When Will The $1 Trillion Student Debt Bubble Burst?

June 6, 2012Personal Financeby David Smith

When Will The $1 Trillion Student Debt Bubble Burst?

Steep rises in the cost of higher education, especially in the US and the UK, have been accompanied by the declining value of degrees, leading some commentators to predict that the student bubble is about to deflate. 

Quebec’s series of spectacular student strikes against rises in tuition fees is the longest and largest civil action in North American history.  

Rises in tuition fees at western universities have stirred protests in many countries, but never before on this scale. Last November, in London, 15,000 British students marched against draconian tuition fees rising to an upper tier of £9,000. But the British protests were tame by comparison with Quebec’s.

David Blacker, a philosophy professor in the School of Education at the University of Delaware, said:

”The Montreal protests are stunning. They are the British protests on steroids. And when the nice mild Canadian government tried to outlaw them, they grew exponentially,”

The Quebec protests were sparked by the Cabinet’s proposal to raise university tuition from $2,168 to $3,793 – still well below the UK price tag – between 2012 and 2017. 

The strike started on February 13 with social sciences students at Université Laval, then a few faculties at the Université du Québec à Montréal. The movement spread rapidly and on March 22, 166,068 students marched. 

Other protest groups, who saw the rises as part of the austerity agenda, joined in and a total of 300,000 people were at the March 22 rally.

The Government tried to suppress the actions by passing Bill 78, an emergency law limiting protest rights. But this, predictably, had the opposite effect and almost 400,000 people marched in Montreal on May 22. As Quebec has a population of just 8 million, the scale was impressive, especially when compared with the 15,000 demonstrators in the UK, a country of 62 million people.

“The Quebec protests give me some optimism for the future. I think there’s a real chance there could be a sea change in attitudes in the generation of 20-year-olds and younger,” said Professor Blacker.

While recognising that a degree is a necessity as good jobs dwindle away, Blacker believes undergraduates have an obligation to try to change the system by becoming as politically engaged as the students in Quebec, or the Occupy movement activists who also expressed their anger about student debt.

“As a parent of two children who will soon both be at university, I think teenagers have no choice but to get a degree even at the cost of a lifetime of debt. In a sense, they are trapped. No soft landing awaits graduates, but without a degree you are thrown into an even more savage world,” he said. 

“But I think part of the price tag of going to university is an imperative towards political activism. Get in the door, but also hit the streets.”

Blacker recognises, however, that the value of a university education is falling at a time when costs are rising, creating a student debt bubble which is analogous to the housing bubble.

“Unemployment is rising in the West all the time, especially for 20-somethings. We’re seeing protests in Greece and Spain, and the London riots in 2011 were a manifestation of the same fears,” said Blacker. “There’s no boom-bust way out because so many jobs have been lost to China, or outsourced overseas. I think unemployment is the big pin headed straight at the student debt bubble.”

In the US, outstanding student debt now totals over US$1 trillion, which is more than the nation’s total credit-card debt. The average is US$25,000, but 10% of graduates owed more than US$54,000 last year. 

The US loans system is punitive when graduates cannot pay, which is increasingly common as good jobs become scarce. In the US, student loans can never be discharged through bankruptcy and about five million graduates are in default on around US$67 billion of student loans.

The US Education Department has hired an army of private debt-collection companies to recoup the money. Working on commissions totalling US$1billion last year, they have provoked a litany of complaints that they are violating federal laws. Debt collectors prompt around 181,000 complaints a year to the Federal Trade Commission, far more than any other industry.

Blacker said: “Often student borrowers take whatever deferments they can get not realising that the interest compounds. So we see horrific compounded interest stories. The private lenders also add huge nuisance fees on for late payments.”

Even the elderly cannot escape student debts. Recent research from the Federal Reserve Bank of New York showed that Americans aged 60, and older, still owe about US$36 billion in student loans. More than 10 per cent of those loans are in default.

“We’re seeing stories of senior citizens having their social security payments garnished to pay off debts. It’s not uncommon for people in their eighties to be harassed by debt collectors,” said Blacker.

And today’s graduates face an even more unenviable situation than previous generations because of the declining value of their degrees. In 2011, fresh college graduates earned an average of US$16.81 an hour, or about US$35,000 a year. That was down 5.4% from 2000, a drop of about US$2,000 a year. Young graduates are earning 5.4 per cent less than in 2000. Meanwhile, official US government statistics show around 8% unemployment, but the real figure is closer to 22%, according to the Shadow Stats website, which takes into account long-term, discouraged workers.

At the same time, the cost of US degrees is rising. Median household income has grown by a factor of 6.5 in the past 40 years, but the cost of attending a US state college has increased by a factor of 15 for in-state students and 24 for out-of-state students. The cost of attending a private college has increased by a factor of more than 13. Ivy League universities charge around US $38,000 per year.  

At some stage, the escalating cost and the diminishing value will cross horns and the bubble will burst, says Blacker. But the bubble, he adds, is not just about money.

“There’s a sense of possibility and hope being extinguished, so it’s even more pernicious than just a financial albatross,” he said. “I compare the situation of today’s students to medieval serfdom. They owe an existential debt which is akin to the way in which serfs were slotted into their positions in society and didn’t have much room to manoeuvre. 

Related: Infographic: How A Student’s Debt Affects the Family Unit

“Everyone has always been told to follow your dreams and find what you’re interested in and it will all work out. But that’s no longer so clear. The deflationary part of the bubble can be measured in expectations, not just financially.”

The debt enslavement is to the faceless financial classes.

“The enormous debts get sold on like sub-prime mortgages to different banks. The debt is to a remote, impersonal corporation, so it ends up being a generalised obligation to the financial class,” said Blacker.

Will Student Debt Destroy Society?

The US student debt bubble has been inflating since the 1960s. Most western nations once resisted imposing tuition fees, but that has changed. Of the European countries represented in the top 200 global universities, only Norway still maintains a policy of free higher education for all, although Denmark, Finland and Sweden, refrain from charging domestic students.

The highest tuition fees of all have been introduced by the Conservative party in the UK, where fees tripled to a maximum of £9,000 from 2012. As a result, the average predicted debt on leaving university for UK students has risen from £26,100 for those starting in 2011, to £53,400 for 2012 entrants. For the English, the projected average is £59,100. Welsh and Scottish students get help from their respective devolved governments.

Though the average British debt is far higher than in the US (US$25,000), the UK Government insists that the terms and conditions of British loans are more lenient. Graduates will have to pay back their loans only once they start earning £21,000, and outstanding debt will be written off after 30 years.

But Howard Hotson, a professor of history at Oxford University, said the Government had deliberately avoided setting the terms and conditions into a statute.

“I agreed with Liam Burns, the student union president, when he said – if this is  the right solution, and it’s fair and transparent, why not set the terms and conditions in statute? Why reserve the right to change those at any time in the future? Right now, students are writing blank cheques to the Government. They don’t know what the terms will be in 5-10 years time,” he said.

Hotson said the Government was keeping its options open because it could not predict the future earnings of graduates. The unstable global financial system, as well as climate change, made crystal ball gazing a hazardous affair.

 “The value of the loans depends on the accuracy of the Government’s predictions, but there’s no way of knowing how many loans will be paid off in 30 years time,” he said.

“It’s an enormous speculative gamble and that’s why the Government is maintaining the right to change the terms and conditions. They could increase the interest rate, suspend the rule that you don’t pay after 30 years, lower the threshold at which have to pay, or increase the proportion of your salary. Rather than saving the UK from bankruptcy it could contribute to it unless they have an opt-out clause.

“The Government is also busy selling loans to private financial institutions, like in the US. The Conservatives deny it, but the direction of travel is towards a US system.”

Hotson grew up in the US and knows both university systems intimately. He feels passionately that the slavish British imitation of all things American is a grave error.

“Copying US ideas is a British disease. It’s based on the misguided notion that Britain passed the torch of global dominance to its younger English-speaking country so naturally it must be on the same wavelength. The unreflective assumption that the way the US does things is a minor variation on the British way has never been more apparent than in the race to privatise education,” he said.

Seeing US institutions at the top of the world university rankings has given the impression that the US privatisation of higher education is efficient, but Blacker says standards are generally much higher in the UK.

“The quality varies enormously in the US. British universities have long represented extraordinary value for money because they have fed off public values and academic values, rather than market values. But the Tory Government is now destroying them without empirically testing the assumptions behind their radical reforms,” he said.

Hotson predicted that the huge rises in tuition fees would make British academia the preserve of wealthy elites.

“A career in a university will become highly undesirable in the UK for all but independently wealthy individuals. Few people would have the courage, determination and recklessness to embark on the ruinously expensive pursuit of a vanishingly small chance of getting a tolerable position at one of the remaining decent universities.

“First you would have to go into around £60,000 of debt for your first degree, but then you’d have to fund higher degrees as there’s no provision to pay for them in the UK – unlike in the US, where Ivy League universities will pay bursaries.”

Hotson said the British university system would be set back 150 years to a time when professors came from the socio-economic elite.

“Last year, for the first time in their 800-year history, the Oxford dons delivered an official vote of no-confidence in a serving minister, the Universities Minister David Willetts. The reason is that most postholders at Oxford were not born with a silver spoon in their mouth, but had the good fortune to come into the system at a moment of genuine social mobility,” he said.

“What we will get is an international stateless elite washing around the world wherever the tax breaks are most generous, then sending their kids to wherever the secondary education is best, then off somewhere else where the tertiary education is best. We will be concentrating educational resources in a small number of institutions to serve the needs of a tiny international elite who will also be teaching at those institutions.” 

Marketisation, he argued, would squeeze the heart and soul out of university teaching.

Students are no longer fellow human beings who embarked on the same quest for richer understanding. They are just customers demanding a service for which they have paid money. This destroys the original Greek ideal that learning was an end in itself and a liberal education would develop a man’s understanding of the world,” he said.

“If you radically drive up costs, and make it so that the number one priority of every student is to dig themselves out of a lifetime of debt, all university education becomes vocational.”

Marketisation was magically realigning the universities with the corporate sector, he said. 

“In a post-industrial world, knowledge equals money and corporations exist to make money so they need to control the knowledge-making industry. That means controlling people who are capable of creating knowledge.” 

“But the basis for studying humanities and social sciences in a thriving western democracy is to instil in ordinary citizens the critical capacity to understand what is wrong with the socio-economic system in which they live.

“Who would be most threatened by a penetrating social critique? Elites who profit from the present socio-economic system. They want universities to educate people into being consumers and employees. Who loses when universities lose this capacity to criticise society? Everyone but the 1% who are the elite,” he said.

In the US, the proliferation of right-wing think-tanks such as the American Research Institute, has been a reaction against this traditional liberal function of universities.

“They are privately funded institutions designed to rationalise the interests of the wealthy,” said Hotson. “They are extremely successful in stimulating popular assumptions in the media about politics. There’s a stream of literature about universities being self-perpetuating left-wing oligarchies, when in reality they are subjecting assumptions to penetrating analysis and undermining the verities these right-wing thinktanks are disseminating.”

The tragedy is that the neo-liberal elite have propagated the idea that governments can no longer afford to pay for higher education out of taxation. But both Blacker and Hotson dismiss this as nonsense.

In the US, for example, higher education costs around US$300 billion per year, a sum which is dwarfed by the state bail-outs of the private banks, or US military spending on war. A small rise in taxes on the richest segments of society would cover the costs.  But this contravenes the neo-liberal dogma that cutting back on the state leads to greater efficiencies.

Blacker does see hope in the Quebec demonstrations and urges students in other countries to mimic their actions.

“The debt bubble is leading to disappointments and hardships on a massive scale. A society can stand some disappointments, but when it’s on this scale, you will get social instability such as we are seeing in Greece and Spain.”

Related: The Student Loan Debt Time Bomb

Related: Infographic: Is Higher Education the Next Big Bubble?

Related: Infographic: Is Higher Education the Next Big Bubble? Part Two

The student debt debate could be one of those threads which you pull and the whole neo-liberal garment falls apart. It speaks to existential questions, such as what kind of society do we want? When the system is not working it leads the rising generations who don’t have a stake in the status quo to seek change and renewal. As a parent my optimism is centred on the political activism of the rising generation.” 

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