Thoughts On Student Debt

My friend Robert Brokamp, one of the stalwarts at The Motley Fool, called my attention to an interesting Atlantic article published earlier this week: A Mystery Behind the Rise of Student Debt. The mystery is embedded in this set of observations:

"...out-of-pocket spending started to slide during the '90s. Adjusted for inflation, students contributed about $4,000 of their own money a year towards tuition at the start of that decade. By 2000, though, student contributions were down to about $3,000. They roughly stabilized until the recession, at which point they plunged once more. Today, students are paying just $2,125 out of pocket."

The mystery, it seems, is how to explain the 25% decline in real (inflation-adjusted) out-of-pocket funding during the roaring '90s, when real household incomes actually rose, unlike the 21st century (more on household income here).

The Atlantic article comes to no conclusion, and I have nothing definitive to offer in that regard. However, it's useful to consider the out-of-pocket funding in the context of the long-term trend for college tuition and fees. Here is a chart of data from the relevant Consumer Price Index subcomponent reaching back to 1978, the earliest year Uncle Sam provides a breakout for College Tuition and Fees. As an interesting sidebar, I've thrown in the increase in the cost of purchasing a new car as well as the more substantial increase for the broader category of medical care, both of which pale in comparison.

During that decade of the '90s, when real out-of-pocket funding declined 25%, tuition and fees rose 92%, which sounds substantial ... until you compare it to the 1140% across the complete data series. Since the days of my own modest private college expenses (a decade before the timeframe in the chart above) paying for college was sort of like buying a car. But in recent decades, it has become more like buying house, for which the strategy of a minimum down payment is commonplace for first-time buyers.

The annual stair-step rise in college costs is probably the most dramatic visualization of inflation data I routinely produce. The only chart I have that rivals it is my quarterly snapshot of federal loans to students from the Fed Flow of Funds report.

Sadly, the chart above illustrates only about half of student loans outstanding. I don't have a data source for private loans for college expenses, but most estimates I've seen suggest that federal loans only constitute about half the total student indebtedness.