Focus on Student-Loan Interest Rates Ignores Larger Issue of Rising College Costs

Elahe Izadi
National Journal

While Congress is focused on reining in interest rates on federal student loans, some policy experts say lawmakers should tackle the broader question of ever-increasing tuition rates.

For decades, tuition rates have been rising faster than the rate of inflation, and now the total debt Americans owe for college education equals nearly $1 trillion, according to the Federal Reserve Bank of New York.

“I feel like we’re chasing our tail a lot because the price goes up, the amount we allow people to borrow goes up, the Pell grants go up, the amount parents are borrowing or putting aside goes up,” said Jim Kessler, senior vice president for policy at the centrist Democratic think tank Third Way. “When do we reach the point where we say, ‘OK, this thing just has to stop?’ ”

Interest rates doubled on July 1 from 3.4 percent to 6.8 percent on subsidized Stafford student loans, which will account for just about 26 percent of all new federal loans in 2013, according to the Congressional Budget Office. Congress is working on an agreement that would reduce that rate this year.

Most students take on a mix of debt to pay for college tuition, and student loans are second only to home mortgages in the amount of consumer debt.

Yet the rise in college tuition, which has increased dramatically over the past 30 years, is not being addressed. In 1980, tuition, room, and board for a full-time undergraduate at a public university averaged $5,939 when adjusted for inflation, according to the National Center for Education Statistics. In 2010, those costs averaged $13,297, an increase of 124 percent in 30 years, the center reports.

While students are paying more, public universities have been getting less from state governments that have been slashing their own budgets. “The cost per student has actually remained relatively flat,” says Jeff Lieberson, vice president of public affairs for the Association of Public and Land-Grant Universities. “For public institutions, the real difference has been a decline in state support.”

The amount of money spent to educate each student has increased an average of 1.2 percent above the rate of inflation over the past decade, according to APLU, much of which is attributable to rising energy and health care costs.

About a decade ago, tuition covered one-third of the cost of educating students at public schools, while state governments covered two-thirds, the association says. With decreased state money, the formula has flipped—meaning students are now responsible for two-thirds of the cost.

An overriding question is whether the initially low-risk debt that students incur for college is worth what they’re getting in the end, said Tucker Warren, managing director of Hamilton Place Strategies.

“When you take a step back and say, ‘What purpose does higher education serve?’ it’s not just to get a degree,” Warren said. “We’re training kids to come out and be productive members of the economy, and they’re not doing that if they’re graduating with a debt burden that doesn’t allow them to do things like a normal consumer.”

Student-loan debt can make it difficult to do things like buy a car or a home, Warren added. A recent paper by his firm argued that by increasing access to student loans, the government has also contributed to enabling higher tuition rates.

College affordability will likely come up later this year, particularly as the Senate Health, Education, Labor, and Pensions Committee takes up reauthorization of the Higher Education Act, due to expire at year-end.