When student debt blows out

The next time a vice-chancellor explains the need for higher student fees to fund their education consider what is occurring in the US, where student debt is through the roof. Yes I know the systems are different, yes I know the established universities there blame everything on for-profit institutions, yes I know a quality education costs.

But the American experience offers salutary examples of what occurs when universities can safely jack up their fees because government carries the risk of default. According to Federal Reserve of New York research reported in the Wall Street Journal, there is US$550 billion in understanding student loans. Sure this is a drop in the US ocean of insolvency, total household debt is $11.42 trillion. But while general debt is down outstanding student loans are on the increase, up 25 per cent over three years.

This is obviously not all due to ever-inflated student fees. The Common Rom suspects many Americans are sitting out the slump by studying for an employment related degrees. But as government funding declines the cost of college individuals wear is increasing and seems certain to continue until the market can bear it no more.

According to one finance company that wants to securitise student loans (and why does this idea seem frighteningly familiar) there was a $133bn shortfall between the cost of higher education and what the taxpayer plus students and parents could fund in 2010.

As it is, US education is much more expensive than its famously wasteful health system. A 2010 paper by Justin la Mort found that between 1982 and 2006 average family income increased by 147 per cent while the cost of the health care system rose by 251 per cent. In contrast, college tuition and fees were up 439 per cent, “In 1983 a student could work full-time during the summer and pay two-thirds of their annual college costs. In today’s climate, however, it would take a year working minimum wage if the student didn’t incur any other expenses. Students are left with little choice but to take a loan or forgo college,” he writes.

So what’s to be done? For graduates carrying big debt the answer is obvious, encourage the best and the brightest by writing off loans. According to Jesse Rothstein and Cecilia Rouse from the National Bureau of Economic Research the best and the brightest will take public service jobs if they are not burdened by debt.

Given that all Washington’s revenues will be spent on defence, health and welfare by the end of the decade without reform, debt forgiveness is not going to happen – and the American undergraduate will stagger on, at least until somebody comes up with a quality low-cost university alternative.

But what if anything does this mean for us, or come to that the Brits, where fees will shortly triple?

Who knows? With apologies to anybody whose work the Common Room is too ignorant to be aware of, nothing much appears to have been done on the iimpact of student debt on what people do with their lives. According to an ABS 2009 report the media student loan debt was $9000 in 2005-2006, (granted this is now ancient information) and a report last year by Claire Houssard, Anne Sastro and Suzana Hardy concluded that more work was needed to determine the impact of HECS debt on socioeconomic inequality.

But the US experience demonstrates what can happen.