The American student debt crisis: the next financial time bomb?

Staggering levels of student debt are strangling the US economic recovery

David Coates
David Coates

In an earlier SPERI comment, Johnna Montgomerie wrote persuasively of household debt being the silent dimension of the financial crisis afflicting both the British and the American economies, and treated that debt as the most telling consequence of the broken Anglo-liberal growth model. She is undoubtedly correct in writing in that manner. What I want to add here is simply more information on one dimension of the household suffering to which she quite properly drew attention – a dimension which is currently more acute in the United States than it is in the United Kingdom, but one which may come to be a significant feature of the UK future unless preventive action is taken now. That extra dimension is the scale of student debt in the United States.

American students pay for college, and the price is going up. Median wages are currently broadly stuck – just 16% higher in real terms than they were in 1980, at the end of more than three decades in which the cost of going to college rose by at least 250%. The average cost of tuition and board at a public university in the United States in the mid-60s was US$6,592 (in 2011 dollars) and at a private university was US$13,233. The equivalent figures today are US$13,233 for public universities and US$31,395 for private ones. With the median family income now just US$52,000 – and lower in 2012 than in 2009 – the problem for families with college-age children is clear. Family income alone will not cover the cost. Ever more parents, or students, therefore have to borrow to make up the difference.

The biggest driver of rising college costs right now in the United States is not internal to higher education, even though American colleges carry athletic budgets in ways that British universities do not, and so have been vulnerable lately to a market-driven increase in the compensation packages of their football and basketball coaches (and their presidents). The main driver of rising tuition costs is external: falling financial support from state and local authorities. Austerity politics at the state level in the United States has reduced public funding/student by almost a third since 2001, with the bulk of that fall coming after 2008 and so occurring at the very time when struggling university endowments were also eroding the amount of grant support universities could offer their incoming students. Recession-induced unemployment left more and more parents unable to subsidise the higher education of their children at the very moment when the tuition and board associated with that education was losing more and more public funding. The result has been tuition hikes paid for by increased student debt.

Students in America can borrow from the federal government and from private lenders. They do both, paying higher interest rates to private lenders, but getting public loans only on terms from which they cannot subsequently escape by declaring bankruptcy. Federal loans turn American students into some modern version of an indentured servant. Right now, the total volume of student debt exceeds US$1 trillion: US$864 billion from federal funds and US$150 billion from private ones.

That total is bigger than total credit-card debt in the United States, and it is the only form of private debt that actually went up during the Great Recession. Two thirds of all American students leaving college with a bachelor’s degree currently also leave with an average debt of more than US$25,000, and one in ten leave with a debt in excess of US$54,000. A debt, that is, in excess of the median wage. Thirty per cent actually leave with debt but without a degree; and in all categories of students rates of default are high and rising. Even those paying off their student debts in full take on average almost two decades to do so.

Student debt is now a crippling burden on more and more American students. It is slowing their access to home ownership, to major purchases and to the starting of families. It is also making its own direct contribution to the slow recovery of output and job creation in the American economy. And, as usual in America, the students worst affected are those in minority populations, particularly those from African-American and Hispanic backgrounds. In 2012 the number of students registered in American colleges actually fell by half-a-million – the first fall since 2006 – as the prospect of high levels of debt and poor employment possibilities kicked in as a serious deterrent to enrolment.  And among those who did enrol, the hunt is on for cheaper colleges, more part-time work alongside study, and grant support from more and more private sources.

The United States is currently trapped in a cycle of low economic growth, low wages, low revenues and low state-support for higher education on the one side, and rising tuition costs, greater student debt and restricted access to high quality university education on the other. This is a crazy way to run a higher education system, an economy and a society. It is certainly not a model that the UK should in any way try to emulate.

A fuller version of this comment, addressed primarily to an American audience and complete with full citations, is available at