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The Real Crisis with U.S. Student Debt No One Is Talking About

A recent study released by the Brookings Institute has reignited public debate about the severity of the student loan crisis in the United States. The study pointed out that the average monthly payment on student loans -- as a percentage of monthly income -- has barely changed since 1992, hovering in the 3.5%-4.5% range throughout.

On the face of it, the Brookings report makes the crisis seem overblown. The report convincingly shows that the archetype of a liberal arts graduate with $100,000 in debt that's waiting tables is far rarer than we're led to believe.

But simply downgrading the situation from "crisis" to "business-as-usual" ignores the group of people that have suffered the most from rising educational loans.

As the New York Times' David Leonhardt wrote: "The vastly bigger problem is the hundreds of thousands of people who emerge from college with a modest amount of debt yet no degree. ... And they are far, far more numerous than bachelor's degree holders with huge debt burdens."

How big of a problem are we talking here?
Leonhardt's reaction spurred me to do some of my own research. Just how big is the debt problem for those who don't graduate?

A fascinating study released by the National Center for Education Statistics (NCES) in April of last year sheds some light on the issue. In it, the authors followed the cohorts of students over the course of six years. The most recent were students who attended college for the first time in the Fall of 2003, and were contacted to collect data in the Spring of 2009.

The study tracked the amount and frequency of Perkins and Stafford loans students used to pay for tuition.

Schools were split into four categories: 2-year public schools (community colleges), 4-year public schools (e.g., The Ohio State University), 4-year private schools (e.g., New York University), and for-profit schools (e.g.,The University of Phoenix).

Where did those students choose to go? Using numbers from the NCES database, the distribution looked pretty close to the infograph below, rounded to the nearest thousand. The graduation rates, as you can see, varied wildly.

Don't forget about debt
As you can see, there's a lot of variation between the cohort of 4-year public and private schools, and those that attend community colleges and for-profit institutions.

A demographic difference inherent in student bodies likely plays a role. For instance, those attending community colleges or for-profits are often times working while pursuing a degree, and taking classes on-line, at night, or on the weekends. For many, the workload may be too much to bear, leading to high non-completion (dropout) rates.

But that alone doesn't tell the whole story.  Remember, we want to know about what happens to students who not only don't graduate, but do so while accumulating debt. Take a look at the results.

The outsized role of for-profit schools
As you can see, a surprising result starts to surface. While for-profit schools initially accounted for just 13% of students, they account for 34% of all students who leave school with no degree and a debt burden. How big of a problem is this?

By taking the average burden of non-completers who have accumulated debt, we get to a figure I refer to as "toxic debt." Though it sounds like a harsh moniker, I use it for three reasons.

First, this debt represents tax payer money spent (through federal loans) for a student who eventually dropped out. Second, it creates a "toxic" burden for the student who has the cost of some college to pay back, but no benefit in a salary bump from a degree. And third, this debt is inescapable for the student, as it cannot be shed even through bankruptcy.

Here's what the overall "Toxic Debt" picture looks like.

Taken as a whole, the picture is not pretty for the for-profit industry. If the whole problem had to be boiled down to two images, these would be them.

How did this happen?
While there are certainly many variables at play here, it's undeniable that some for-profit companies made a lot of money between 2000 and 2010 while racking up toxic debt for both students and tax payers. That's because many of these schools derive more than 80% of their revenue from federal student loans.

It doesn't help that in 2010, the Government Accountability Office sent agents undercover as prospective students to some of the industry's largest players. Here's what they found, with the particularly fraudulent behavior starting at the 1:00 mark. (Warning: it's a 12 minute video)

Who benefited?
From 2003 to 2009, investors in Apollo  (NASDAQ: APOL  ) , ITT Tech  (NYSE: ESI  ) , DeVry  (NYSE: DV  ) and Strayer  (NASDAQ: STRA  ) saw their company's net income increase by 16% to 32% per year!  

As a group, investing in these four companies between January 2003 and December 2009 would have netted you an average return of 214% -- not bad considering the S&P 500 only returned 43% over the same time frame.

The trend toward higher profits accelerated as the Great Recession sank in and many were out of work. A lot of people were naturally inclined to go back to school while work was hard to find. And because many recruitment officers were compensated on a commissions basis (which has now been outlawed), a perfect storm formed.

The CEOs of these companies took home extremely generous pay packages as well. In 2009, for instance, Robert Silberman collected a pay package worth an estimated $41.5 million while at the helm of Strayer.

One year later, according to The Chronicle of Higher Education, ITT's CEO Kevin Modany brought home $7.6 million in compensation, while Apollo's co-CEO's were paid a total of $16.8 million.

And what do we get for this?
With such huge profits, and onerous compensation packages, there's something that's often overlooked: We, as taxpayers, footed the bill for almost all of this. What do we have to show for it?

There are most certainly graduates of these schools who have gone on to contribute to society. But the overall return on our investment has been awful. We've formed a huge class of people who took on a far greater debt load than they could handle, and have nothing to show for it.

Earlier this year, ITT Tech was brought to court for its allegedly misleading recruiting tactics. It's impossible to know if any other schools will be ushered down the same path.

While some might say all of this is old news, it represents a critically important lesson to remember.  When we hear about the student debt crisis in the news, it's not the bachelors-degree-holding individual we should be most worried about. He or she will likely end up just fine.

It's the individual who has late fees and interest-accruing debt racking up with each passing year. Not only is that a terrible situation to be caught in, but it's one that will drag on entire communities, and the economy, for years to come.

Start out on the right foot: solid dividend stocks
One of the keys to avoiding this student-debt fate is to start saving for your child's (or grandchild's) college education now.The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute.

They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Read/Post Comments (10) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 20, 2014, at 2:33 PM, arkbiz wrote:

    Don't forget that many college grads end up in non-degree required jobs. And, what's more, the average American degree is pretty fluffy, irrespective of whether employers pine for the degreed (HR is on par with astrology, after all). American grads only rank 12th of 16 for numeracy.

    Just as people misjudge the nature of student debt, focusing on the anecdotal, they misjudge to utility of degrees, generally.

    Face it. We have a problem in America. Lots of superstition and ignorance, even among the nominally "educated". Many people think the Sun orbits the Earth and at least three quarters don't buy natural selection.

    We have met the enemy...etc.

  • Report this Comment On July 20, 2014, at 2:33 PM, Hal15 wrote:


    I agree the problem with student debt is the non-completion rate not so much the fees and after completion loans. Your interpretation of the data is correct but your sample set is not. You cannot make a simplistic view of student debt while comparing two very different business structures. If you were to accommodate bonds, grants, stipends and federal/State funding we ' give ' to public schools the numbers in this article would skew in the other direction. The number of non-completion student rates and issues such as the costs for a student taking 6 years to complete an Associate degree at a community college [ this is the average completion rate at many schools ( NCES, 2013) ] are where the rising costs are hidden in non-profit education.

    An analysis of this topic must compare the same or identify the differences and your article does not. While I agree with you in the shady practices of some for profit schools in signing up students. I believe if the data were researched and interpreted properly the numbers would be small compared to the non-profit schools white collar crime in bonds the schools offer for work that is not completed, stipends, project double dipping and bad accounting of non-profit school funds. The for profit schools have a different business model which is accountable to their shareholders so you will not find the same business practices. I very much agree with you that we created this mammoth problem in that we have allowed a large system to function with zero accountability. Now the question is how do we go about fixing it? Both the non profit and the for profit fit a specific student demographic need. As your article states, ' most for profit students complete their training to augment their skills while employed' this is a valuable service in that the workers skills set is changing at an exponential speed. Industry needs skilled workers and these employees cannot quit work to go to the traditional school in a classroom on a campus at a leisurely rate. I vote we begin top down. Change the leadership at All of our schools with new expectations and metrics of accountability and eventually the griping we hear from people upset that the party boat is gone will stop. And, if possible, ensure those students without an education are given the opportunity for training to live sustainable, productive and healthy lives. The functioning of our education system like most of our financial sector borders on criminal. And, we all saw how that turned out.

  • Report this Comment On July 20, 2014, at 2:50 PM, bm029444 wrote:

    Great!!! The Government does not want to help students because it is more concern to help illegals rather than young american citizens with heavy debts, having a difficult time to find well paid jobs to help pays off these loans. The Government allocates money to help illegals who don't speak English, get pregnant to have all available benefits and work under the table, not paying taxes.

  • Report this Comment On July 20, 2014, at 5:05 PM, BuyLowBandit wrote:

    The crisis that nobody talks about, but which is talked about ad nauseam.

    Just make sure that if you go to a for profit school, you get a degree in a skill that is in demand, like nursing or electrical engineering.

  • Report this Comment On July 21, 2014, at 6:20 AM, Riggerwo wrote:

    Big Education has taken a page out of Big Pharmas play book....lets just make as much money as fast as possible..and screw the customer and the consequences. They hike up tuition...knowing the idiot "Uncle Sugar" will just make larger loans....and the prospective student gets deeper and deeper into debt...while the CFO / College dean pulls in over a million dollars a year!..College is not for everyone....The so called counselors in these videos need to be fired..and the schools held accountable for these Dodgy practises...The Government needs to get control over the student loan program and stop schools over charging students.

  • Report this Comment On July 21, 2014, at 2:49 PM, KayakerRW wrote:


    Excellent article analyzing the more serious types of student debt.

    Current policies make it too easy for the for-profit schools to tap into billions of federal dollars while not educating students or helping them get a degree that will benefit them and society.

    Too many for-profits are not teaching students. They are enrolling students, getting them to take out expensive federally subsidized loans, and profiting no matter what happens to the students. Many employ more recruiters than teachers. Some spend 3 to 4 times as much on recruiting as on teaching. One school employed 1,700 recruiters but only one career placement counselor.

    Some have no teachers; the classes are entirely “self taught.” Students read an on-line textbook or paper text and complete assignments that are “evaluated” (often not very rigorously).

    One on-line for-profit (Western Governors University) offers a nursing program in which the students have little (if any actual contact with patients or mentors). Would any of us want to be the first patient our nurse performed a procedure on unless there was a veteran mentor observing the first-timer?

    Most of these students build up significant debt, much of it federally subsidized. For example, in 2010, Bridgepoint received 85% of its revenue from federal student aid.

    We need policies that will help students successfully complete legitimate courses of study (whether at a public, private, or for-profit) while making it difficult for schools to receive full payment when too many students have toxic debt levels without completing degree programs.

  • Report this Comment On July 22, 2014, at 9:22 PM, trixr4kids88 wrote:

    $100K in debit is nothing. Graduate students in law, medicine and business have a lot more debt than that.

    Education is a big business in the States, and we as students succumb to idea of investing in our future by becoming more educated. What we ended up doing is risking our future peace of mind to go to school, to fight for jobs that don't pay enough to pay back these loans. I was brainwashed into thinking that college would guarantee you a good job and a graduate degree would serve you even better. What a waste! I hope the younger generations will do better and realize that community colleges, part time programs and careful planning will help you navigate though these sharky waters of student loans. Pay your way by saving and working full time or get a scholarship. BORROW AS LITTLE AS POSSIBLE. Avoid graduate school unless you are a master networker and have connected parents that can help you land a good first job. Otherwise be prepared to own tens of thousands in interest over the life of these ridiculous student loans!

  • Report this Comment On July 22, 2014, at 11:30 PM, an1974 wrote:

    The high student debt is a serious issue. However, it appears to be a problem for the government (who owns a printing press anyway) and the borrower (who will be made bankrupt if loans are not re-paid). That's probably why student debts didn't blow up in GFC.

    If Wall St is not going to be affected, then I'm not going to be too concerned about it (from an investing point of view). It doesn't seem to concern Buffett too.

  • Report this Comment On July 23, 2014, at 12:24 AM, BillFromNY wrote:

    Rigger, you have it exactly right. I went off to a difficult and expensive engineering school in upstate New York in 1969. I had a National Merit Scholarship that paid a lordly sum of $1500 a year, and that was all that was needed to fully cover tuition.

    Twelve years later I went back to the same school full time for a Masters. Costs had risen steeply, but I got a nice government-backed loan at favorable terms; I didn't even have to start paying it back for a year.

    About ten years later my nephew went off to school and the tuition increases had risen beyond belief. Yet once again government backed loans were there to make him, and every other student who had been accepted, able to afford the school.

    At this point I really got it. Why were the colleges raising costs so much. Inflation? Not nearly enough to cover the increases. Higher expenses to the schools to have impressive faculty and build up the physical plant? I'm sure that many universities used a portion of their extra revenues for this purpose, but not enough to justify or explain the size of the increases.

    It was simple. Universities raised tuition and other costs because the government had made maximum loan amounts high enough to pay the bill. When students did not have enough money to pay the ever-increasing costs, the government just raised the loan ceiling again.

    And buttressing all of this fraud on the taxpayers was society's message that every child needed, no, was entitled to a college education.

    What a racket.

  • Report this Comment On July 23, 2014, at 1:38 AM, RxPro wrote:

    yet another reason why we need tax reform so that school can be paid with pre-tax money.

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Brian Stoffel

Brian Stoffel has been a Fool since 2008, and a financial journalist for the Motley Fool since 2010. He tends to follow the investment strategies of Fool-founder David Gardner, looking for the most innovative companies driving positive change for the future.

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