Federal and State funding of subsidized higher education is heavily reliant on tax revenues and competes with other forms of public spending, and within education budgets competes with pre-school, elementary and secondary education spending. During the recession we saw severe revenue declines at the federal and state levels. Being highly credit constrained, with university subsidies being part of operating budgets which must be funded with current tax revenues, many states cut planned education funding while allowing public universities to increase tuition levels. This in turn contributed to a significant shift of education cost to students and parents. In research conducted at the New York Fed, we found that since 2007 those states with the largest funding cuts also had the highest tuition increases, with an average annual tuition growth rate of 3.4 percent. As shown in Chart 2, this compares to an annual average tuition growth rate of 1.7 percent during the 2007–2010 period for all other states combined. That is, we observe an economically meaningful relationship between public funding and public institution tuition changes since 2007. Higher tuition has forced many students to take on larger student loans. Student debt and tuition increases were not limited to public institutions. Research conducted at the NYFed found that over the same period there was even larger tuition and student loan growth at forprofit institutions. [Chart 3] Despite larger average support through Pell grants, with tuition  1  National Center for Educational Statistics, 2012. “Digest of Education Statistics”. 2  College Board, 2013.
Another way to look at borrower difficulty in loan repayment is to consider the state of repayment by the end of 2014 for all student loan borrowers we observe finishing their new loan accumulation, between 2005 and 2010. High rates of delinquency and default, and the high prevalence of participation in repayment-delaying programs such as deferments, forbearances and income based repayment, lead to a lower rate of balance reduction in the years after student loan borrowers leave school. In order to understand the magnitude of this delay, we investigate the extent of student loan repayment that recent school-leaving cohorts have achieved by 2014. For the blog series, we calculated the outstanding balance of each of the 2005–2010 schoolleaving cohorts as of the second quarter of the school-leaving year. For each cohort, we then recorded the share of the original student loan balance that remained as of the end of 2014. For example, for the 2010 cohort 91 percent of the original balance remained unpaid four and a half years later, at year-end 2014. This is typical of all the cohorts we examine, from 2005 forward. So what accounts for the high default rates and low repayment rates of recent cohorts? Undoubtedly the weak labor market conditions for entering college graduates played an important role in explaining defaults and low loan repayment rates. As the youth unemployment rate continues to improve, we would expect repayment rates to gradually improve.