Three Dangerous Student Aid Myths (and what higher education leaders can do to debunk them)
Unless you live in a cave, you’ve seen the alarming headlines highlighting “exploding” college costs and “crushing” student loan debt. Because the media is trying to grab readers’ attention, these articles often use the most startling cases of these serious problems without providing context needed to fully understand the complexity of these issues. A simple internet search reveals the prevalence of these types of articles.
Here are just a few recent headlines:
- "College Costs and Student Debt Explode?"
- "Student Loans May Be ‘Next Debt Bomb’ for Economy"
- "Student Loan Debt Is Crushing America’s Senior Citizens"
- "Staggering Law School Debts Will Lead to Exploding Debt Disaster for Graduates and Taxpayers"
The aim here is not to trivialize the challenge students and families face when trying to pay for college or repay loans. These are serious issues that merit serious debate and real solutions. But it’s important to take a realistic look at the college access and affordability challenges we face to encourage a thoughtful and practical debate based on facts.
While these articles effectively accomplish their goal of grabbing readers’ attention, they do a poor job of informing the public of the complex interplay between the many economic, demographic, and technological factors driving up the cost of college and student loan borrowing.
Unfortunately, a more accurate headline, such as “A Complex Combination of Economic Factors Increases College Costs and Loan Debt for Certain Students,” just isn’t as effective in grabbing readers’ attention as headlines that suggest increasing college costs and student loan debt will cause immediate and devastating economic and societal damage.
Articles framed in that way hinder serious, rational debate on these issues. Worse, these articles make it appear as though we’ve already reached a point of no return on college access and affordability. They identify and then condemn a few factors for causing these trends and appeal to readers’ emotions, making it more difficult to have a discussion based on empirical evidence.
This type of “hit and run” reporting uses hyperbole to distill complex issues into convenient sound bites that can create or reinforce myths and misconceptions. These myths are then adopted as facts and are regularly used by lawmakers and policymakers to develop and push higher education and student aid policy.
Following are three dangerous myths about student aid that are regularly used by policymakers to push misguided policies—and what higher ed officials must know to debunk them.
1. Increases in student aid drive up college costs.
This myth is a cornerstone of House Republicans’ fiscal year FY2013 budget resolution and is often referred to in House and Senate hearings on student aid and college costs. Lawmakers will cite this myth when justifying proposals to cut federal student aid spending. Unfortunately, this myth is prevalent because it offers a seemingly simple, easy to understand explanation for what is really a multifaceted issue. It is much easier to blame student aid than to explain the complex interplay of numerous factors that actually influence college costs.
A report issued by House Republicans to accompany their fiscal year FY2013 Budget Resolution maintains that “the decisions of colleges and universities to raise their prices would have been constrained if the federal government had not stepped in so often to subsidize rising tuitions.” To address this issue, the budget resolution proposes limiting the growth of financial aid and focusing funds on low-income students to “force schools to reform and adapt.” Essentially, the budget resolution would reduce federal funding for student aid by eliminating student loan subsidies and limiting student eligibility for Pell Grants and other federal aid.
Even if every borrower defaulted on his or her student loan at the exact same time (an impossibly unlikely scenario), it wouldn’t have the same impact on the economy as the housing collapse.
But this theory is not founded in reality. In testimony before the House Education and the Workforce Committee, Education Secretary Arne Duncan noted that college costs increase even when the government reduces student aid spending or keeps it level. There is conflicting evidence on the correlation between the federal student aid spending and increases in college costs and absolutely no research that indicates a causal relationship.
There are several factors that drive up college costs. Two economic professors at The College of William & Mary conclude that the primary forces driving up college costs are the technological changes that have reshaped the entire global economy over the past century. David Feldman and Robert Archibald are co-authors of Why Does College Cost So Much? (Oxford University Press, 2010). Their book explains that the most important engine of cost growth in higher education is the very thing that is driving costs down in other industries: technological advancement. Technology advances have caused productivity growth in some industries, like manufacturing, to overshadow productivity growth in other industries, including higher education.
Another recent factor driving up college costs is reductions in state spending on higher education. A recent report by the State Higher Education Executive Officers (SHEEO) found that state and local funding for higher education reached its lowest point in 25 years in 2010. To make up for these funding cuts, many public colleges have raised tuition and fees. In 1965, state and local governments covered more than 50 percent of the costs of higher education, with the federal government providing an additional 10 percent. By 2008, the proportion of higher education expenses covered by state and local governments shrank to just over 30 percent. Who makes up the difference? Students and families. While the total cost of providing a college education may not be going up as dramatically as portrayed by the press, the proportion of costs students and parents are paying continues to increase.
2. Student loans are the next mortgage bubble.
A rash of recent articles compares student loan debt to housing debt and predicts catastrophic economic disaster on par with the bursting of the housing mortgage bubble. I don’t want to minimize the seriousness of the recent increase in student loan borrowing, but there is little value in comparing student loans to mortgages because student loans do not pose the same systemic economic threat as the collapse in housing.
The size of the mortgage market at the height of the housing bubble in 2006 dwarfs the current student loan market. Dean Baker, the co-director of the Center for Economic and Policy Research, notes that the current student loan market is valued at roughly $867 billion. The residential housing market was worth $22 trillion in 2006—more than 25 times larger.
When the mortgage bubble burst, it lost nearly $8 trillion in value, according to Baker. Even if every borrower defaulted on his or her student loan at the exact same time (an impossibly unlikely scenario), it wouldn’t have the same impact on the economy as the housing collapse.
The value of higher education also continues to grow. Putting an exact dollar value of a college degree is difficult, but researchers have estimated that someone with a bachelor’s degree will earn anywhere from $280,000 to $800,000 more than someone with a high school degree over their lifetime.
In addition, those with a college degree are less likely to be unemployed. Recent figures from the Bureau of Labor Statistics show the unemployment rate of college graduates is below 5 percent compared to more than 9 percent for high school graduates who never attended college. This gap is likely to grow as more jobs demand highly-skilled and trained employees.
A June 2010 report by the Georgetown University Center on Education and the Workforce finds that the fastest growing industries are those with the greatest demand for workers with at least some postsecondary education. The report predicts that 63 percent of job openings in 2018 will require some college education.
The increase in student loan borrowing is also being spread among record numbers of students attending college. The economic downturn and high unemployment has sent many people back to school to increase their skills. In addition, there are record numbers of college-aged people. The U.S. Department of Education reports that the number of students in college grew from 19 million in 2008 to 22 million in 2010.
Of course, none of this is meant to minimize the negative affects defaulting can have on individual borrowers. The good news is that borrowers today have more repayment and deferment tools at their disposal than ever before. In fact, with new regulations about to be issued from the U.S. Department of Education, borrowers will not have to pay more than 10 percent of their discretionary income towards their student loans, and can receive loan forgiveness after 20 years of repayment.
3. Most students borrow way too much.
Media outlets often use stories about students who borrow $200,000 to demonstrate that students are borrowing too much. While these instances are serious, they also are relatively rare. Only 0.5 percent of borrowers take out more than $200,000, according to a March 2012 report written by the National Economic Research Associates (NERA) on behalf of the Young Invincibles, a national organization representing the interests of 18- to 34-year-olds. Another 0.7 percent borrows $150,000 to $200,000 and 1.9 percent borrows $100,000 to $150,000. (It should be noted that only graduate students are able to even reach these levels of indebtedness.)
Students are much more likely to borrow manageable amounts, explains the report, called “High Debt, Low Information: A Survey of Student Loan Borrowers.” More than 43 percent of undergraduate and graduate borrowers take out between $1,000 and $10,000 and another 30 percent borrows between $10,000 and $25,000. Unfortunately, these students don’t make the news because their debts are manageable.
For those who are struggling, the federal government has taken some encouraging steps to help. Recent changes made to the Income Contingent Repayment program for student loans should help students who borrow too much by lowering their monthly payments to a manageable level and cancelling remaining loan balances after 20 years of repayment.
The Young Invincibles report highlights an additional opportunity to help borrowers before they take on an unreasonable amount of debt. Based on a survey of 6,500 undergraduate and graduate borrowers, it notes that 65 percent misunderstood or were surprised by aspects of their student loans or the student loan process. Ensuring that these borrowers fully understand the terms and penalties of student loans will help them make more responsible student loan choices.
Serious Debate of Serious Issues
The United States faces serious challenges to keep higher education accessible and affordable. This challenge deserves thoughtful, deliberative debate and policies that are rooted in facts and data. Headlines and talking points based on half-truths and myths are often counterproductive to meeting the challenges we face and finding solutions. Instead of focusing on outliers, our focus on the issues the majority of students face will guide a thoughtful discussion on relevant issues, such as:
- Is a fixed 3.4 percent interest rate an appropriate rate for a subsidized Stafford loan? What should the interest rate be on Stafford and PLUS loans?
- How much does the average parent take on in student loans for their child? How many of those parents are current or defaulting on their loan payments?
- Are there certain schools or programs of study where students should be allowed to borrow more or less?
- Why do we have an annual fixed amount of Federal Pell Grants, but a graduating increase in the amount of loans available? Is college more affordable in the first year?
These questions aren’t even asked in an environment where the focus is on the extreme, not the norm. As a community, it is our responsibility to ensure that the discourse on these issues is rooted in accuracy. This is the only way we can debate, develop, and institute policies that effectively address complex college access and affordability issues.
—Justin Draeger is president of the National Association of Student Financial Aid Administrators.