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College Affordability Down, Debt Up

As states have begun to reinvest in public higher education, tuition hikes in 2014-15 have been much smaller than in recent years, as we describe in our new paper.  Nevertheless, tuition is up substantially since the recession, and students are increasingly using debt to pay the bill.

Published tuition — the “sticker price” — at public four-year institutions rose in 34 states over the past year, but only modestly.  But since the 2007-08 school year, average annual published tuition has risen by $2,068 nationally, or 29 percent, above the rate of inflation.

Meanwhile, federal financial aid also has risen.  The federal Pell Grant program — the nation’s primary student grant aid program — more than doubled the aid it distributed between the 2007-08 and 2013-14 school years, even after adjusting for inflation. (Whether these gains will be sustained is in question; the recently approved budget agreement threatens deep cuts to education funding, including Pell Grants.)

The increase in federal financial aid has helped many students and families pay for recent tuition hikes, but because grants and tax credits rarely cover the full cost of college attendance, most students — and low-income students in particular — borrow money.  Debt has risen since the start of the recession for college and university students collectively.  By the fourth quarter of 2014, across public, private, and for-profit institutions, students held $1.16 trillion in student debt — eclipsing both car loans and credit card debt. 

The share of students graduating from public universities with debt has risen.  Between the 2007-08 and 2012-13 school years, the share of students graduating from a public four-year institution with debt rose from 55 to 59 percent.  At the same time, the average amount of debt held by the average bachelor’s degree recipient with loans at a public four-year institution grew 16 percent — from $22,000 to $25,600 (in 2013 dollars).

The rise in student debt has important implications for the economy.  While debt is a crucial tool for financing higher education, excessive debt can impose considerable costs on both students and society as a whole, as graduates may put off attending graduate school, buying a home, or saving for retirement.

There’s also growing concern that rising debt levels may be preventing some young adults from starting their own businesses.  Many entrepreneurs rely heavily on personal debt to help launch their small businesses, and student loan debt may make it more difficult to access the credit necessary for launching a startup.  A Federal Reserve Bank of Philadelphia study found that as student loan debt rose, net business formation of the smallest businesses fell.

This research suggests that states should strive to reinvest in their colleges and universities to promote college affordability and quality, which are critical to developing the entrepreneurs and skilled workers needed to compete in today’s global economy.