Why Does the Average Student Loan Debt Keep Going Up?

average student loan debt

The average student loan debt keeps going up, with 2016 graduates owing a record average of $37,172 when they walk across the stage.

So why does the average student loan debt keep rising? Unfortunately, it’s the result of many factors, most of which are outside of students’ control.

Reasons for growing average student loan debt

Here’s what you need to know about why the average student loan debt is higher each year – and how to avoid graduating with a huge debt.

Rising cost of tuition

The cost of tuition at all colleges – include public, private, and community colleges – is rising faster than the rate of inflation.

According to the College Board, which tracks trends in college pricing, the average in-state college student at a public university had to pay $9,410 for tuition in the 2015-2016 school year, compared to $4,400 in 1995. The total sticker price for such a student living on campus, including room, board, books, travel, and other related fees and expenses, rose to an average of $19,550 from $10,550 in 1995.

For students at private universities, the total cost of a year of study on campus rose to $43,920, up from $27,200 per year back in 1995.

While community colleges remain the least expensive option, their costs are also rising. According to the College Board’s research, the average full-time community college student who lived at home paid $3,440 in annual tuition and fees for this school year, whereas 20 years ago it cost $2,080.

It should be clear that more expensive education equals higher student debt – that’s a pretty basic correlation. But what is contributing to the rising cost of education? That’s where things get a little murky.

Why higher education costs keep going up

If you listen to the sound bites on news programs decrying the student loan crisis, you might get the impression that student loans themselves are to blame for the increases in tuition.

A theory known as the “Bennett hypothesis” suggests that offering more federal student aid leads to an increase in the price of college. According to this theory, making college more affordable to more students creates more demand for education, which leads to an increase in education costs.

Universities are also often derided for allowing bloated budgets to impact students. With colleges spending huge amounts on administrative salaries, sports programs, and unnecessary amenities, the costs must be made up for by increased tuition.

It turns out neither of these theories is true. According to research from multiple government studies, there is no evidence of a connection between increased federal aid and rising tuition. Also, though large budget items at universities may generate a great deal of attention, they are responsible for a relatively small portion of tuition increases at their schools.

Ultimately, the real culprit for the continuing increase in tuition costs is a reduction in state spending for education. This has been especially stark since the 2007-2008 recession, after which point many states had to cut funding for higher education in order to balance their budgets.

According to the Center on Budget and Policy Priorities, 47 states were spending less per student for the 2014-2015 school year than they were for the 2007-2008 school year. The average state is spending 20 percent less – and both public and private universities (whose subsidies have been reduced) feel that pinch.

Credentialism and inelastic demand

It might appear that there is a simple solution to the problem of rising college costs: just don’t go.

In fact, this is often the answer touted by pundits and your know-it-all Uncle Jimmy. But there is a big problem with simply bowing out of college costs in that way: a college degree offers enormous financial benefits.

The New York Times reported in 2014 that “Americans with four-year college degrees made 98 percent more an hour on average in 2013 than people without a degree. That’s up from 89 percent five years earlier, 85 percent a decade earlier and 64 percent in the early 1980s.”

Of course, the improved financial prospects for a college graduate can become something of a Catch-22. Not only do you earn more by getting your degree, but in many cases, you can’t even get an entry-level or lower paying job without one.

This is known as “credentialism.” If you try to take Uncle Jimmy’s advice to get straight to work rather than get your degree first, you might find that you can’t get even get that entry-level job without a degree.

This creates a situation that economists call “inelastic demand.” That term refers to goods or services that people will buy no matter how expensive they get because of how valued they are. If graduating high school students feel that they must have an education in order to get ahead, they will be willing to pay a premium (to the tune of $37,000 in student loans) in order to get it.

Avoid becoming a student loan statistic

It’s not possible for students to fix a state’s budgeting issues or reduce credentialism. However, every student can and should learn about the federal student loan and financial aid options in order to avoid graduating with a huge debt burden.

According to a 2012 study by the Consumer Financial Protection Bureau and the U.S. Department of Education, many student loan borrowers who took on private student loans, “did not exhaust their federal Stafford Loan limits before turning to the private loan product. Some borrowers reported that they did not know they had fewer options when repaying their private student loans than they did.”

Federal student loans offer more flexible repayment options than private loans. Taking on private loans before exhausting your federal loan limits can end up costing you.

Additionally, many students don’t know about all the grant options available to them through the federal government and their schools. Qualifying for grant money allows you to pay for school without any obligation to pay it back.

Ultimately, the way to avoid the growing average student loan debt that plagues graduates is to understand all of the costs of earning a degree, from which university you choose to what types of aid and loans you take on.

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Published in Federal Student Loans, Private Student Loans, Student Loan Economics