You can blame student debt for America’s inequality and shrinking middle class

[KC native]

http://qz.com/211061

There is a tendency among elite opinion makers to believe that debt accrued while gaining a college degree is “good debt” that isn’t problematic because, as the thought goes, those with college degrees tend to make enough money to recoup their debt over a lifetime. Student debt is supposedly an equalizer—a way for students to gain access to credit in order to get a degree that will give them an equal chance to enter the middle class and achieve the American Dream. Sadly, like many pundit platitudes, this assertion is grounded in fantasy, not fact.

In fact, this is only true for some students—those who were fairly wealthy in the first place. College is certainly worth the cost, but that at present it is saddling poor and middle-class students with student debt is actually preventing them from participating in the wealth-building processes that previous generations have enjoyed.

The debate over student debt usually focuses on those right out of school, but that masks that a substantial portion of those with student debt struggle mightily to pay off their loans in a timely manner, delaying (sometimes in perpetuity) their entry into the middle class. Research by the US Federal Reserve Bank of New York finds that many borrowers still haven’t paid off their student loans by their 40s and 50s.



For students just out of school, upward of 15% of their federal student loans are in default within three years of students leaving school, and delinquency rates for student loans have continued to rise during and after the recession, even as delinquencies in every other form of loan—including mortgages, home equity loans, credit cards, and auto loans—have declined.

The inability to pay off debt is a really big deal, because these students are more likely to take any job that comes their way to pay off their loans than invest in themselves. Research from Demos finds that if “current borrowing patterns continue, student debt levels will reach $2 trillion sometime around 2022. Another report concludes that, “an average student debt burden for a dual-headed household with bachelors leads to a lifetime wealth loss of nearly $208,000.” Given that wealth inequality has returned to Gilded Era heights, this finding should be disturbing.

The problem is that, rather than being seen as a social investment, college education is increasingly seen as a commodity—something that is accessible for the wealthy, but out of reach for the poor, and increasingly, the middle class. Sure enough, student debt is highly correlated to income level with the wealthiest having the lowest amount of debt as a portion of their income (see table).



Poor and middle class students are much more likely to take on student loans—in fact, nearly 9 in 10 graduates who receive Pell Grants also needed to borrow to finance their degree, compared to 53% of graduates who did not receive Pell Grants. These students will spend more time paying off their debt and less time saving for retirement or other needs, creating a vicious cycle of deepening wealth inequality.

There is a more tenuous, but equally important way in which rising inequality has increased student debt among the poor and middle class – through the political system. Recently, Martin Gilens and Benjamin Page sent the internet alight with their assertion that “economic elites and organized groups representing business interests have substantial independent impacts on U.S. government policy, while average citizens and mass-based interest groups have little or no independent influence.” This finding is corroborated by Larry Bartels, Dorian Warren, Jacob Hacker, Paul Pierson and Kay Lehman Schlozman who have all recorded similar findings.

Although this elite and corporate control of the political system is bad a priori, it has particular importance in the case of education. In their study of the political attitudes of the wealthiest 1%, Larry Bartels, Benjamin Page and Jason Seawright find that the wealthiest 1% have different policy priorities than average voters. For instance, while 78% of the general public agree with the statement, “The federal government should make sure that everyone who wants to go to college can do so,” only 28% of the wealthy agree. Elites are also far less likely to agree that, “The federal government should spend whatever is necessary to ensure that all children have really good public schools they can go to,” by a margin of 35% to 87%. They also believe that cutting deficits is a more important priority than funding education, and believe that education is a lower spending priority than the middle class.

This helps explain why states have slashed spending for education while also cutting taxes—those with the most influence over policy have little to gain from public education, but much to gain from cutting taxes. It also explains why there is very little national attention paid to community colleges, which educate 4 in 10 college students, and who are disproportionately impacted by state budget cuts. Research by Greg Duncan and Richard Murnane shows that wealthy spend far more supplementing their children’s incomes than the poor, which means that state level cuts have a devastating impact on the poor (see chart).



Robert Hiltonsmith and Tamara Draut find that in the aftermath of the Great Recession, 49 states (all but North Dakota) cut spending on higher education and that state spending on higher education hit an all-time low in the wake of the recession (see chart). This, essentially, results in higher tuition. Draut and Hiltonsmith find that, “Nationally, average tuition at 4-year public universities increased by 20% in the four years since 2008 after rising 14% in the four years prior.” Tuition continues to grow as a share of the median income, which means all families but the very rich have to take out large debts to pay for their education. This, in turn, means that recent graduates are paying off loans, rather than building wealth.



College is an important pathway to the middle class and one of the most effective ways to fight inequality. As it becomes increasingly difficult for students to gain an education, it closes gateways to upward mobility. The effect is particularly potent for blacks. A recent study by Bhashkar Mazumder finds that, “blacks have experienced substantially less upward intergenerational mobility and substantially more downward intergenerational mobility than whites.” He finds that this gap shrinks among those with 16 years of schooling.

One simple way to move away from the debt-for-diploma system is for the government to shift from a policy of loans to a policy of grants. There is no reason why college education should primarily be funded by expensive, high interest loans. In the past, Pell Grants helped the poor and middle class attend college, but Pell Grants make up an increasingly low percentage of the cost for college (see chart).



At a bare minimum the government could allow students to refinance their debts at a lower level; most other countries have policies that allow students to pay off debts as a portion of their income and eventually allow the debts to be forgiven. In Britain, students don’t begin paying off their loans until they find stable employment, and then they pay in proportion to their earnings. Australia similarly ties the cost of paying off the loan to the income of the graduate, and loans themselves come with no interest attached. In Denmark, education is considered a right by the people and an investment by the government, and is therefore free. Some students are even offered a stipend by the government to defray costs. Norway and Sweden have similar systems of higher education. The US has attempted to implement loan repayment schemes that allow students to pay in accordance with their income, but the default repayment plan on federal student loans is still an arbitrary 10-year time period—a time when borrowers tend to make less, and when saving for retirement could benefit them the most. But enrollment in these plans have been slow, likely due to the fact that our system is needlessly complex and opaque (to wit, there are upwards of 9 different repayment plans one can choose on student loans).

Education, and especially college education is a pathway to the middle class, and most Americans think it is more important than ever. But as society becomes more unequal, access to debt-free education becomes harder and harder.

[BucEyedPea]

You can blame student debt for America’s inequality and shrinking middle class

You can BLAME the GOVERNMENT for this too. East of financial aid is a gravy train for colleges. Another govt intervention that has pushed the demand curve artificially.

Better to leave that whole higher ed business, as a combination of working ones way through. It separates those who really are driven to get it, is good for them to work for it and leaves less debt.

[Dayze]

I agree BEP.

short of having rich parents, or parents that were fortunate enough to have the $ to stash away for a college education.......kids should recognize they need either a scholarship, or be prepared to work their way through.

If I had kids, I don't think I'd recommend to them taking out any loans. I would let them live at home until they finished. I can't imagine taking out that much money in a loan that isn't a mortgage.

[mr. tegu]

I would like to see loan limits that do not exceed the cost of tuition for what the student is enrolled in. That would be a good step in preventing students from borrowing too much money which they cannot manage. If they need to borrow extra money it should come from a private loan, not the government.

[Nirvana58]

Originally Posted by Dayze

I agree BEP.

short of having rich parents, or parents that were fortunate enough to have the $ to stash away for a college education.......kids should recognize they need either a scholarship, or be prepared to work their way through.

If I had kids, I don't think I'd recommend to them taking out any loans. I would let them live at home until they finished. I can't imagine taking out that much money in a loan that isn't a mortgage.

Good in theory except school is getting so expensive there is no possible way to work your way through by yourself and pay for your school. You have to take out loans unless your family is wealthy. Especially when it comes to Masters or Doctorate level schooling. They advise you not to work while in these programs. Honestly you dont have the time to work with the level of commitment you need to graduate.

[Dayze]

fair point. didn't think about that.

[mr. tegu]

Originally Posted by Nirvana58

Good in theory except school is getting so expensive there is no possible way to work your way through by yourself and pay for your school. You have to take out loans unless your family is wealthy. Especially when it comes to Masters or Doctorate level schooling. They advise you not to work while in these programs. Honestly you dont have the time to work with the level of commitment you need to graduate.

It certainly depends on the field of study whether or not you can work, and if so, how much you can work. But if you are at that level, the return is much more likely to be higher, more immediate, and more attainable, especially if the degree is for a specific skill set. These factors make the loans much more justifiable.

[Nirvana58]

Originally Posted by mr. tegu

It certainly depends on the field of study whether or not you can work, and if so, how much you can work. But if you are at that level, the return is much more likely to be higher, more immediate, and more attainable, especially if the degree is for a specific skill set. These factors make the loans much more justifiable.

This is very true. Some try to work part time jobs but it usually does hurt them on the academic side. Now if that person doesn't have family to take care of them you have to add in the expenses of life and the crippling cost of school. If they get a degree that returns the investment it will be worth it over time but still severly handicaps the have not's in the world when it comes to acquiring education.

[fan4ever]

A majority of these specialty schools (culinary, graphic design, nursing, ie) are predatory as hell. For example, here in Phoenix, we have "Collins College" which is a graphic design/computer animation "school". They tell all these kids they're artistic geniuses, get them to take out enormous loans, crank them out in two years, and for some reason, the government lets them give out "Bachelor's Degree Certificates". One situation I know of, a local kid here got his degree in computer animation, and wanted to go on and further his education at a university...they would not accept a single credit from that college he blew $60,000...he would be coming in as a freshman even after his "Bachelor Degree". Be VERY wary of any of these schools...I don't know how they're not illegal.

[KC native]

The For Profit education industry needs to die in a fire. It is a pure wealth transfer from the government to those "schools".

And there should be some recourse for the government to go after schools, traditional and for profit, for churning out students and have a default rate on loans above a certain threshold.

[Dayze]

wow

[suzzer99]

Originally Posted by Nirvana58

Good in theory except school is getting so expensive there is no possible way to work your way through by yourself and pay for your school. You have to take out loans unless your family is wealthy. Especially when it comes to Masters or Doctorate level schooling. They advise you not to work while in these programs. Honestly you dont have the time to work with the level of commitment you need to graduate.

Stop issuing guaranteed loans for almost any amount and watch tuition magically drop to whatever the max amount is.

[suzzer99]

Originally Posted by KC native

The For Profit education industry needs to die in a fire. It is a pure wealth transfer from the government to those "schools".

And there should be some recourse for the government to go after schools, traditional and for profit, for churning out students and have a default rate on loans above a certain threshold.

It's a wealth transfer from poor and middle class students to those schools, with the government acting as loan shark.

[BucEyedPea]

Originally Posted by Nirvana58

This is very true. Some try to work part time jobs but it usually does hurt them on the academic side. Now if that person doesn't have family to take care of them you have to add in the expenses of life and the crippling cost of school. If they get a degree that returns the investment it will be worth it over time but still severly handicaps the have not's in the world when it comes to acquiring education.

My daughter works 20 hours a week and still maintains at 3.85 GPA but could have been 4.0. It allows her to have a car so she won't give it up for the higher GPA.

Also, if people register for fastweb.com there's all kinds of scholarships for just about every kind of student but it's work to apply. My kid applied to 11 and nailed a big housing scholarship--not from taxpayers but a private foundation. Total $32K. It was a lot of work for her senior year of high school. FW matches scholarships to the student's profile. It's just impossible without some scholarships. So I highly recommend this.

Mine could have got $10k more if she continued to apply for more and participated in a few more essay contests, but got this great online PT job pay a few dollars more than minimum wage and she can do it right from her room too.

[BucEyedPea]

Originally Posted by suzzer99

Stop issuing guaranteed loans for almost any amount and watch tuition magically drop to whatever the max amount is.

WOW! Can't believe you said this. Awesome that you did though!
So true.

[planetdoc]

Originally Posted by suzzer99

Yes they have. The smartest thing a middle-class kid can do now is take two years of community college, then finish their four-year degree...

solid advice, as well as taking AP courses in highschool (college level credit on taxpayer dime).

Originally Posted by suzzer99

Unfortunately kids today are also highly influenced by peer pressure to want to go to the top-rated, IE - most expensive, colleges around.

that may not be a bad thing. Cheapest is not necessarily the best, and neither is the most expensive. One has to look at "value", as perceived by Return on Investment. Going to an Ivy league school many times offers networking opportunities that will get you your foot into a fortune 500 company much faster than a non-ivy league school.

The info that needs to be published is how soon graduates from a degree program at a school are able to get a job, if that job is in their field of study, and the average salary of graduates after X yrs of experience. That info is not readily available.

Originally Posted by BucEyedPea

but got this great online PT job pay a few dollars more than minimum wage and she can do it right from her room too.

cam girl?