And I owe it all to my Alma Mater

Financial Review

 PUBLISHED: 28 Apr 2012 

Anna Bernasek

It’s graduation time in the United States. On college campuses across the country, students and parents are celebrating the end of four years of university, and the beginning of adulthood.

So after 22 years I’m visiting Ann Arbor, Michigan, this weekend to give a commencement speech at my Alma Mater, the University of Michigan.

Ann Arbor is one of America’s great college towns. The university was founded in 1817 in Detroit and moved to Ann Arbor 20 years later. The central campus grew around a vast lawn known as the “Diag” and the town and campus developed together so that there’s not much distinction between the two.

The university enrolls about 40,000 students and at this time of year Ann Arbor’s restaurants, bars and cafes are happily bursting at the seams.

Not too much has changed on campus over the years. At least, that’s how it appears. Yet for students today there’s an important difference you can’t see. Graduates are leaving Michigan with far more debt than at any other time in history. In the US, student debt isn’t like most consumer debt. Even in bankruptcy it stays with you. There’s no way to get out of it.

When I graduated in 1990, the average debt for graduating college seniors nationwide was about $US10,000 in today’s dollars. By 2010 it hit $US25,250, according to the Project on Student Debt. That means in a little over two decades average debt for college students more than doubled in real terms.

The aggregate figures are alarming. At the end of last month, officials at the Consumer Financial Protection Bureau released a new study that found outstanding student debt surpassed $US1 trillion last year.

The latest student debt figure is much higher than previous estimates. Earlier this year the Federal Reserve Bank of New York estimated outstanding student debt at $US870 billion. The NY Fed also estimated that 15 per cent of Americans, or 37 million people, have outstanding student loans.

Not long ago that included President Barack Obama and his wife, Michelle. This week, turning student debt into a campaign issue, Obama told a crowd of students at the University of North Carolina, Chapel Hill, that he and his wife only paid off their student loans eight years ago. They both completed graduate degrees in law at Harvard University.

Obama has urged Congress to extend legislation on federal student loans that is due to expire in July, affecting more than 7 million students. In 2007, president George W. Bush signed a bill that cut interest rates on federal student loans in half from 6.8 per cent to 3.4 per cent until 2012. Unless Congress extends the law, those rates will revert back to 6.8 per cent.

The $US1 trillion estimate for outstanding student loans raises the prospect of a bubble in student debt. But that misses the mark. At the same time that debt rose, the cost of going to college soared and the benefits from a college degree shrunk. With high youth unemployment for college students and stagnant wages it may be more appropriate to talk about the bubble in higher education costs.

In 1990-91, the annual cost of going to a public university was $US8403 in today’s dollars, according to the National Centre for Education Statistics. That included tuition, room and board. By 2009-10, the yearly cost had risen to $US14, 870.

The cost increase is even worse for private institutions. In 1990-91 a private college cost, on average, $US21,218 a year. By 2009-10 it had risen to $US32,475. Of course, that’s just an average. Tuition, room and board at some private colleges and universities reaches $US60,000.

The most disturbing part of ballooning student loans, though, is that the pay-off isn’t as obvious. It used to be that a college degree pretty much guaranteed a good job. That isn’t the case any more.
Inflation-adjusted hourly wages of college-educated men in their 20s fell 5.2 per cent from 2007 to 2011 and had been falling even before the recession hit, according to the Economic Policy Institute.

College-educated women have experienced a similar decline in earnings, about 4.4 per cent during the recession and 1.6 per cent between 2000 and 2007.

Then there’s the increasing likelihood of no job at all. The unemployment rate for young college graduates is 9.1 per cent, the highest rate in recent history.

For now, there’s no sign that college fees will stop rising. At this rate, I’m guessing that by the time my daughters (ages nine and five) go to college, the cost at top private universities will hit $US100,000 a year.

Many ageing baby boomers can recall a time when college education was free. Before 1970, tuition at the University of California cost exactly zero. Perhaps it’s just a coincidence, but that generation built a cultural and economic dynamo in California that’s the envy of the world.
I wonder what they would have produced with a trillion dollars of student debt hanging over their heads.