Continuing Impacts of the 2008 Financial Crisis on Students and Institutions
Traditionally, affordability in higher education was facilitated through a combination of low tuition, access to financial aid, and state-level subsidies for community colleges and state institutions of higher education. While funding in these areas stagnated over the past 40 years, significant impacts from the 2008 financial crisis and corresponding downstream budget constraints at the state level pushed student debt to an all-time high (Paulson, 2012). Several factors drove the explosion in student debt and cost – all creating a near-perfect storm of factors from which we have yet to recover.
The prime driver over the last ten years was the impacts and fallout of the 2008 financial crisis. 2008 saw a worldwide economic recession driven by banks, real estate, and other financial institutions. The decline in real estate prices and relative ease of securing government-sponsored student loans led to a shift in borrowing from home equity to student loans, including taking additional permitted amounts for living expenses and supplies. The deferral of payments while a student is in a student loan program assisted families and students with cash flow management during the financial crisis. In contrast, the family home was no longer a store of value able to be tapped by home equity lines of credit or cash-out refinancing (Amromin, Eberly & Mondragon, 2016). This trend continues, as housing prices are now just reaching pre-crisis levels, but the deductibility of HELOC interest was removed with the 2016 Tax Cuts and Jobs Act, making student loans more advantageous from a tax and cash flow perspective to students and families.
A second element driving student loan borrowing higher was a decline in state funding for higher education. Faced with declining tax revenue and a need to support additional unemployment and social welfare programs in the face of a severe economic crisis, many states moved to cut budgets in areas not deemed to be essential to respond to the economic emergency (Shen, 2013). This caused state-supported schools to increase tuition in response to decreases in state funding, shifting the cost burden from society through taxation policy to students and their families, resulting in additional student borrowing.
A third driver arising from the 2008 financial crisis was increased demand for college and graduate-level programs. Demand for higher education programs tends to be countercyclical, driven by the unemployed returning to school for retraining or additional training to ride out the economic downturn. This increase in demand in 2008-11 caused colleges and universities to expand and invest in new facilities, programs, and staffing – adding high fixed costs. Exacerbating these issues were the steep declines in investment returns on university endowments and decreases in giving. To meet the increased demand, universities were forced to borrow, creating institutional structural debt. These structural costs continue to this day, even with declining enrollments and permanent demographic changes in student-age populations. New programs, facility costs, faculty, and administrative hires are challenging to reduce once committed. The high fixed cost structure of the traditional higher education institution limits its ability to decrease costs or reduce tuition. As the number of students decreases from 2008-11 levels but costs continue to rise, the burden is spread across fewer students, resulting in tuition increases and additional student loan borrowing. Many structural reforms expected to come out of the financial crisis never materialized (Smith, 2013).
Finally, as noted above, while most debt is dischargeable in bankruptcy proceedings, the 2008 financial crisis wiped a significant amount of debt burden off the balance sheets of families as they used bankruptcy and foreclosure to restructure their finances in the face of unemployment or financial difficulty, this was not available to student loan borrowers. Their loans may have been placed in deferment or income-based repayment. However, this doesn’t eliminate the debt from an insolvent student and may cause the debt to increase as interest continues to accrue faster than the payments pay the loan down. Student loans began to climb as a percentage of outstanding debt in addition to increasing in absolute terms – continuing to be an ever-growing financial albatross around the necks of families faced with stagnant wage growth since the 2008 crisis.
Realistic Student Debt Reform is Necessary
Access to higher education is not only a financial issue but also an equitable one. Income mobility and the ability of students from economically and socially disadvantaged communities to transcend historical and structural limitations are driven by access to higher education (Mitchell et al., 2018).
Taking each of the four drivers mentioned above, real policy options exist to explore to address them. While none of the potential solutions are without drawbacks, conversation and exploration are necessary, and difficult decisions must move from the status quo to a more equitable funding outcome.
As housing prices rebound, the family home becomes a driver of wealth. However, homeownership and access to stored home equity among minorities and economically disadvantaged families are significantly lower than in the middle and upper classes. Home equity should be considered at some level when awarding financial aid and providing access to limited state and institutional resources. Home equity is not considered part of the FAFSA (Pinkster, 2019). This may place two students with significantly different economic abilities to pay in the same category for financial aid – diluting the award for the student with less access to stored wealth. There should be an expectation that home equity, along with imputed costs to access it, will be considered as part of a redistribution of limited financial aid resources to economically disadvantaged students. As Pinkser notes, this approach has downsides, including accuracy measures for home equity and the need to account for maintenance and upkeep. However, the wealth is real and needs to be factored into the allocation of financial aid.
A second reform is the restoration of funding to universities by the states and the expansion of need-based financial aid at the state and federal levels. As the country experiences a ten-year streak of economic growth and increasing wealth, it is time to reduce borrowing and restore funding. This is not the time for tax cuts. Instead, it is a period when institutions should be investing in deferred maintenance, new programs, and state-sponsored rainy day funds and endowments to reduce the impacts of the inevitable next recession. States have been reluctant to increase taxes during the recovery (Shen, 2013), and the Federal government continues to cut taxes. However, this is a poor policy regarding economic, fiscal, and physical conditions. The Federal and state governments should be raising taxes, paying down debt, and addressing deferred spending from the last decade while times are good to buffer against future economic downturns and reduce the need to cut funding as they did in 2008.
A third reform is within the academy itself. Higher education institutions must honestly assess programs, enrollment patterns, institutional mission, and staffing levels. Programs no longer viewed as relevant by students or society need to be staffed appropriately, transitioned, or eliminated. Technology and multi-modal class delivery methods need to complement brick-and-mortar classrooms, allowing for fewer buildings, larger class sizes, and flexibility for students. The administration needs to look in the mirror and eliminate redundancies, overstaffed fiefdoms, and inefficiencies. States must look at opportunities to merge institutions and use shared services models for administration and support functions. While part of the solution lies in increased funding, this increased funding policy will not be supported by the general population unless accompanied by cost reform on campus.
The final reform is to expand the limitations of dischargeability in bankruptcy for student loans and provide means-tested forgiveness and repayment plans that do not negatively amortize. The federal government must fulfill its promise for federal loan forgiveness for students working in public service or the not-for-profit sector on a means-tested basis. This payback to give back will return on investment for communities, particularly those wishing to give back to historically, economically, or socially disadvantaged communities.
The combination of cost-based and need-based funding reforms should reduce students’ inability to meet student loan obligations while addressing the current and long-term needs of the institution and society as a whole. Other reforms include examining enrollment marketing, societal pressures on moving away from school, and limiting student loan borrowing worthy of exploration. However, these additional reforms cannot be successful without a robust system of affordable state-supported institutions. Reform begins with addressing accessibility and affordability, and these four steps will begin that reform journey.
The current financial challenges students and their families face are not insurmountable, but real reform is necessary. The reform needs to be structural, comprehensive, and disruptive to truly impact the student loan crisis. Each of the four elements mentioned above has potential solutions to explore. Policymakers and higher education stakeholders must collaborate to make difficult decisions to ensure continued access to higher education.
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