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College’s newest club: Drowning in Student Debt

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College’s newest club: Drowning in Student Debt

Estella Fucelli

Estella Fucelli

Estella Fucelli

McKenzie Beard

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Morgana Yellen was, at first, hopeful when approaching American University’s Financial Aid Office. However, she left with little to show besides a new membership to a quickly growing club. The club, whose 44.7 million members suffer from student loan debt, is predominately made up of adults under the age of 30. This is as a result of an increase in borrowing to fund education over the last several decades, according to the Federal Reserve.

“They told me I don’t qualify,” said Yellen. She said the university told her that her mother’s retirement savings were the source of her ineligibility. “They’re retirement funds, not for tuition, and if she used them to help me pay for college, she could never retire. She’s 70 now and still working.”

After years of looking at quickly raising tuition prices, mounting student loan debt and the shortfalls of higher education, researchers have concluded that the current method of financing college is not sustainable. That bubble may soon burst. Private colleges like AU are attempting to adapt their financing methods to preserve the institution, but is it too late?

 

Sustaining Privatized Higher Education

With political platforms centered around affordable education, student loan debt, and tuition-free colleges, a conversation about economic reform in higher education has sprung up. Slowly across the country, states are adjusting how students who attend their public colleges pay for schooling.

Across the country, there are more than 400 College Promise Programs reimagining how students can fund their education. These initiatives provide a financial aid award, dictated by factors like grade point average and location, beyond state and federal aid in order to fund students’ higher education, according to an analysis published by the University of Pennsylvania Graduate School of Education. These programs have garnered much attention in recent years from students and private universities that do not supply such bold programs.

Private universities are attempting to stay afloat amidst rising trends of students seeking out alternative methods for financing their educations. According to a study by the consulting firm Kaufman Hall, their current plan is faltering. The study states that 47 percent of financial planning staff at universities in the United States believe that the current tuition-reliant model is not sustainable when paired with rising expenditures.

According to American University’s Assistant Vice President of Budget and Finance Nana An, the school intends to shift the budget to maximize economic efficiency. AU is similar to other colleges that currently operate under an unsustainable model.

“Our reality is that we need to do a better job in fundraising to increase scholarships,” said An. “We need to diversify our revenue, look at [things like] fundraising, etc., and at the same time, we also look at the expenditure side to see whether we could do a better job in terms of managing our resources.”

When asked how the free tuition movement affects the price of AU An said, “as a private institution, something similar to that wouldn’t be viable [here.]”

To make AU more affordable, An said an increase in fundraising and alumni support would build the schools reserve. “By doing so, we won’t have to rely on tuition revenue as much as we currently do,” An said.

An blamed several factors for the university’s high sticker price and inability to provide more aid. She said that AU is a young institution with young alumni, despite its 126-year lifespan, creating a lack of funds flowing back into the school.

An also highlights the diverse and international student body at AU and a change in student demographics.

“We tend to have more students coming from the Midwest instead of the Northwest region,” An said.“[Along with increasing minority students who have more need.”

As for the minority students An speaks of, approximately 86.8 percent of black students took out loans to finance higher education compared to 59.9 percent of white students, says the National Center for Education Statistics. After graduation, the Federal Reserve says that these individuals, specifically black and Hispanic borrowers, are more likely to fall behind and/or default on their loan payments and are less likely to have repaid their loans compared to their white peers.

 

Justifying Debt in the Face of An Impending Economic Burst: Theory Versus Reality

Economists have compared the student debt crisis to the other economic plights of the last several decades in the United States. Financial markets like the dot com boom of the late 90’s along with the housing crisis in 2008 are frequently described as bubbles, created when the pervasiveness of risk overtakes the financial capabilities of buyers. People buy things on credit that they cannot afford to repay solely because they see others doing so, according to the Financial Industry Regulatory Authority.

In the student debt crisis, young college students must decide how much they value their education and weigh their future economic prosperity against it.

“It’s disturbingly similar to what happened to tank the mortgage market,” said Barmak Nassirian, American Association of State Colleges and Universities Director of Federal Relations. In fact, these researchers estimate that the financial bubble is set to pop any minute.

Data produced by the Federal Reserve states that outstanding student debt, at roughly $1.53 trillion, currently exceeds auto loan debt, at $1.1 trillion, and credit card debt, at $977 billion. Close to 20 percent of student loan borrowers owe more than $100,000. Despite these statistics, students continue to take out massive student loans to finance their educations.

Today, one in four Americans owe an average of $37,172 in student loan debt. Many of them, like students at AU, will struggle to repay it.

To rationalize taking out large sums of debt, many students wager their future economic prosperity under the notion that the benefits of an alumni status from a prestigious university will be worth the upfront costs.

“At the end, is a college degree earned from American University what you want? You carry the status as an AU alum for the rest of your life. Are you willing to think about that value proposition for all the years to come? Is it worth it?,” An said.

While students attend elite colleges for an opportunity, for those who have to work, the financial burden prevents these students from taking full advantage of all the opportunities prestigious colleges use to justify their high tuition prices.

When asked how her student loan debt affects her while studying at AU and her involvement on campus, Yellen said, “Outside of school I work 20 plus hours a week, and sometimes I need to take on an extra shift. There are times when I have to pull an all-nighter and then go to the next day of classes. School should be my first priority, but I have to go to work.”

This pressure is something that many students on campus don’t experience, though, for students financing their own educations, a wide variety of factors come into play.

“It would be nice to try to seek out an internship, but I don’t have time. I could’ve tried to pursue one this semester, but I had to take a minimum wage job that isn’t relevant to what I want to do just because I need the money,”  Yellen said. Even if I got [an internship], I would have to take on another paid job as well.”

 

What About When the Bubble Bursts?

Historically, prestigious colleges and universities boast an impressive alumni group and claim to offer their students the best resources to prepare them for the workforce. However, for students like Yellen to reap the benefits of these assets, they are forced to take out tens of thousands of dollars in loans. The Institute for College Access & Success reports that two out of every three graduating seniors reported leaving their universities with outstanding debt in 2017.  

There is no definite way to predict when the student loan bubble will burst, or how the consequences will alter higher education. AU prides itself on molding students into lifelong learners who know the world inside and out. However, the methods required of many students in order to attend the university leaves them with a lifetime of debt.

“I’m not exceptional,” Yellen said. “So, they don’t care that I’m here. They just don’t care.”