You often hear that a college education in this country is a ticket to a better and more rewarding future, and it often will be. However for it to be more financially rewarding you need to keep a handle on its costs. Especially if you intend to one day have a home or a family. These are big ticket expenses that might have to be deferred a number of years if you allow educational expenses to engulf you.
At the moment there is 605.6 billion in federal student loan debt outstanding and 167.8 billion in private student loans outstanding (for the first time exceeding Credit Card debt), according to Mark Kantrowitz, publisher of FinAid.org and FastWeb.com. The average debt load carried by the graduating undergraduate stands at $24,000 dollars at a time when they are entering a world where the unemployment rate is a record high of 8.7%. For those that have already graduated and been working they already understand the tough choices one has to make financially to responsibly handle the student loan debt. The questions we should be asking are three fold: (1) How did we get here?; (2) Why it should be receiving major media coverage, and (3) What can be done about it?
How did we get here:
We got here like we did with most of our financial problems in the recent past, easy credit. However what makes this situation unique is that the costs associated with education have not been contained and have been allowed to increase at twice the rate of inflation. With tuition costing as much as $26,000 a year for a public or Private 4 year university last year, a lot of present students are finding themselves in the position to have to borrow more, transfer to a more affordable institution, or move home and attend a Community College.
In order to compete, Universities invest more in lavish infrastructure improvements to attract potential students and keep current students. These investments often make the college experience both rewarding and enjoyable, but it also gives one the illusion that this is what life will be like when you leave the sheltered walls of University life. The model as it currently exists is unsustainable, especially if this country wants to remain competitive economically over the long term.
Why it should be receiving more media coverage:
When we hear about financial problems nowadays we hear about foreclosures, financial banks, municipalities, and the unemployed. However what seems to be conspicuously absent from the conversation is that the escalating Student Loan debt in this country could be a future bubble that if it bursts will stamp out any economic recovery. The debt levels carried by both past and current students limit financial choices and at the same time could prevent a recovery from taking place in the housing market.
In 2010, there was an average of 330,000 foreclosure filings, 46% of them taking place in Nevada, Florida, California, and Arizona. The unemployment rate nationally stands at 9.8%, 8.7% for recent graduates. Wages have remained fixed with little appreciation on average. Taken together these statistics are not ingredients for a successful financial recovery.
If wages remain at present levels, and unemployment persists, then how is the college graduate couple, between the ages of 23-40 suppose to buy up this outstanding housing inventory when they have a combined $46,000 dollars in debt before they start.
The only way out of the housing crisis is for wages to increase, employment to pick up at a vigorous pace, and home prices to increase so people no longer feel like they are underwater. Otherwise the Young Professional Couple or Single person can not be expected to do their part and buy up the existing inventory and replace the baby boomers that choose to downsize their homes as they retire.
Above we discuss the norm, not the outliers. There are those out there that have over $100,000 in student loan debt, have been earning at rates far below their education level, or those that happen to get laid off. For those it can be a much harsher existence. That is because the rules of the game are written to benefit the lender, and we subsidize demand in higher education and not supply.
I understand those out there who say you did not have to pay that money, did not have to get in over your head to finance your education, and thus are solely responsible for your current fiscal situation. However, I have some counter arguments for you to consider:
(1) The Guidance Counselors, Admissions Officers, and Financial Aid Officers will all tell you that Student Loan debt is “good debt” that will improve your station in life and thus they encourage you to borrow. In a climate where tuition rates are double inflation schools use the “illusion” of aid to hook you then reduce it systematically each year leaving a student in a situation where borrowing or transferring are the only options to continue their studies.
Remember that Student Loan debt as a pure Investment is rather “poor”. It is illiquid and has no equity, and unlike most consumer debt vehicles cannot be discharged in bankruptcy.
(2) For those that get laid off and possess Private Student Loan debt there is no mechanism that allows you to avoid default if you cannot repay. It is the only financial loan instrument where the lender is sheltered from responsibility for the loan, but enjoys the power to garnish wages, seize income tax refunds, garnish Social Security benefits, and revoke Professional Licenses (bizarre if goal is repayment of principal plus interest). For those with Federal Loans they enjoy more flexibility and recent legislative caps, but if deferments have been exhausted the Borrower will find themselves in the position where they will have to forbear and that interest will “Capitalize” and the compound interest will be added to the principal and the vicious cycle will continue thus increasing the repayment amount of the loan exponentially. In these situations the rules of the game benefit the lender and greatly restrict the Student borrower’s future financial options.
What can be done about it:
First, we can address the cost of Higher Education. Educational Institutions across the board should freeze tuition rates and bring them in line with the cost of Inflation. This can be done by reworking the way colleges are provided government dollars. For those Public Universities that were able to cut costs and cut tuition rates they would have access to grant dollars.
Second, Guidance Counselors and High Schools should be required to provide a financial resource that could lay out the costs associate with a student’s educational choices and devise a plan to pay for it. If they do not come from a background where parents will contribute or foot the bill then they should be presented a plan that includes a “pay as you go” option and explains to students that school can be paid for in “monthly” installments thus avoiding the associated interest charges.
Third, for those with existing student loan debt that are not current students Congress should debate the wisdom of “forgiving” a percentage of this outstanding debt and freezing interest rates of those unable to repay. This would prevent the problem of compound interest and allow the members of this vast population to help contribute to “digging” this country out of its current financial crisis. If Young College educated Couples and the Single College educated person have to “delay” major life purchases then our recovery will continue to drag along.
Fourth, Congress should strongly consider passing HR 5043 – “Private Student Loan Bankruptcy Fairness Act of 2010 (D-Steve Cohen) and S.3219 – “Fairness for Struggling Students Act of 2010” (D-Richard Durbin) both of which will allow students presented with challenging circumstance with the option of discharging the debt in bankruptcy.
We live in a challenging time and we need our best and brightest to play a part in helping us collectively put our nation back on solid footing. In order to do this we need to build a solid foundation of fiscal responsibility. This can only be done if we: find a way to make Higher Education more affordable without the need for incurring debt, provide financial literacy resources to aspiring students at an early and appropriate age, and avoid being punitive to those that are dealt a bad hand.
