Student Debt Crisis: Administrative Costs Grow Twice as Fast

A new study suggests that the student debt crisis was caused by college administrative costs growing twice as fast as other college expenses.

Leftists scream that big industry charges high prices, engages in lots of featherbedding, and manipulates the political system for handouts. But they have been mum about skyrocketing college bureaucratic costs.

The U.S. government first began trying to encourage more Americans to attend college by offering partially guaranteed private bank loans under the National Defense Education Act of 1958. But commercial banks continued to bear underwriting risk from the loans they made on a first-dollar basis. Over the next 25 years, the cost of college tuition rose at about the same rate as the cost of inflation.

But newly-elected President Bill Clinton, as part of his first budget agreement with Congress, passed the Omnibus Reconciliation Act of 1993. The legislation gave the U.S. Secretary of Education, under the “Federal Direct Student Loan Program,” the power to require colleges to make sure that at least 60 percent of all new student loans were made directly with the United States government. The law remained silent as to the maximum percentage of student loans that could be made directly by the federal government.

With Clinton eliminating all underwriting requirements that made sure student borrowers or their parents had a high probability of being able to repay the loans, the program exploded. Colleges realized they could raise tuition and increase enrollment knowing the U.S. taxpayer was now 100 percent responsible for losses on loans made to 18-year old students, regardless of their ability to repay.

With inflation growing by 43 percent over the next 25 years, the cost of college tuition and fees increased from $6,100 to $12,559, or 106 percent.

Skyrocketing tuition, stagnant incomes and the growth in college attendance explain why about 70 percent of students graduating from college took on student loans and about 40 million Americans are still carrying some student debt.

Despite all other forms of consumer credit shrinking since 2006, due to the residual effects of the Great Recession, student loan debt has tripled from $481 billion to $1.37 trillion. The total of U.S. student loans is currently growing at $2,726.03 per second.

According to the Foundation for Economic Education (FEE) this explosion in student debt did not primarily go to funding college instruction and research, which only accounted for about 38 percent of the cost growth. About 62 percent of the rising cost of a college education went to paying for college administrative costs.

The Clinton administration’s expansion of federal financial aid drove tuition costs up dramatically. The loan program did expand the number of students attending college, but it was administrators themselves who received the greatest direct financial benefit, the study suggests.

FEE calculates that the increased access to financial aid from direct federal loans, which also drove up tuition costs, will dramatically drive up default rates. They forecast that the current default rate should be about 17 percent, rising to 32 percent over time.

Although the Obama administration “officially” claims the national student loan default rate fell from 13.7 percent to 11.8 percent last year, Breitbart News reported in April that the St. Louis Federal Reserve determined that the student loan delinquency rate was 27 percent.

The Fed determined that the Obama Administration used a political calculation for the default rate that included all student loans outstanding. But 45 percent of student loans are not in repayment, along with a substantial number of non-paying loans that have negotiated a “forbearance.”