Photo Credit: Alamy Stock Photo
Education has long been considered the path to professional and financial success. It’s true that higher levels of education correspond with lower unemployment and higher earnings. But, a combination of sharp tuition increases and comparatively slow wage growth has created an environment in which many U.S. college graduates struggle to pay off their debt. As the 2020 presidential election approaches, whether or not to make public colleges and universities tuition-free has become a hot topic in the Democratic primaries.
According to data from the New York Fed, student loan debt is at a record $1.48 trillion, making it the second largest consumer debt category behind mortgages. Between 2005 and 2018, median annual earnings for full-time workers over 25 with at least a bachelor’s degree increased by approximately 31 percent. During the same time period, total national student loan debt and the average debt per graduate both increased by more than 270 percent. For these full-time bachelor’s degree holders over 25, student loan debt as a percentage of annual earnings stands at nearly 30 percent. Across all bachelor’s degree holders over 18 (including both full-time and part-time workers), the number is 37 percent.
Perhaps more concerning is that student loans have the highest delinquency rate of any loan category—more than double that for auto loans. The percentage of student loan debt in serious delinquency (90+ days late) skyrocketed in 2012, but fortunately has remained fairly flat since then. As of Q2 2019, 10.83 percent of student loan balances were 90+ days delinquent.
According to research from the St. Louis Fed, student loan delinquencies increased during the Great Recession because of a weak labor market and increased tuition, especially at private, for-profit colleges. But private colleges aren’t the only institutions contributing to the student debt crisis. Student loan delinquencies over the past 25 years have corresponded with decreases in state and local support for higher education and the increased reliance on tuition to fund operations.
Historically, public universities have been funded through a combination of tuition revenue (paid for by students and their families) and state and local support sources known as “educational appropriations” (paid for by taxes, lottery revenue, mineral and resource extraction revenue, and state-funded endowments). Research conducted for the State Higher Education Finance FY18 report released by the State Higher Education Executive Officers Association (SHEEO) found that educational appropriations per full-time enrollment (FTE) still have not fully recovered from pre-recession levels.
At the state level, there is a statistically significant negative relationship between public higher education funding and student loan debt for graduates living in the state (note: student loan debt per graduate includes all college graduates living in a state, whether or not they attended college in that state). In states with lower levels of public support for higher education, the cost burden is shifted to students and their families who must incur more debt to pay for their education. Ballooning levels of student debt and delinquencies have also triggered fears of another financial crisis.
Politicians continue to debate the best path forward. On the far left of the political spectrum, there are proponents of making four-year public colleges and universities tuition-free by imposing various taxes on wealthy Americans or businesses. But given that public colleges and universities are not run by the federal government, getting individual states onboard with the plan won’t be easy.
More moderate Democrats support tuition-free community colleges and/or making four-year public colleges debt-free for students below certain income thresholds. GOP lawmakers, on the other hand, tend to support measures aimed at helping borrowers stay current on their loans and avoid default. Such mechanisms include lifetime borrowing limits, automatic paycheck deductions (similar to federal payroll taxes), and income-based caps on monthly payments.
While student debt is a nationwide problem, college graduates in some states fare better than others. To find which states have the most and least student debt, researchers at HeyTutor analyzed data from the Federal Reserve Bank of New York Household Debt Statistics report. To gain a more complete picture of college graduates’ financial situation across states, they also analyzed median earnings for all college graduates (full-time and part-time) based on data from the U.S. Census Bureau and public higher education funding statistics from the State Higher Education Executive Officers Association 2018 State Higher Education Finance report. Here’s what they found: