Once again, the cost of going to college rose significantly in the 2012/2013 academic year, prompting concerns about how students would cope with increased debt levels once they left school and entered the workplace. This picture was made all the worse by the fact that financial aid budgets for students across the nation essentially remained flat. In fact, the cost of going to college increased at more than twice the rate of inflation, and there seems to be no end in sight to the upward trend.
Let’s take a look at the figures, which come to us courtesy of the College Board. The headline number for a student attending a public college in-state is $22,261 – that’s an increase of 3.8% over the previous year. Worse still, once scholarships, tax benefits and grants are taken into account, that number goes up to 4.6%. In other words, benefits students receive to offset the cost of going to college are actually down this year – not flat, but down. Now, that figure does include tuition and fees, books, and food and board, but it’s still a large amount to come up with each year for a four-year course.
The picture is even worse at private schools. Here, the overall cost of tuition and fees alone rose 4.2% to $29,056 a year, with the total bill coming in at $43,289. When student benefits such as grants, scholarships and tax breaks are added to the equation, the net comes in at about $27,600 – which is up 5.6% from the previous academic year. According to Sandy Baum, lead author of the report, we shouldn’t expect things to get much better, with tuition continuing to outpace inflation for the foreseeable future.
The reason for the upward trend in tuition costs becomes apparent when you take a look at recent changes in state funding. Since 2007, the amount of money coming from the state to support colleges has dropped by $15.2 billion. When the rise in student populations is taken into account, that equates to a drop of about 29% in state funding per student in the last five years. As a result, the increases in tuition at public colleges isn’t even covering the loss of state subsidies. While private colleges obviously don’t have access to these public funds, they are also facing upward price pressures as the cost of employee insurance and healthcare, technology infrastructure and student services continues to rise rapidly.
All of this is raising questions about how bad the student debt crisis is going to get. According to a FICO study from earlier this year, the average graduate is carrying loans of around $27,000. Not only that, the delinquency rates for recent graduates are going up – this stands at 15.1% for loans taken out after October 2010, whereas the equivalent rate back in 2007 was 12.4%. This means that the delinquency rate has increased nearly 22% in the last five years. When you consider that student debt across the nation comes in at over $1 trillion, about 25% more than the nation’s total credit card debt, that is worrying.
Part of the problem is that students are taking on debt to pay for increasing tuition fees in the expectation that they will be able to make enough money when they graduate to cover the payments. However, entry-level salaries are often much lower than expected, leaving students scrambling to cover their bills. As a result, many end up missing payments, which has a large negative impact on their credit scores. This makes it more difficult for them to obtain loans for the necessities, and to get mortgages. Of course, there are always ways to fund necessary purchases – for instance, students in Missouri who need a car can turn to a Kansas City bad credit car dealership, but it would be better if they were not in that position in the first place.
The rising cost of going to college isn’t just affecting students. It seems that, faced with an almost unsustainable set of costs, students are turning more and more frequently to the bank of mom and dad. As a result, borrowing by parents has risen by 75% over the last seven years, according to a report issued last year by the National Association of Consumer Bankruptcy Attorneys, with the average parent carrying $34,000 in student loans for their offspring.
For an economy still struggling to its feet after the last financial crisis, this has to be of grave concern. The question is whether student debt is set to become the next time bomb for the US economy, picking up where the sub prime mortgage left off.