The Student Loan Crisis Paradox

Here's a number that might give you heartburn. $90,000. That's the price for a single year at some private colleges in the US. Even public universities can cost over 30,000. But the reality is most students don't actually pay those amounts. What explains the gap? Why does college come with a price tag? That looks like a luxury item, but works more like a flight. Everyone pays a different fare. I'm Sony Tassom and this is 1440 Explorers. where we unpack the essential knowledge that explains your world. with help from experts who know the subject best. And today, our guide is Dr. Sandy Baum. Economist and senior fellow at the Urban Institute. and one of the country's leading experts on college tuition. Sandy flips the script. Revealing that the real story of college costs might be more complicated. And less dire than it seems. Stay with us. Listen, learning has never been harder. The internet is overwhelmed with low quality content. Clickbait with little substance, AI generated slop. And opinions masquerading as facts. Curious people like you are left sifting through noise instead of finding what matters. Enter 1440 Topics. We've curated the highest quality resources from across the internet. Think data visualizations, captivating videos, long form journalism, and paired them with staff written overviews to make every subject easy to understand and explore. Want to learn about venture capital or how new weight loss drugs work? Do you keep reading about CRISPR but are missing the best 101 on the breakthrough technology? All of this and so much more at join fourteen forty dot com. 1440 Topics, separating what's worth your time from the rest of the internet. Mm. This episode is about a mystery. Price tag on higher education in America. How it got so high, white so confusing. And who's really footing the bill? To understand that, we have to begin in a different era. Because once upon a time College wasn't meant for most people. Here's economist Sandy Baum. Originally college going way back was basically preparing people for the ministry. College for a long time was the territory of the elite. Most people didn't go to college. College began as religious training, and even as it expanded, it remained a pathway for a small elite slice of society. Like future lawyers, doctors, and civic leaders. And that stayed true for centuries. early 1900s, things began to shift. States started investing in public universities. Colleges expanded access to technical and agricultural education. and more women begin enrolling in college. Still? College was far from common. Then came a world war. After World War Two there was the GI build that allowed people coming back. to get a university education. The gates flew open. By the late 1940s, over two million veterans had enrolled in college using the GI Bill. For the first time in American history, higher education was more mainstream. Not just for preachers or the wealthy. But for plumber's sons, returning soldiers, and first generation students. It was a revolution of access. Only just beginning. One president in particular picked up the baton. President Lyndon B. Johnson. He grew up poor and taught school before entering politics. And Johnson believed fiercely. College shouldn't just be for the lucky few. President Johnson made a very moving speech about how making federal loans available to students was going to open the doors of opportunity because if you're 18 years old, you've never had any credit and your parents don't have money. Since the 1970s, the federal government and state governments have participated in providing financial aid to people who can't afford to go. One of the things that they got was grant aid, but they also provided loans. President Johnson's Higher Education Act of 1965. the government would guarantee loans to students, making it possible for millions of teenagers to do something their parents never could. Enrollment in U.S. colleges ballooned from just 1.5 million students to over 19 million over the next 50 years. Women enrolled, immigrants enrolled. adults returned to school mid-career. Entire sectors of the economy began requiring college degrees for the first time, but with more access came more cost. And the reality is the amount of loans has grown significantly over time. Both as more people go to college and as price of college has gone up. Then it becomes controversial because some students borrow so much more than they can pay back. So let's follow the money. Actually paying the price of college. Why do so many Americans feel like the system is broken? Is it? Maybe not as broken as it seems? To make sense of it, let's start with my own story. I went to the University of Illinois for College, a large public university, funded in part by the state. Then I did grad school at Northwestern, a private institution with a very different financial model. time I understood the difference mostly in reputation and feel. but I didn't really grasp what I was paying. how those two systems actually worked. And it turns out Understanding how public and private colleges are funded. is the key to understanding the whole story behind college costs in America. Here's economist Sandy Balm again. The example of your two institutions, Northwestern and University of Illinois, that's a really good example. Because The University of Illinois gets money, some money from the state of Illinois. So people in Illinois pay state taxes. Some of those tax revenues go to subsidize the public universities. Not as much as they would like. Maybe just not enough. But still the tuition at the University of Illinois doesn't have to cover all their expenses. Translation, if you're an in-state student at the University of Illinois, Sticker price for tuition and fees is around $17,000 a year. ad room and board and you're looking at $33,000 total. And then there's Northwestern. Northwestern doesn't get that money. they spend much more per student than the University of Illinois. Now they have a big endowment and they use some of that money. to help supplement tuition revenues. Northwestern sticker price is about sixty-seven thousand dollars a year. Just for tuition. Once you add housing, meals, books, and fees, you're looking at $90,000 a year. That's more than the median household income in the US. But what are you paying for? At a place like Northwestern. any elite private university. Paying for world class faculty, cutting edge research, small classes. And yes, plush amenities. And to be fair, plenty of public universities have these too. Over the past 20 years, both public and private universities have invested in gyms dorms and student centers to compete for students. But here's the thing. Amenities are the most visible part of the price tag, not the biggest driver of it. Economists like Sandy point to deeper structural forces that have pushed sticker prices up faster than inflation. First, universities are labor intensive. Teaching can't really be automated. and salaries for faculty and staff arise with the broader economy. Second. Campuses now provide far more services than they did a generation ago. mental health care, disability support, tech security, compliance offices, and advising. Third, healthcare costs for university employees have grown dramatically. And because universities tend to have older, longer tenured employees and offer generous benefits, those increases hit their budgets hard. And fourth. For public universities, many states have reduced per-student funding over several decades. All of this adds up to a simple truth. Tuition didn't rise just because colleges suddenly got luxurious. It rose because they were trying to cover rising labor and health costs. And in many cases. place shrinking state support. So what do most people do when their price tag is this high? You guessed it. They take out loans. And that brings us back to those federal loan programs we mentioned earlier. Launched under President Lyndon B. Johnson. quietly become the backbone of the whole system. Today, over 43 million Americans carry a total of around $1.7 trillion. The average borrower owes about $37,000. Graduate degrees often push that far higher. Meanwhile, the price of college has climbed steadily. Since two thousand Average tuition at public universities has risen nearly 180%. private colleges, it's up over 120%, even after inflation. Here we are. Two systems, two different price points, and one federal loan program holding much of it together. But before we spiral into what some refer to as sticker shock, what if we're missing part of the picture? Stay with us. I'm Shankar Vedantham. Here to tell you about a great mystery. That mystery. is you. As the host of a podcast called Hidden Brain. I explore big questions about what it means to be human. Questions like, where do our emotions come from? Why do so many of us feel overwhelmed by modern life? How can we better understand the people around us? Discover your hidden brain. Find us wherever you get your podcasts. The sticker price of college is just that. A sticker. It grabs attention, but it doesn't always tell the full story. Well, we know that people think college is more extensive than it actually is. Every time they do a survey, they find that out. First of all, you read headlines like This college is charging more than $100,000 and then you think every college charges more than $100,000 when only a couple of them do. But that headline number isn't the one that decides what families actually pay. Most students don't pay the full sticker price. One part of that is They get this. aid from federal and state governments that we've already talked about. But for many students, the college doesn't charge them as much as that sticker price. So That is basically they're getting a discount. The number that Sandy says really matters is the net price. Tuition and B's after grants, scholarships, and institutional aid. And that's where the picture changes. At private colleges, the average student pays about a third of the sticker price. And at public universities, it's less than half. Here's the crucial thing economists like Sandy point out. Since the early 1990s, sticker prices at four-year colleges have jumped by well over 150% after inflation. Over that same period, the average net price has risen much more slowly. That's because financial aid expanded almost in lockstep with tuition. So when you plot the two lines on a graph. The sticker price shoots upward. While the net price slopes upward far more gently. And barely moves at all for the lowest income students. The takeaway is this. The headline number exploded. the real price most families pay. Didn't. If the real price is lower. Why does college still feel unaffordable? Sandy says the answer is simple. people don't understand about financial aid. You know, financial aid is very complicated. It's not simple. So they don't understand. how much help there is out there for them to go to college and. Sometimes people don't even bother to apply because they think they can't afford it, but they would be able to afford it if only they knew that. Sandy is referring here to a few things. Hell Grants, Federal aid for low income students. Roughly six million students receive Pell Grants each year. The maximum grant today is around $7,000. There's also state level grants. States like California, New York, and Texas offer major tuition support programs. And then Another source of financial help is institutional aid. Meaning money that comes from the college itself. This isn't just for top test takers or athletes. Colleges use it to compete for all kinds of students. and most offer it to the majority of their applicants. In fact. 80% of undergraduates at private nonprofit colleges receive some form of institutional aid. So now you may be thinking, who actually pays that full number you see on the college website? Does anyone? The answer is yes. Less than a quarter of students at private colleges do. These tend to be students from families with very high incomes. Families who don't apply for aid at all. Many international students and a small group at ultra selective institutions where aid thresholds are strict. And ecologists depend on this. Those full pay students are effectively the financial backbone of the model. Their tuition is what allows institutions to offer such deep discounts to middle and low income students. So now we know most students don't pay the sticker price. But here's where the story takes another unexpected turn. Because when you look at who's actually carrying the biggest student loan balances, the picture flips. The vast majority of the high debts are held by people who make a lot of money. Turns out the largest debts, the six-figure balances, are mostly held by people who went to graduate school. Lawyers, doctors, MBA grads. And those borrowers are overwhelmingly in the top income brackets. In other words The size of the loan doesn't always signal distress. Sometimes it signals the exact opposite. meaning opportunity. and access to a high earning degree. But even if that's all true. There's still an uglier side to the story. The people who struggle the most to repay their student loans are actually people who borrowed small amounts. The people who went to college. And didn't complete a credential. There are some people who borrowed five thousand dollars, went to college. For half a year. and dropped out and now you know they're working for minimum wage and they really Can't make payments. It's really a hardship. No matter how small those payments are. That's the part of the story you rarely hear. about the millions of Americans who do everything they were told. go to college, take out a manageable loan, work hard. But something derailed the plan. Got in the way. Maybe they had to take care of a family member or lost a job. And they left without a degree. And a lot of those people default. feel like they didn't get any benefit and they didn't get much benefit. Among those who drop out Default rates are nearly four times higher than among graduates. Even though many of them borrowed less than $1,000, it's still too much when you're making $3,000 a year or less. The paradox is this. people who owe the most. often have the tools to pay it back. and the people who owe the least. are the ones most likely to drown. Sandy spent part of the conversation tapping down the more dramatic headlines. But she was clear about not brushing off the people dealing with very real consequences. There are people who are really struggling with student debt. For some former students, student debt is a crisis. So you never wanna say there's no problem. There are huge problems for some people. That said, we need to make it clearer how you can pay it back. was a sobering part of the conversation. One that prompted me. As many do. Asked. Why don't we just do what Europe does? College free. But here too. Sandy had some nuance to throw our way. Free. Isn't really free. It's actually a choice. A choice about who pays? Who gets in? and what kind of college experience a society decides to offer. Well, in the places where it's free, one, people are more willing to pay taxes. And two, in general, fewer people go to college. Or in some places where public education is free, there's not enough space in the public institutions that take only the best and the brightest. In some countries it's totally the norm, you just live at home while you're in college, right? Many students do live at home in this country, but many don't. And that's a huge part of the extent of being in college. Like if you live In a household where you don't have to pay rent. You can save a lot and you're gonna borrow less money. So that's another thing that that we could do, but we really believe in there's this sort of norm of, you know, you're gonna leave home when you're 18, you're gonna go off to college and it's gonna be this whole life experience. And it is. That's a really important experience. It costs money. So the European model isn't just cheaper college. It's a different philosophy. More selective public universities. Far less campus life. Higher taxes. Less mobility at eighteen. America pays more. partly because we choose a system built around access, campus life, and scale. And as Sandy reminds us, Every design comes with trade-offs. As we kept talking, I raised another idea I hear often. That student loans have allowed colleges to quietly inflate prices over time. But Sandy says economists find little evidence of that. with rising labor and health care costs playing a much bigger role. As I went to wrap up our conversation with Sandy. There was one last thing that was bugging me. If most students don't actually pay the sticker price. Why don't schools do more to explain this to the public? The short answer is almost no incentive to. The sticker price signals prestige. and the world of higher education. Matters. A higher number can imply higher quality. And underneath that number? Is our pricing system so complicated? It's almost impossible to explain it simply. One student's offer might look totally different from others. Which is the point. Colleges want pricing flexibility. They want to shape their class. and they want to use financial aid as a recruiting tool. If they published one number like an average cost. they'd risk turning off full pay families. They'd invite scrutiny. So instead. The higher price anchors expectations. and college is a swoop in later with aid that feels like a deal. So where does that leave us? Hall of America is expensive. That's true. But the story isn't as simple as a sticker price. Most students pay far less than the headline number. Biggest, scariest loans? mostly belong to high earners. Doctors, lawyers, MBA grads. And the people in real trouble. They're often the ones with the smallest balances. And sometimes no degree at all. We've built a system that's confusing. Uneven and full of trade offs. But it's also a system that reflects some very American priorities. Broad access. Massive scale. and independence at eighteen. Explain the cost. doesn't make it easy to understand. College looks like a luxury item. Price like a discount flight. Unpredictable and designed to feel different for everyone. And once you see that. It's hard not to wonder. Who does the system work for? Who does it leave behind? Many thanks to Sandy Baum for being our guide in this episode. And thank you for listening to Fortune 40 Explorers. I'm Sony Cassom. Make sure to follow the show and leave a review on Spotify, Apple, or wherever you listen to your podcast. and let us know what you think at podcasts at joinfortune40.com. 1440 Explorers is a production of Rhyme Media for 1440 Media. This episode was produced by Nicolo Minoni and edited by Dan Bobkoff. Our fact checker is Meher Kazalbash And our sound designer is Jake Howitt. The executive producer at Rhyme is Dan Bobkoff, and the executive producers at Fortune 40 are me and Drew Steigerwald See you next time.