In the United States, 43 million borrowers owe $1.3 trillion in student debt, a liability second only to mortgages. The class of 2015 is the most indebted ever, with an average indebted graduate owing over $35,000. In North Carolina, 2014 grads did better but still owe roughly $25,000 on average. The total outstanding debt has quadrupled since 2000 to the trillion-dollar problem we face today.
Why has student debt exploded? According to The Hamilton Project, it’s attributable not only to rising tuition and enrollment but also to a few other possible explanations: The Great Recession increased reliance on student loans, legal changes in bankruptcy laws enabled for-profit colleges to increase enrollment and the socioeconomic demographics of college attendees are shifting. Nevertheless, college sticker price appears sensitive to federal student aid availability.
Whatever the causes for increasing student debt, higher education is critically important for North Carolina, especially the Triangle. The University of North Carolina system statistics show there were approximately 312,000 students attending all North Carolina four-year colleges and universities in 2014. Approximately two-thirds of those students attended one of the 17-campus UNC system schools, and about a third attended private institutions. The UNC system is the largest component of the higher education landscape in North Carolina. UNC-Chapel Hill and NCSU, its largest, most elite and best-endowed campuses, are both in the Research Triangle. Along with Duke, these schools underlie the economic vitality of this region. Student debt is an issue that touches students, families and employers in this area.
One of the downsides of student debt is that it imposes a liquidity crunch on individuals. The liquidity crunch most affects millennials, but older generations are increasingly saddled with a greater share of debt. Student debt hits middle class students particularly hard, with disproportionate effects felt by middle class African-American and Hispanic students. Moreover, it overwhelms lower-income students who attend two-year or for-profit institutions, especially when they don’t earn degrees. A Brookings report shows these nontraditional students to be grossly overrepresented in delinquencies and defaults, with most traditional students managing the debt.
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While nontraditional students experience most of the defaults, largely due to poor labor market outcomes, traditional graduates carry the majority of the debt burden. For many borrowers, the debt overhang creates an opportunity cost that drags on individuals, families and the economy. Mounting evidence shows that student debt impairs and delays major life-cycle decisions. It chills start-up activity and stymies graduate education, adversely affecting small-business growth. It delays marriage and children and affects retirement savings. It even defers parent retirement. Student debt is also adversely affecting home and automotive purchases.
A home is both a stepping stone to the middle class and the largest asset of most Americans. John Burns Real Estate Consulting estimated that student debt pushed home sales down 8 percent in 2014, equivalent to roughly $83 billion in value, or 414,000 homes. Rick Palacios Jr., author of the full report, emphasized these are estimates. These findings nevertheless appear consistent with downward trends in homeownership for younger adults frequently reported in the media. More recently, the National Association of Realtors reported that over half of all homebuyers cited student debt in delaying a home purchase.
All this debt compels some to ask: Is college is still worth it? According to Goldman Sachs, the answer may be no. But we think college is still worth it. U.S. Bureau of Labor Statistics data show that people with bachelor’s degrees or higher earn much more than less-educated Americans. Likewise, U.S. Department of Education data show that college graduates earn on average $1 million more than high school graduates over their lifetimes. A National Bureau of Economic Research working paper suggests that college is worthwhile for both average and marginal students. With respect to North Carolina, UNC system data agree, showing a direct correlation between academic achievement and earning potential for most North Carolinians.
Higher education may be expensive, but it’s necessary for North Carolinians to compete nationally and for Americans to compete globally.
But we lose something by reducing the value proposition of higher education to purely economic terms. There’s surely more to education – and to life – than money. Those who think otherwise may carry a heavier burden than debt.
Timothy R. Ferguson of Chapel Hill is an attorney and president of The Gracchi Institute. Mark R. Kurt of Chapel Hill is an associate professor of economics at Elon University. Their opinions are their own.
A four-part series examining America’s student loan crisis
TODAY: A $1.3 trillion headwind: A problem in North Carolina and beyond
Part 2: Evaluating policy proposals: Some unintended consequences
Part 3: Existing debt: Turning a liability into an asset
Part 4: Reducing future debt: Increasing transparency, preventing abuse