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

The liberal arts major with $100,000 in debt is rare. This is where the real crisis is happening.

Brian Stoffel
Brian Stoffel
Jul 20, 2014 at 11:15AM
Consumer Goods

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 (NASDAQOTH:ESINQ)DeVry (NYSE:ATGE) 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.