Via Financial Times

Sarah Voorhies lost her mother while at Vermont Law School. Although she was an excellent student in her first year, the loss of her only close relative caused huge disruption to her studies.

“It was hard for me dealing with the grief,” says Voorhies. She had already paid tuition fees and taken out a loan, but her grades failed her. She was expelled for academic failure in 2011.

Without a law degree, she did not earn enough in her back-up profession to pay the debt she had accumulated as a student. Her initial loan ballooned from $70,000 to $160,000 in just a few years, as interest payments multiplied.

Voorhies is one of 45m students who are paying off debts to the federal government after seeking its help to fund their university studies. Millennials aged between 25 and 34 years old account for one-third of this number. They have faced a particularly harsh economic environment in the past decade, including the recession that followed the financial crisis, stagnating wages and rising tuition costs.

For many of this generation, higher education has not only failed to deliver on its promise of prosperity but left them trapped in a student debt nightmare. As the issue emerges as a big theme of the 2020 US presidential election, experts are urging policymakers to tackle the spiralling US student loan crisis. What are the ramifications for those suffering its worst effects?

The debt cycle

Many millennials struggling with their student loans have taken more than one job to make ends meet or opted to refinance debt several times. Some seek help from public refinancing programmes, often falling into the trap of paying increased interest rates or failing to qualify for assistance. Others have tried to disappear from the system or even declared bankruptcy in their mid-twenties.

A heavy burden of student debt brings wider economic consequences, including lower rates of home ownership, small business creation and consumer spending. Donald Trump, US president, has acknowledged the seriousness of the student debt problem, describing it as “outrageous”. Federal student loan debt totalled $1.6tn in 2019, or 8 per cent of the country’s national income. Trump pledged to reduce that number during his presidency, but measures to tackle the issue have so far failed to deliver.

In other countries, the costs of higher education are often heavily state-funded or capped. In the UK, universities can charge a maximum of £9,250 a year in undergraduate tuition fees for UK and EU students. Annual rates charged by US universities, however, range from $10,000 to $50,000 for the more prestigious degrees.

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Tuition costs for a four-year bachelor degree can reach $200,000. Those studying law, a postgraduate degree, will pay another $50,000-$60,000 a year on top. A law degree at Harvard costs $65,875 in annual tuition alone. At Princeton the price tag is $51,870 a year.

Parental support is a primary source of revenue for higher education. But a study published by HSBC in 2018 found that the average shortfall in total expenses for US students, after taking parental help into account, was $82,100.

Root causes

Ben Miller, a researcher at the Centre for American Progress, a think-tank in Washington DC, says the crisis is mainly the result of cuts in federal and state funding. Federal funding has consistently fallen as a percentage of overall revenue for universities from the mid-1960s to 1990 and has stagnated since 2007. A similar trend emerged in US state funding in the early 1980s. Each recession has led to deeper cuts, not reversed during periods of growth.

Tuition costs, on the other hand, have risen since the 1950s. Universities have shifted part of the schools’ financial burden to students, in turn boosting their federal loan debts.

Tucker Ebersole, a 25-year-old manufacturing safety specialist from Pennsylvania, relied heavily on federal support when studying environmental health at Millersville University in Pennsylvania.

He took a $33,000 federal loan with a variable interest rate of 3 to 4.5 per cent. When that was not enough to cover tuition and living expenses, Ebersole sought help from his parents, who also applied for a federal loan. They borrowed $118,000 at 6.5 per cent from a public loan programme called Parent Plus. Ebersole worked part-time through college and at one point had two jobs.

“I would go to class from 7:30am-1pm, go to my first job from 1:30pm-5pm, then get to my second job at 5:30pm and would work until 2am,” he says.

That still wasn’t enough to escape the debt burden. After graduating, Ebersole moved back in with his parents to save on rent but could hardly afford the monthly debt payments. He is now looking for a part-time job on top of his full-time job.

“Growing up, schools and teachers made it out that a four-year degree was the only way to be successful,” he says. “[But] a college degree has turned from a tool for a better future to a luxury for upper-class families.”

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Broken model

Most students believe a degree will lead to a high income, enabling them to pay off their student debt. But the old model has come under pressure as incomes have stagnated over the past decade. “The return on a degree is far lower than 20 years ago,” says Miller.

Leanna Harrison, a college science graduate from Wright State University, Ohio, thought that getting a degree would be her way out of poverty. She recalls reading a leaflet on job prospects suggesting salaries of about $60,000 a year. She took out a $64,000 federal loan to foot the bill and now makes closer to $36,000 a year.

Like many Americans, she turned to federal programmes for support, successfully applying for an income-based repayment plan, a government-funded initiative that caps federal loan repayments at 10 per cent of a borrower’s income. Harrison started paying $700 to $800 a month towards her student debt but realised that the overall debt was not going down.

Federally-supported income-based repayment plans tend to make borrowers worse off, argues Miller. Unlike in the UK, the interest rate increases with time and the US government does not forgive the debt after 30 years.

Harrison realised her rate had gone up to 6.2 per cent and that the outstanding interest was $15,045. Her debt went from $60,000 to $79,119. “I feel overwhelmed and like I can’t get ahead of it all,” she says.

Defaulting is another option. But if a debtor chooses to do this, the US government can take about 15 per cent of their discretionary income, subsidies and other taxes. The loan remains intact, with a higher default rate applied to it. Any future income — including social security income, a federal subsidy to support low-income people over 65 years old — can be captured. “The system is essentially punitive,” says Miller.

Another way out is to work in the public sector. Under the public forgiveness programme, student debts of public workers are cancelled after 10 years. But only certain loans and payment plans are considered: Harrison, who worked for six years in a public hospital as a laboratory scientist, found that more than one-third of her federal loan debt was ineligible. 

Student debt weighs more heavily on low-income workers who either fail to finish their undergraduate degree or cannot manage to pay off that last $10,000. Minorities, including Hispanic and black students, are disproportionately affected, as are women.

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The burden of student loans is likely to widen the wealth gap, as poorer people take longer to pay their debts and struggle to save for their own children’s future. “It’s a sad irony that [the government] took measures to take people out of poverty and now uses those same measures to send them back into it,” says Miller.

Seeking solutions

How can students avoid falling into a debt disaster? Mark Williams, a lecturer in finance at Boston University, urges parents and students to give more thought to course and university selection. “Students, supported by their parents, want to go to the best university, the most prestigious. They think they’ll hit the lottery when what they should be thinking about is the best financial fit for the career they want.”

Some should consider going to cheaper universities, such as community colleges, then transferring to the more prestigious ones for their final years to save on tuition, Williams says.

Some people work before taking a degree so they can build a savings war chest. Others move to the state of their chosen university until they qualify for residency, so they will pay cheaper “in-state” tuition rates.

President Trump has proposed further cuts in federal funding and shorter degrees, and early this year floated a plan to cut 10 per cent from the Department of Education budget. At the other end of the scale, Democratic presidential candidates Elizabeth Warren and Bernie Sanders want to forgive or cancel chunks of debt and pay for it with taxes on the rich.

Although experts are sceptical that these pledges will see the light of day, they see signs of hope in the action taken by some states to support universities. Tennessee, Indiana and Michigan have tried to raise funds for state colleges, reversing the decades-long downward trend.

“We used to have a deal where states would subsidise public higher education so students could afford college without debt,” says Miller. Today, some states are trying to rebuild this role, he adds. 

Given the slow pace of reform, however, many former students are likely to remain locked in debt for years to come. “The reality is I will probably be paying off these loans the rest of my life,” Harrison says.