Student loan crisis: $1.5t now outstanding, 2nd-most of any consumer-debt segment. And Default rates are rising : >1 in 10 borrowers are at least 90 days delinquent, highest for all household debt segments

via 13d:

On a personal level, political and macroeconomic level, there are few questions with more significant implications for Americans.

The following article was originally published in “What I Learned This Week” on October 25, 2018. To learn more about 13D’s investment research, please visit our website.


On a personal level, on a political and macroeconomic level, there are few questions with more significant implications for Americans. Since 1985, the cost of college has increased at roughly four times the rate of inflation as measured by the Consumer Price Index. Just between 2007 and 2017, college tuition spiked 63%, school housing 51%, and textbooks 88%. All told, with the contributions of individual families and government combined, Americans now spend roughly $30,000 per student per year — nearly two times that of the average developed countryaccording to the OECD.

This outsized appreciation is at the heart of the student debt crisis, and in turn, the millennial financial crisisTotal student debt has seen cumulative growth of roughly 157% in the past 11 years, with $1.5 trillion now outstanding, the second-most of any consumer-debt segment, trailing only mortgages. And default rates are rising — more than one in 10 borrowers are at least 90 days delinquent, the highest for all household debt segments. As we explored in WILTW August 2, 2018this debt burden is not only a threat to the personal finances of millennials, but the vitality of the U.S. economy as a whole — threatening everything from home values to the dependency ratio to consumer spending and entitlement spending.

From short-sighted politicians to endemic administrator greed to reckless amenities spending and entitled students, the blame game dominates the political and media discourse around the skyrocketing cost of college. And no doubt there is plenty of blame to go around. However, boiled down, the problem is as systemic as it appears intractable.

For four decades, a concerted — and overwhelmingly successful — effort was made to expand college accessibility across socioeconomic strata. This not only catalyzed greater government spending, but forced colleges to raise headline tuition so families with means could subsidize the education of families without. This pressure dramatically increased following the Global Financial Crisis (GFC), when states slashed funding for public universities. An arms race ensued — colleges spent on amenities, faculty, and administrators at a record pace in order to globally recruit a limited pool of students capable of paying full-freight.

For the 2017 school year, U.S. colleges estimated the total incoming fall student body at 20.4 million, roughly 5.1 million more than in 2000. According to the Pew Research Center, 40% of millennial workers aged 25 to 29 have a bachelor’s degree, which compares to 32% of Gen Xers in 2000, and 26% of baby boomers in 1985. And as a recent report by anti-poverty nonprofit CLASP details:

“Only about a third of students at public colleges fit the description of a white, middle class 18- to 22-year-old who can depend on their parents. In fact, nearly 50% of students are living on their own and do not receive support from their parents. More than half are considered lower-income, and about a third live below the federal poverty line.”

This explosion in college attendance began in the 1970s when a grass-roots student movement instigated congressional approval for need-based grants (i.e. Pell Grants) and low-interest loans. Adjusted for inflation, federallegislative appropriations to higher education are ten times higher today than in 1960 (by comparison, the military’s budget is only about 1.8 times higher). The more federal money became available, the more colleges competed for prospective students, triggering escalating spending on faculty, facilities, and services. And as universities invested in the educational experience, they raised the headline tuition rate. As the Federal Reserve Bank of New York has concluded, “every dollar increase in government aid adds anywhere between $0.25 and $0.63 to the price of tuition.”

This systemic intertwinement between competition and tuition cost only intensified after the GFC. The college system in the U.S. is in reality three largely independent systems: public nonprofit, private nonprofit, and for-profit colleges. The former dominates total enrollment. Roughly 73.5% of students currently seeking two- and four-year degrees are enrolled at public schools.

And between 2008 and 2017, overall state funding for public colleges fell $9 billion dollars. In nine states, per-student spending fell by 30% or more. To make up for the cuts, universities had only one place to turn: students. Last year, for the first time in U.S. history, half of all states relied more heavily on tuition than on government appropriations to fund higher public education, according to CNBC.

This placed escalating pressure on colleges to boost enrollment numbers and recruit as many full-freight students as possible, setting off an administrative staff and facilities spending race that trickled down through private colleges.

“Overpaid”, tenured professors have often been blamed by pundits for college tuition inflation. There’s a good reason for this: average salaries for full professors at top public institutions have risen 12% in excess of inflation since 2000, according to the American Association of University Professors. However, that inflation belies the reality of university educator spending. As Richard Vedder, an economics professor at Ohio University, told Business Insider recently: “A typical university around 1970 would have allocated 40% directly for instruction, mostly professor salaries. Nowadays, it’s more like 30%.” The reason for this decline: colleges staff far fewer full-time professors today than in the past — as of 2011, part-time faculty accounted for 51% of total faculty, up from 30% in 1975.

Instead, it’s administrative staff — the fundraisers, the financial aid advisors, the global recruitment staff, etc. — that have received new spending. Between 1993 and 2009, colleges grew the number of administrative positions by 60%, 10 times the rate of growth of tenured faculty positions. According to The Boston Globeprivate colleges in New England increased spending on administrators by roughly 30% just between 2007 and 2016.

And the more administrators on staff, the more valuable the chief manager of those administrators has become — the university president. As of 2015, average pay for private-college presidents in the U.S. surpassed $550,000, with 58 presidents taking home more than $1 million a year.

A similar escalation of facilities spending is also evident. Last year, U.S. universities and colleges spent $11.5 billion on construction, an all-time high. While some went to renovating old buildings, that money also paid for 21 million square feet of new space, according to Dodge Data & Analytics. Adding to the cost, much of that building has been funded by debt. Public university and community-college debt has more than doubled since the recession, now at roughly $150 billion.Private colleges and universities have $95 billion in debt. According to research by the University of California, Berkeley, the annual cost of paying interest on that debt is now at $11 billion.

As Amanda Ripley wrote for The Atlantic last month in an article dissecting why the cost of college in the U.S. is so disproportionately high compared to the rest of the developed world:

“In the beginning, university administrators may have started competing for full-freight paying students in order to help subsidize other, less affluent students. But once other colleges got into the racket, it became a spending arms race. More and more universities had to participate, including private colleges unaffected by state cuts, just to keep their application numbers up. ‘There is such a thing as wasteful competition,’ Charles Clotfelter, a Duke University professor, wrote me in an email.”

As the student debt crisis attests, the young have ultimately paid the price for the excess spending. No doubt, some of the investments made by colleges have enriched the student experience and expanded educational options. However, given the cutbacks in full-time professors — not to mention a recent OECD study that suggests American college students underperform relative to developed world peers — it is debatable whether all that spending has actually resulted in a better education.

There are signs of improvement. Between 2012 and 2017, colleges and universities increased their grant aid for undergraduate and graduate students by 24%. In turn, students and parents borrowed less, from an inflation-adjusted $127.7 billion in 2010 to $105.5 billion last year. Swelling endowments are likely helping — “last year, only 14 of the 447 university endowments with assets over $100 million failed to net at least 8% growth,” according to The New York Times. However, the underlying systemic cycle — higher cross-socioeconomic demand combined with federal loans triggering a recruitment spending arms race — will continue unless systemic measures are taken.

This article was originally published in “What I Learned This Week” on August 2, 2018. To subscribe to our weekly newsletter, visit 13D.com or find us on Twitter @WhatILearnedTW.

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