Across the U.S. a debate is simmering over student loans. A quick Internet search produces headlines such as “Debunking the student loan crisis,” “Is the so-called student loan crisis one big exaggeration,” and “The student loan crisis is crippling American families.” Americans owe $1 trillion on their student loans, more than both credit debt and auto debt.1 Twenty-five percent of borrowers are behind on their payments.2
Most countries understand that they need a highly educated workforce to maintain high wage jobs and rising living standards. Studies show that workers with a bachelor’s degree earn 45 percent more in wages on average over their lifetime than high school graduates, with similar demographics.3 Investments are being made in education. In 2008, OECDA group of the world’s most advanced and wealthiest economies that is both a forum for and an active participant in debates about international economic policies. It was established in 1961 and now has 34 members, including the United States, Canada, Mexico, Japan, South Korea, and most members of the European Union. countries spent a collective 6.1 percent of their GDP on education, though some countries such as the U.S., Israel, and Chile spent more than seven percent. Tertiary education accounted for about one-third of the total combined OECDA group of the world’s most advanced and wealthiest economies that is both a forum for and an active participant in debates about international economic policies. It was established in 1961 and now has 34 members, including the United States, Canada, Mexico, Japan, South Korea, and most members of the European Union. expenditure on educational institutions, or 1.9 percent of the combined GDP.4
College and graduate enrollment in the U.S. has risen dramatically over the past couple of years, from 19 million in 2008 to 22 million in 2010.5 Accompanying the rise of college enrollment is a massive increase in student debt. Student debt has risen faster than inflation. While the rate of inflation rose 115 percent from 1985-2011, the college education inflate rate rose 498 percent in the same period.6 Since many students and parents can no longer cover the cost of college, they turn to the private companies and/or the federal government for subsidized loans.
While many in the U.S. view college loans as a domestic issue, it is an issue that relates to many aspects of globalization including international finance, global education, and economic development. Countries around the world are struggling to subsidize higher education despite tough fiscal constraints. While most countries do not want to replicate the U.S. student loan debt crisis, many are examining student loan schemes to ensure more students get a college education. This news analysis will compare and contrast the student loan crisis in the United States, the budding crisis in the United Kingdom, and the basic education financing challenge in developing countries.
U.S. Student Loan Crisis
Approximately 7.4 million Americans owe money on to the federal government for student loans. This is not just a problem facing recent college graduates, but includes senior citizens as well. More than two million adults 60 years old or older owe money on their student loans.7 One of the reason why so many are affected is that there is no U.S. statute of limitations on student loans. These loans cannot be discharged during bankruptcy.
In the book The Student Loan Scan: The Most Oppressive Debt in U.S. History – and How We Can Fight Back, Alan Collinge outlines how major corporate profits and lenders making millions off defaulted loans, due to fees and penalties. The Higher Education Act was revised numerous times to give further support to student loan companies, taking away additional consumer protections, such as statutes of limitation, refinancing rights, and truth in lending requirements. Some of these protections were recently instituted for federal loans. Still though, the government can take the borrower’s wages, tax returns, social security and disability income, and terminate public employment.8
Others believe the crisis began in 1992 when the government started offering Federal Stafford loans to students without parent income restrictions. The government provided millions of dollars of aid to students and allowed them to accumulate massive debts. Some claim that this led to the huge increases in the cost of a college education.9 This is hard to prove.
The government started a direct lending program in 1993 because it was cheaper than guaranteeing loans by private providers. Direct lending declined because guaranteed programs were more profitable to schools, with financial aid officials getting kick-backs from private lenders. Many colleges switched back to direct government lending in 2007 and 2008 because of the financial crises. Many private lenders left the student loan business.10
In 2009, the U.S. Department of Education cut interest rates from six percent to 3.4 percent, allowed borrowers to pay 15 percent of their incomes to loans (rather than a fixed amount), and pledged to forgive loans after 25 years. In 2010, Congress passed the Affordable Care Act, converting all federally guaranteed student loans to direct loans administered by the government. Prior to the Act, 65 percent of federal government backed loans originated from the private sector.11
In 2011, Obama further reduced the percent of borrower’s income to be spent on student loans from 15 percent to ten percent and reduced the period of forgiveness from 25 years to 20 years. Additionally, students who had taken out multiple loans were given permission to consolidate their loans into one loan with lower interest rates. Some of these provisions though will expire and Congress will need to renew them.12 Both Democrat and Republican members of Congress support low student many of these provisions, but do not agree on how to pay for them.
Student Loans and the United Kingdom
While the U.S. seems to be struggling with how to keep federal interest rates low for students, the price of college education is not currently under debate. In the United Kingdom, higher education was free until 1998, cost 3000 pounds in 2006, and has since increased at the pace of inflation.13 As the government shifts more of the burden to students, the issue of student loan debt will become central.
While taxpayer support is being removed from England’s universities, they no longer face the same enrollment caps. Universities can enroll as many high performing students as they want. Universities that enroll lower achieving students will face a reduction in their enrollment cap unless they charge less than 7500 pounds. The number of available university spots is a major issue because many students do not get accepted in any English university. Last year 130,000 students were not accepted.14 Clearly England has learned from U.S. mistakes of subsidizing expensive, for -profit educational institutions that enroll low-performing students.
Some of England’s students may leave school with as much as $64,200 in debt, compared to the average $23,300 initial debt facing American students. Unlike their American counterparts, English students will only the debt if they make at least 21,000 pounds a year. The borrowers pay nine percent of their earnings over 21,000 pounds and their debt is forgiven after 30 years. Some fear the new program will cost more than the old subsides if the loans are not repaid. Many governments across Europe are watching the British experiment, as free or highly subsidized education is common across the continent.15
In draft World Bank report,16 D. Bruce Johnstone and Pamela Marcucci outlined various models that developing countries can adopt to create effective state student loan systems. There are three interrelated problems associated with student loans schemes in low and middle income countries. The first problem is inadequate design. The low interest rates are not capable of yielding sufficient repayment streams. The second problem is inadequate execution and/or collection. Default rates are higher than they need to be and the legal and regulatory framework do not support adequate collection.
The third problem is the inability to tap private markets. This is problematic because it forces the loans to come from repayments of past lending and appropriations. This amount is usually insufficient to cover the administration and collection costs in addition to the defaulted loans. Thus, the subsidization of loans has to compete with other budgetary priorities, which has resulted in fewer and smaller government loans.
While strictly private loans are available throughout the developing and developed world, those loans are often only given to the most credit-worthy students, such as advanced professional students in medicine, law and business, or to students with parents who can afford the loans. Loans given to the general student body are usually dependent on the government. So private loans are helpful but do not reach the governments’ main goals of increasing educational access for the largest number of students.
Johnstone and Marcucci recommend improving the design by establishing co-signatory requirements, decreasing the number of student borrowers at high risk of non-completion, reducing the maximum indebtedness allowed, and easing bankruptcy laws for defaulters. These design elements are found in loan schemes around the world. Japan, Germany, and Sweden among others only lend to students in selective universities that are likely to repay loans. Most countries have a maximum indebtedness rules. While the U.S. has strict bankruptcy laws, other countries are often much less stringent.
To the tap private markets, Johnstone and Marcucci recommend reframing student loans as assets, rather than expenditures. All loans have an asset value that can be sold, borrowed upon, or securitized using private capital markets. Private capital markets are likely to get involved if the loans have a high asset value. Johnstone and Marcucci highlight eight strategic to enhance the loan’s asset value:
1) Offer minimally subsidized rate of interest on student lending
2) Use good lender practices, such as professionalizing loan servicing and collecting and establishing appropriate repayment periods, to lessen defaults, enhance recovery and control administrative costs
3) Require governments to cover the risk, as direct lenders, implicit lenders, and guarantors
4) Require co-signatories to cover the risk, which can include employers
5) Create a loan reserve that has a shared risk among many parties private and public, which can include philanthropies, donor agencies, and private higher education institutions
6) Pay the loan originator an upfront fee to cover the risks
7) Charge a premium interest rate that will cover part of the risk
8) Risk rate or lend only to creditworthy borrowers.
Middle and high income countries around the world already employ a mix of these strategies. To pass an effective student loan program, all countries will need to address politics as well.
Where do we go from here?
Johnstone and Marcucci recognize that politics plays an extremely important role in federal student loans schemes and that is why they tried to offer low-income and middle-income countries solutions that do not tie student loan funding to the government budget because it often will not hold its own against competing priorities. The issue of competing priorities does not seem to enter into the United Kingdom student loan debate as the government is trying to shift the burden to students and are instead looking at ways to make it more palatable. It will take time to see if that approach works.
In the United States, both Republicans and Democrats want to make student loans more accessible to more people, the problem really comes down to politics. How will the government subsidize the low interest rates? That political battle will probably be as brutal as any other legislative issue over the past couple of years. Hopefully students are not the ones to suffer, again.
1 Leonard, Andrew. “The student loan crisis everyone saw coming.” Salon.com. April 6, 2012.
2 Luhby, Tammy. “There is no student loan ‘crisis.’” CNN. March 30, 2012.
3 Wessel, David and Bachero, Stephanie. “Education Slowdown Threatens U.S.” The Wall Street Journal. April 26, 2011.
4 “What Proportion of National Wealth Is Spent on Education?” Education at a Glance 2011: OECDA group of the world’s most advanced and wealthiest economies that is both a forum for and an active participant in debates about international economic policies. It was established in 1961 and now has 34 members, including the United States, Canada, Mexico, Japan, South Korea, and most members of the European Union. Indicators. OECDA group of the world’s most advanced and wealthiest economies that is both a forum for and an active participant in debates about international economic policies. It was established in 1961 and now has 34 members, including the United States, Canada, Mexico, Japan, South Korea, and most members of the European Union.. 2011.
5 Luhby, Tammy. “There is no student loan ‘crisis.’” CNN. March 30, 2012.
6 Wadsworth, Gordon. “Skyrocketing College Costs.” October 19, 2011.
7 Staley, Oliver. “England Student Debt Unprecedented as Government Shifts Funding.” Bloomberg. April 22, 2012.
8 Collinge, Alan. The Student Loan Scan: The Most Oppressive Debt in U.S. History – and How We Can Fight Back. February 1, 2009.
9 Wadsworth, Gordon. “Skyrocketing College Costs.” October 19, 2011.
10 “Federal Student Loan Programs – History.” New America Foundation. March 28, 2012.
11 Leonard, Andrew. “The student loan crisis everyone saw coming.” Salon.com. April 6, 2012.
13 Staley, Oliver. “England Student Debt Unprecedented as Government Shifts Funding.” Bloomberg. April 22, 2012.
16 Johnstone, D. Bruce and Marcucci, Pamela. “Making Student Loans Work in Low- and Middle-Income Countries: Enhancing Asset Values and Tapping Private Capital.” February 2010.