Have you read the example about an orthodontist with over $1 million in federal student loan debt? The situation seems totally preposterous and unimaginable.

Estimated read time ~ 10 minutes Estimated watch time at 1.5X about 5 minutes 30 seconds.

The gist of the Wall Street Journal article is that an orthodontist borrowed federal student loans to the tune of $600,000 to pay for his education at USC. He’s now repaying that debt under an income-driven repayment plan and his monthly payments don’t keep up with interest. So his loan balance continues to grow every single month and is currently over $1 million. After 25 years of income-driven repayment the loan balance is projected to be over $2 million.

 

A series of problems with funding for higher education contribute to this unimaginable student loan situation. While not common currently, there are 101 borrowers with balances of at least $1 million, if we don’t approach funding higher education and student loan debt in a new way we’re going to see these >$1 million cases more frequently.

 

Before you brush this off as an impossible scenario created solely by the irresponsibility of a few borrowers, here’s a rundown of how this super debt happens.

 

Inelastic Demand

 

Federal student loans are directly correlated with the price of tuition and fees at universities where students can use federal student loans to fund their education. As more funding is available, tuition and fees increase. In other markets an increase in price would presumably lead to a decrease in demand. But that’s not the case with higher education.

 

Despite tuition hikes, students continue to demand education at the same rate. The demand for education is inelastic, not based on price, because students have access to as many student loans as necessary to fund their tuition. Colleges and universities realize this and continue to raise tuition and fees accordingly.

 

Perpetual Tuition Hikes

 

College tuition has increased at a rate well above inflation for the past few decades. In constant 2013 dollars, tuition and fees at a four year public university were $2,147 in 1980 and nearly quadrupled to $8,070 in 2013 (NCES Table 330.10). In 30 years the rise of tuition and fees exceeded the rate of inflation by almost 400%.

 

When parents and students estimate the cost of attending college it’s wise to factor in tuition hikes of at least 5% annually.

 

Reduced State Funding

 

Why are colleges raising tuition and fees at such exorbitant rates? One factor is a reduction in state funding of public universities. Public universities obtain their funding from both federal and state sources. State funding is primarily in the form of grants and other funds that can be used for general appropriations (keeping the lights on, paying staff, new construction, etc) while federal funding is primarily in the form of student loans.

 

In 1980 public universities received the majority of their funding from the state, today the balance has flipped and they now recieve the majority of their funding from federal sources. That means, in order to continue funding general appropriations at the same level, colleges pass the loss of funding on to borrowers. Borrowers have more access to student loans so borrowers are the ones footing the immediate bill for state budget cuts.

 

High Paying, High Cost Professional Degrees

 

This seems like an oxymoron, the best paying careers are contributing to the problem of super debt. But it’s true. Degrees that tend to pay a lot on the back end tend to cost a lot on the front end. The colleges offering these degrees will often assure borrowers that they’ll make “good money” and be able to easily repay their student loan debt after graduation. These fields pay well, but without loan forgiveness no W2 employment pays well enough that a borrower can repay a million dollars in student loan debt.

 

When someone goes to medical school they’re on a long road. First, they have four years of an undergraduate degree to pay for, next they have four years of medical school. Medical school is where it gets expensive, even if you attend a public in-state university you’re looking at a price tag of over $150,000 for tuition and fees plus cost of living on top. After graduation, specialization requires residency and fellowship which can take another five years to complete. If the borrower decides to enter forbearance to avoid struggling to make payments on their student loans while making a resident stipend the interest can get out of hand quickly.

 

High Interest Rates

 

Interest rates are the next major contributor to super debt. Borrowers only have access to a maximum of $23,000 in subsidized federal student loans. That means any loans over that amount are in the form of unsubsidized loans which start accruing interest immediately. Interest rates for unsubsidzed loans are typically between 6-7%.

 

That means while students are still taking out student loans they’re immediately accruing thousands of dollars of interest. IF this interest is left to compound for the years of education and residency required in specialty fields the balance quickly becomes unmanageable. Then when high debt borrowers enroll in an income-driven repayment plan, the monthly payment doesn’t keep up with interest and the loan amount continues to rise. Leaving huge amounts of student loans to be forgiven after the borrower has made payments for 20-25 years.

 

Inefficient use of Taxpayer Dollars

 

Ultimately we have a system that is inefficiently using tax payer dollars. Rather than fund our public universities up front and pay the immediate costs (translating to lower tuition for borrowers and lower loan amount) we use taxpayer money to forgive debt that has been accruing 7% interest for years.

 

The most efficient use of taxpayer money is to reduce the cost of college by adequately funding their operating expenses instead of waiting to pay for college education via loan forgiveness because the cost of the borrower’s education is much more than their high paying career can afford to repay.

 

Ultimately, tax payers are going to pay for higher education one way or another. Whether it’s forgiving super student loans or providing funding for universities up front. It makes sense to advocate for up front application of our tax dollars to reduce up front costs and get our money’s worth out of that spending.