are once again priced out of the opportunity of pursuing a college degree.
John is a writer and web publisher with five years experience in helping students find money for college through financial aid, scholarships, and grants. While these methods were once sufficient to fund a higher education, he sees student loan reform as increasingly essential for all parties involved - from students and their parents to employers and tax-payers alike.
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