As of June last year, Americans now owe more in student debt than they do in credit card debt. Student borrowers are winning the dangerous debt race as both amounts hurtle toward the $1 trillion marker, student debt rose by over 500% since 1999 (1). To put this in perspective, student debt has increased at nearly double the rate of inflation seen in the housing bubble that caused the recent financial crisis. There are foreboding similarities between real estate and education. Until 2008, it was assumed that both commodities would unfailingly rise in value and that the market was far from saturated. However, the number of unemployed college graduates is rising and a recent report found that two out of five student loan borrowers were delinquent on their payments at some point in the first 5 years of their loan (2). Moreover, unlike credit card or mortgage debt, student debt is not diffusible through bankruptcy, it stays with borrowers for life.
Despite this unstable situation, in August 2011 Congress passed the Budget Control Act that will abolish subsidies from a pillar of education finance—the Federal Direct Stafford loan. Although undergraduates with the loan will continue to receive subsidies, graduate students will start accruing interest while still in school. With the skyrocketing costs of higher education and the increasing time it is taking post-grads to pay off their loans, this amount adds up quickly. For example, a medical student who matriculates in 2012 and receives the unsubsidized Stafford loan for all four years of her schooling will graduate with $5000 more in debt than a medical student who graduated this year, all resulting from interest charges that accrued while she was studying full time. It often takes medical students 10 years or more to repay all their debt, and in that time interest will continue to add up so that she actually pays $10,000 just for the interest on that single, federally-provided loan. In total, $18 billion is being passed off onto graduate students over the next ten years (3) The removal of subsidies is a subtle step but it sends a strong message. If the federal government continues to retract its commitment to financially support higher education, it risks three major effects: exaggerating the student debt crisis, inhibiting diversity in higher education and discouraging the pursuit of non-profit or socially responsible careers.
