College tuition has been inflating severely since the early 1990s, at a rate far exceeding the CPI. This alarming trend defies simple explanation... and there is no simple cure.
Without question, tuition inflation is one of the most severe challenges for American millennials. Although the data assure impressive long-term (~30 year) return on college investment for most students, tuition inflation has made it almost impossible for students and their families to make that investment without long-term loans. And unfortunately, much student debt is serviced at interest rates far exceeding reasonable benchmarks e.g. the 30-year bond yield or the 30-year mortgage rates.
It is important to note that little of the cumulative student debt is served by the Federal assistance programs such as the Stafford program. This is well known to families with students in college today.
In the most cynical analysis, it appears that some parts of Higher Ed and the loan industry are in collusion, baiting students with promises of remunerative careers while luring them into loans they may never repay. Indeed this analysis seems particularly apt for certain for-profit programs, which have been the target of recent Congressional attention.
Highlighting the impending increase on Stafford loans from 3.4% to 6.8%, Senator Elizabeth Warren recently brought some much-needed attention to the problem of loan repayment; she summarizes her program in this PDF:
One of Senator Warren's most compelling arguments is the following:
"This year, the federal government will make $34 billion on student loans. The government even makes money on its loans to low-income students – 36 cents, on average, for every student loan dollar it puts out. If Congress allows the interest rate on these loans to double, the federal government will bring in even more revenue – money that comes straight from the pockets of college students."
However, as noted before, only a fraction of student loan debt is served by the Stafford program.
Also, it important to note that a very simple market principle: in the debt markets, the demand for loans is inversely proportional to the loan rate. In other words, if the loan rates are depressed, more students will take on debt. Is that really what we want? or do we want to find ways to make it possible for stduents to complete college without a mountain of debt?
Of course, Sen. Warren intends to migrate student debt away from predatory loans to less expensive loans, and is one way to help today's students in debt crisis. But the larger issue -much larger than Sen. Warren's well-intended vision of debt relief- is ongoing tuition inflation in higher ed, which will continue to hit tomorrow's students very hard. And that inflation arises from complicated institutional effects that aren't easily distilled into political sound bites. The uncomfortable truth is that I and many of my colleagues were able to complete college with ~zero debt only a few decades ago, and that is almost impossible today. Why?
In the coming weeks, I'll visit the various sources of tuition inflation in an informal way, and suggest reasonable ways to address them. and I pledge that nothng will be sacred. So stay tuned!