America’s ballooning student debt: Lessons learned from Chile

America’s ballooning student debt: Lessons learned from Chile
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Public discontent over for-profit university financing schemes in the United States could present serious sociopolitical and economic challenges. The 2011 student protests in Chile serve as a sobering example of what could happen if policymakers fail to enact student debt-restructuring in a bloated university finance sector.

If student debtors in the United States can achieve mobilization like the Chileans in 2011 and threaten to default, it could severely strain the American economy. With $1.2 trillion in student debt-centered liabilities, a serious restructuring of the student debt regime should be pursued to stabilize relations between student debtors and creditors.

United States: bloating student debt pool and signs of stress fractures

Debtor-creditor relations have been gradually deteriorating in the United States. In the past four months, rashes of student debtor discontent have sprouted across the country over issues of education quality and institutional misinformation. Because of the disproportionate size of the student debt pool in the United States, which is exponentially larger than that of Chile, failure to restructure the student loan regime could have devastating sociopolitical and economic implications.

In 2015, the average student graduated with $28,000 in student debt. Interest rates on unsubsidized education loans are extremely high, with some reaching 9%. Private debt (domestic credit to private sector) amounts to over 190% of GDP (109% in Chile), of which student debt composes a hefty portion—in the case of the United States, student debt is nearing $1.2 trillion, or 7.5% of GDP.

Out of the $1.2 trillion student debt pool, $200 billion originates from private institutions, which provide strict grace periods and exorbitant interest rates, deterring further education for recent graduates. The volume of loans has also increased precipitously: since 2008, the student loan pool has increased by 86%.

Ripples of economic uncertainty in the university financing industry are already visible. Corinthian Colleges, one of the largest for-profit career university chains in the United States, recently collapsed and filed for bankruptcy after allegations that it deceived students with job placement rates. After repeated allegations, the U.S. Department of Education led a formal investigation and found that at least one of its colleges had distorted job placement data.

Former students have requested permission to file a $2.5 billion claim against Corinthian Colleges. The newest case of predatory practices by for-profit institutions in the United States involves the University of Phoenix and its parent company, Apollo Education Group.

University of Phoenix is one of the largest online education institutions in the country, with 213,000 enrolled students in 2015. The Federal Trade Commission is investigating allegations that the online university ran unfair business practices by targeting veterans and leaving them with high levels of indebtedness. A very large debtor population is already pushing back against predatory practices, creating stress fractures for the university financing industry.

The issue of student debt has crept to the top of the agenda in American electoral politics, with both Republican and Democratic candidates promising reform. On the Democratic side, Hillary Clinton and Bernie Sanders are pushing for added student loan subsidies to be handled by the U.S. Department of Education.

Clinton’s plan suggests an added $350 billion, while Sanders is pushing for approximately $500 billion. Some of the Republican candidates, including Jeb Bush and Marco Rubio, argue for controlling public costs and promoting highly specialized for-profit education institutions and cheaper online education programs.

At any rate, the issue of student debt will be popular and pivotal in the coming electoral cycle. Candidates in both parties understand the economic implications of embracing the status quo.

Chile: Calls to shift from private, for-profit education to a public system

In Chile, similar high levels of student indebtedness and scandals at for-profit universities sparked a social movement for public education that has rocked the political establishment and led to an institutional crisis.

Since 2011, the country has experienced elevated levels of social mobilization and citizen discontent in large part due to the success of student protests. The education system in Chile shares many characteristics with the American system, owing to its history as the vanguard of ‘free market’ experimentation. For example, Apollo Education Group includes in its portfolio Chilean higher education institutions.

The US is known for its high university costs, but among the OECD countries Chile’s is the most expensive relative to income. The Chilean student also personally covers 76% of his or her higher education costs, while the OECD average is only 31%. As a result, the typical student graduates highly indebted.

Even when paying so much, the Chilean student cannot be assured of quality. Just as the student movement was taking off in 2011, the scandal at the Universidad del Mar exploded, in a case that bears obvious similarities to that of Corinthian College.

The President and Board of Directors of the university made handsome profits, which according to the letter of the law was totally illegal. Teachers were underqualified and not paid, students were without the minimum resources necessary to study, and graduates were unable to gain employment.

Rage around this incident fueled the movement for public education, which went on to dominate the political agenda for the rest of President Piñera’s term. The electoral implications from the student protests were significant—the 2013 elections ushered in a center-left coalition and four former student leaders were elected to congress.

Michelle Bachelet was elected president of Chile on a platform that bore striking similarity to the demands of the public education movement. However, her inability to carry out satisfactory reforms has brought Chile to an institutional crisis with no clear way out.

Finding broad parallels

Although the Chilean and American economies are structurally different at the macro level, a broad resemblance can be drawn from these two cases—Chile’s growth in 2011 was booming, while the U.S. is currently enjoying faster growth than any other advanced industrialized nation.

Socioeconomically, the stories of Chile in 2011 and the United States in 2015 also converge. Chile has the highest standard of living in Latin America, a highly educated workforce, and unlike its regional counterparts, a population concerned with problems of the developed world.

Yet, notwithstanding its impressive macro social indicators, Chilean society, similar to that of the United States, is largely unequal. A substantial portion of its population does not have realistic financial access to education and health services. Despite a booming economy in 2011, Chile’s subpar (per OECD standards) social indicators, such as high inequality and unrealistically expensive education financing, led the social movement with enduring political consequences.

Punting on university finance reform could negatively affect incumbent lawmakers

University financing has suddenly become a popular electoral topic in the United States, and with good reason. It seems that the neither the White House nor Congress will pursue substantial reform in the remainder of President Obama’s term.

With well over a year until the new president takes office in January 2017, sitting legislators and President Obama are making a gravely irresponsible miscalculation by conforming to the idea of university financing reform as unfixable in this political cycle.

If the status quo persists, the student debt pool will only continue growing disproportionately and become a greater liability for incumbent lawmakers on both sides of the aisle and creditors enjoying a post-recovery economy. The Chilean case provides a clear precedent.

This article was co-written by William Skewes-Cox, who runs Chile From Without, an English language commentary on Chilean politics, current affairs, culture, and news.

Categories: Latin America, Politics

About Author

Daniel Lemaitre

Daniel is a GRI Senior Analyst. He has worked in policy research centered on the political economy of the Andean region in the public, NGO, and private sectors. Daniel holds an MSc in Comparative Political Economy from the London School of Economics, concentrating on Latin American markets.