The Middle-class Squeeze

After Alison Baulos completed her degree at the University of Chicago last summer, she planned to find work in the public sector as a social worker. Unfortunately, the small matter of $95,000 (£54,000) in student loan debts soon put an end to that idea.

"The job only paid $20,000 and I owed $1,000 a month just in loan payments," she says.

Baulos eventually took a much better paid job at the university’s Economic Research Center, but says it’s a shame debt payments prevented her from finding the job she wanted.

An American university education has always been an expensive prospect but in recent years costs have swelled considerably. According to the Digest of Education Statistics, tuition fees over the last 20 years have consistently risen at twice the rate of inflation and more students than ever are being forced to take out student loans.

The Washington-based Public Interest Research Group (PIRG) reports that 60% of US undergraduates finish their studies with some federal debt and roughly 40% percent of these borrowers end up burdened with "unmanageable" levels of debt, when their monthly payments exceed 8% of their income.

"The American college system is still the best in the world but an increasing reliance on huge federal loans is having serious consequences for students’ future careers and personal lives," says Luke Swarthout from State PIRGs.

This burden is set to intensify after Congress last week narrowly passed the budget spending bill, which promises huge interest rate increases on federal student loans. Officially called the Deficit Reduction Act, the bill will allow parents and students to borrow more through federal loans but spending will be cut by $12.7bn, the biggest reduction in university funding since the 1965 Higher Education Act.

On July 1 rates on loans taken out by parents, known as Plus loans, will rise from 6.1% to 8.5% and the rates on Stafford loans, taken out by students, will increase from 5.3% to 6.8%.

Proponents of the bill, such as Republican congressman John Boehner, the chairman of the education and workforce committee, argue the bill is making savings, not cuts, from student loan programs. He says the most important aspect of the bill will guarantee $14bn in extra revenue over the next five years. Until now, he explains, lenders have been able to keep any profit when their interest rates were lower than those of students. But under the new bill this windfall will be passed onto the government, he says.

According to Boehner, the new legislation will also provide $3.75bn for programs aimed at increasing access for disadvantaged students. New grants will be available for students from low-income backgrounds who maintain high grades at high-school and who are interested in studying high-demand subjects like science, maths and certain foreign languages. "In short, this bill roots out excess lender-subsidies while increasing student access to loans. It’s a win-win for students and taxpayers," he says.

But Swarthout believes the bill’s biggest winners will be the wealthy. He says the new legislation is simply creating a hidden tax for students in order to pave the way for tax cuts. "Rather than finding inefficiencies in the loan system this derives most of its savings from increased student revenue," he says. "Interestingly in the same budget bill Congress also called for $70bn in tax cuts for some of the wealthiest Americans."

The bill might be win-win for the very wealthy and the very poor, but according to Ebony Wade, another recent graduate from the University of Chicago, it’s more like lose-lose for everyone in between. Wade says for those like her, who don’t qualify for the main low-income programs like the Pell grants, cutting loan money is only going to make it harder to pursue any chosen career path. Some $30,000 of loan debt has already convinced her she can’t afford graduate school and right now she says she’s consigned herself to putting life on hold while she tries to pay off some of her loans. Alanna Ossa, the vice-president of Arizona State University graduate students’ association, has spent the last few weeks encouraging students at her campus to mobilize and fight the bill. She agrees that the new measures will send out discouraging message to middle-class students.

In particular, she says, it will only add to the growing number of those like Alison Baulos who are being forced to turn away from a career in the public sector. "Students need to make increasingly good money to begin paying off debt and the public sector is losing out," she says. "For instance here in Arizona we have a serious shortage of nurses and that’s because it costs a lot to train and isn’t particularly well-paid."