What Caused the Student Loan Debt Problem?

By Mark Tetzlaff, JD, MBA, MAR

Everyone agrees that student loan debt is spiraling out of control. Analysts cite many reasons, but offer few remedies. In my view, the reason for no offers of plausible solutions is that experts have failed to pinpoint the primary cause—Congress passing the Higher Education Amendments of 1992 (HEA-92) and its resultant effects that make burgeoning student loan balances an omnipresent reality for over 40 million student loan debtors and created another ominous macroeconomic 1.3 trillion dollar “bubble” waiting to burst.

Why so? Prior to Congress passing HEA-92, students could borrow up to $23,000 for an undergraduate education, and $57,500 for graduate education under the old Specialized Loan Servicing (SLS) loan program. However, to get loans, a student had to either be creditworthy or get a third party co-signer to secure the loans. Most often, a student’s parent(s) co-signed the loans. That all changed, however, when Congress passed HEA-92.

Most important, HEA-92 tossed aside traditional loan underwriting rules. Specifically, HEA-92 did away with requiring good credit or a third party co-signer. In addition, HEA-92 raised the undergraduate student loan cap to $57,500 to complete a bachelor degree program and raised the graduate student loan cap to $138,500 to finish graduate school under the new Direct Stafford Loan Program (DSLP). Thus, HEA-92 opened Pandora’s Box.

Now, anyone could get a college or graduate degree. No constraints, no complaints! And that is the how the system still works today. Several other key factors flow from Congress’ decision to pass HEA-92 that compounds the student loan debt problem. First, educators quickly realized that HEA-92 gave them a “cash cow.” With HEA-92, educators embraced a profit maximization strategy. The idea was to get as many students under the federal student loan program as possible.

And that is exactly what happened. According to the U.S. Department of Labor, the College Tuition Price Index (CTPI) grew by nearly 80 percent between August 2003 and August 2013). Likewise, the CTPI growth rate more than doubles that of the Consumer Price Index (CPI) for the same period, as the chart below plainly illustrates. Note how text book prices rose—more sticker shock! That is nearly double the growth rate of the Medical Care Price Index (MCPI).

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A Moody’s Analytics study also confirms the Labor Department’s findings that tuition and fees (CPTI) have also more than doubled since 2000. But look closely at how fast the slope of the CPTI (green line) starts to rise exponentially after Congress passed HEA-92 in 1992. It takes off like a rocket. As this data suggests, many colleges and educational institutions, both public and private, maybe fleecing students by raising tuition and other costs artificially in order to maximize student loan income.

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Another cascading effect of HEA-92 causing student loan debt to rise is the growth in demand for both undergraduate and graduate business degrees. Since the late 1960’s and 1970’s, commerce began seeking a more highly skilled workforce. The all-famous “MBA” became the most publicized and sought after degree. By the 1980’s, success became synonymous by having an MBA. So, demand for MBA graduates soared. Recent studies confirm that this trend will likely continue.

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For example, one study found that 191,571 people who graduated from U.S. schools with advanced business degrees represented 25.4% of all the master’s degrees conferred. That compares with 178,062 master’s degrees in education, or 23.6%, of all the advanced degrees. Another study conducted by the Graduate Management Admission Council (GMAC) concludes that “Worldwide, 84% of companies plan to add new MBAs to their workforce, up from 74% in 2014 and 62% five years ago.”

GMAC also noted that demand for MBA’s is greatest among companies in the Northeast, where 96% of employers plan to hire MBA candidates followed by 93% of Midwest companies, and 90% for companies in the South and West. Not only do the majority of companies in the United States plan to hire recent MBA graduates, but also a majority in most regions plans to raise the number of MBA candidate hires in 2015.

Yet another aftershock of MBA growth is the demand for graduate business specialty degrees. After the economic meltdown that occurred in 2008, demand for MBAs shrank. Part of the reason is that the MBA graduate market had become flooded. As one study found, “While MBA programs saw a decline in program demand, Master’s Specialist programs actually saw a 142 program increase overall. The greatest benefactor was finance, which added 32 new programs, giving it a 1.05 percent growth with respect to total programs.”

Not only has growth in demand for all types of business degrees increased markedly, so has demand for all types graduate degrees. According to one report, “The Path Forward: The Future of Graduate Education in the United States,” by 2018, 2.5 million new jobs are estimated to need advanced degrees. Likewise, the Bureau of Labor Statistics estimates that jobs requiring master’s degrees will grow by 18% from 2008 to 2018.

In addition, growth in demand for undergraduate degrees mirrors what has occurred in the graduate degree sphere which adds to the student loan debt burden. One study found that the total number of students enrolled at institutions of higher education increased from under 13 million in 1987 to over 21 million in 2010. Almost 73 percent attend a public college, a broad category that ranges from local two-year community colleges to graduate research institutions.

Approximately 18 percent attend a private non-profit college, a sector that ranges from research universities to small liberal arts colleges and specialized religious institutions. Approximately 9 percent attend a private for-profit institution. Enrollment growth is fastest at for-profit schools, which have increased in size from 200,000 students in the late 1980s to nearly 2 million students today. In sum, higher education is big business!

Why will people continue to pursue college degrees? There is substantial evidence that post-secondary education raises earnings. The median weekly earnings of a full-time, bachelor’s degree holder in 2011 were 64 percent higher than those of a high school graduate ($1,053 compared to $638). The earnings differential grew steadily throughout the 1980s and 1990s. Recent evidence suggests that the earnings differential observed today is higher than it has ever been since 1915, which is also the earliest year for which there are estimates of the college wage gap.

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Moreover, the earnings differential underestimates the economic benefits of higher education since college educated workers are less likely to be unemployed and more likely to have jobs that provide additional non-wage compensation (e.g., paid vacation, employer-provided health insurance). Higher education is also important for intergenerational mobility.

Other important causal factors emanating out from HEA-92 include pyramidal growth in for-profit educational institutions and internet-based degree programs. Given the transient nature of American society and constant changes in labor force requirements, technology has radically changed how learning can be transmitted in more effective and efficient ways. As I noted earlier, HEA-92 is a money-magnet for both public and private educational institutions, be they non-profit or for-profit.

Another factor, for-profit education has grown phenomenally. Enrollment in for-profits has increased nearly six-fold since 1986, a time when the sector only enrolled about 2% of all students. Once an insignificant part of the higher education landscape in the United States, for-profit institutions now command a substantial portion of the market and have established themselves as legitimate and viable participants in the postsecondary education arena.

The growth of for-profits is due to the variety of institutions and offerings the sector provides. Institutions range from small vocational and technical schools that offer hands-on career training to large fully-accredited colleges and universities that offer a traditional classroom experience. Many for-profits offer non-degree programs and technical certificates, however associates, bachelors, and doctoral programs, once reserved primarily for traditional universities, are now offered by institutions within the for-profit sector.

Likewise, growth in internet-based degree and learning programs continues to spiral upwards. One study found that over 6.7 million students were taking at least one online course during the fall 2011 term, an increase of 570,000 students over the previous year. Seventy-seven percent of academic leaders rate the learning outcomes in online education as the same or superior to those in face-to-face. Thirty-two percent of higher education students now take at least one course online. A proportion of chief academic leaders who believe that online learning is critical to their long-term strategy is at a new high of 69.1 percent.

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Is it any wonder why we have a student loan debt problem? Given that 70 percent of all students borrow and will continue to do so, the likelihood that we will remain in deep debt is certain.