Student Loan Debt is a Looming Crisis
We often teach our kids that going to school is their ticket to becoming successful. In order to send them to school, we willingly make big financial sacrifices. The debt accrued during the process is typically discounted as a necessary evil because their education represents an investment in their future. While this is true, an increasing proportion of students are graduating from college saddled with such enormous debts that their economic future looks bleak despite earning the degree. A college education may provide the prospect of higher earnings, but what good is that if you need to spend the next 10+ years of your life trying to rid yourself of the debt first?
Student Debt Represents a Bigger Problem Than You May Think
Student loan debt has now surpassed credit-card debt.
According to the Federal Reserve, Americans owe around $826.5 billion in revolving credit. Note that most of revolving credit is credit-card debt. By comparison, both federal and private outstanding student loans add to approximately $829.785 billion per Mark Kantrowitz, publisher of FinAid.org and FastWeb.com. That’s a $3 billion difference!
Unfortunately, there are now more students than ever with debts substantially larger than their anticipated incomes; they will be repaying these loans decades after they finish. Functionally, this debt is creating an economic underclass: the educated indentured servants. They are trapped, and their choices are restricted by debt. Many recent graduates feel that they lack the freedom to pursue entrepreneurial endeavors, start families, stay at home with children, or choose lower paying jobs that may be a better fit. Financially, this puts them at a distinct disadvantage. Typically, these concerns are dismissed because the overall lifetime earnings of the college graduate compared to the non-graduate were estimated to be significantly larger. However, recent studies have challenged these findings.
Additionally, common sense suggests that it is not fiscally responsible to spend $150,000 for a philosophy degree. This is why I have advocated that costs must be a consideration when making the decision to pursue higher education. Legislation changes have made education costs even more important now than before. Student loans typically cannot be discharged in bankruptcy. Also, they are associated with some of the toughest collection practices. For example, lack of payment may diminish one’s Social Security benefit, result in garnishment of wages (without going to court), cause suspension of professional state licenses, and result in automatic withholding of income tax refund.
How Did We Get Here?
Part of the reason why student loans exceed revolving credits is because more Americans are defaulting on their other debts, and defaulted debts are charged off for accounting purposes (can no longer be legally counted as receivables). Second, many credit card companies are raising minimum monthly payments or cutting off new and existing lines that consumers had previously turned to during tough economic times.
Third, at the same time that revolving credits have gone down, tuition and associated fees have increased. Since schools want students to be able to “afford” the rising costs of tuition and fees, obtaining student loans has historically not been very difficult. In 1968, Lyndon Johnson signed the Higher Education Act, which enhanced access to higher education by making federally-funded loans and scholarships available.
A fourth contributor to student indebtedness is that these loans are a socially-accepted form of debt. This is illustrated by how little press the student loan problem gets. Student Loan Justice, a student loan advocacy group, estimates that the ratio of coverage of credit cards vs. student loans is 15:1.
Investing in Reverse
Regardless of the dismal coverage of the student debt problem, the financial implications are indeed significant. The amount of interest that accumulates on a student loan is akin to investing in reverse. What started out as a $40,000 student loan debt after completing college can balloon up to a $128,000 debt before the graduate finishes paying it off. This is NOT the typical path to economic success. We must restore pragmatism to higher education; otherwise, despite our best intentions, we are burdening our students with exorbitant costs for pursuing degrees that may not yield the promised financial rewards.
About the Author: I’m Roshawn Watson, and I write at Watson Inc on eliminating debt, investing money, and building wealth. Get my free ebook Your Foundation to Wealth by signing up for my email updates (no spam I promise). Please connect with me on Twitter @roshawnwatson too.
College is just another marketplace in this country. It has little to nothing to do with education! Since having a 4-year degree is practically expected by almost all employers, it has become a standard. This means that most people believe it is necessary and therefore, will not count the costs of attending college!
We have been fooled to believe that it is always worth it, and we should be willing to pretty much sell our souls in order to obtain a degree. Parents will destroy their retirement in order to send their kids to college, and students will destroy the next 15 years of their lives - but no one does the math to see if it makes sense!
This bubble will burst one day and probably bring this nation down with it.
Fair enough. I believe we may be talking about two different things. When I say degree, I really am referring to the “degree” whereas I believe you are talking about the “pedigree” of a school. If my understanding is correct, then I personally share your opinion on pedigree. I think it is absolutely worthless in so many cases. I haven't seen recent data to support this, so my opinion is primarily based on my personal experience and other anecdotal evidence though.
There's no doubt in my mind it sucks to carry that burden; my debt was high, so I have empathy for your situation. With focused intensity on cleaning it up and a decent income, many people are able to rid themselves of Sallie Mae and her cousins in a reasonable time. Good luck.
P.S. I love the Good Will Hunting reference.
I think part of the problem is that you're paying for the degree and not necessarily the education. I went to the highest ranked law school that I could get into (taking on over 100k of debt I would not have had if I went to a lower ranked school, with scholarships, etc.) because, in my mind, the cachet and the enhanced future earnings that were going to come from that degree would more than pay back the increased debt I would find myself in. Now that I am actually staring down that debt, I am not sure it was the wisest decision
I'm also reminded of that line from Good Will Hunting when Will says to some Harvard graduate student that just tried to show his friend up: "You spent $150,000 on an education you could have gotten for a $1.50 in late fees from the library."
I'm always amused whenever someone brings up the "indirect" or "abstract" benefits of higher education. If you truly want to expand your horizons, develop a deeper understanding of your fellow man, or enhance your philosophy of life (some of the types of catch phrases used to justify exhorbitant student loan debt) - then please: just read books. Between libraries, podcasts, e-books, swapping sites, and online booksellers - the inventory of reading material has never been more vast and more available to so many.
There are plenty of dumb college graduates who haven't cracked a book since they closed their "History of Western Civilization Vol. 23" once they graduated from Status U. In the meantime, there are numerous intelligent farmers, truckers, plumbers, and entrepreneurs who read every single day.
Higher education has always been overrated, responsible for the indoctrination of millions into leftist thought (so much for broadening your horizons), and now it's insanely expensive. Emphasis on "insanely".
Yes, it's all a give and take. I planned on going to law school after receiving my B.A. degrees, but after researching the market, it seemed less of a financial risk to look in a different directly. I miss studying law, and it was really hard to turn down law schools, but I know that when my husband I have children, they won't be growing up in a debted home.
When I was going to college, my parents were very adament that I only take grants and loans not accumulating interest. Of those loans, I had to cross out the amount that exceeded the actual exact of tuition required. They said if I needed money beyond that, I could get a part-time job, and if I needed help beyond that, they would loan me the money interest free, even if it meant taking out a loan themselves.
I never understood what the big deal was until I started to hear my friends talk about how much money they owed back. I owed $7,000 (I had been using my part-time income to pay down my loans), they owed over $40,000.
I had a college professor that once said, "Live like a student now, or you'll have to live like one later." I think he really nailed it on the head.
I am lucky in that I LOVE my job and so I don't feel constrained as much in the job that I chose (because I would choose it anyway), but my boyfriend didn't realize that he would have to do the kind of law that he hated 80 hours a week just to pay the bills. And the saddest thing is, the attorney market is so glutted right now that he's lucky to have a job at all, even if he's put himself into the hospital once already with overwork. And he's 31.
Amazing responses, Roshawn.
You know I (briefly) considered medical school, before I realized how much debt I would get into by doing it. Sorry lawyers and doctors, but you chose your lifestyle. I feel sorry for your massive debt, and I'm grateful for your choice because we need doctors, and perhaps we even need lawyers, but in the end, are you really surprised?
Like anything else, you go into the profession because you have a true love and passion for it. Although doctors do make a very nice salary (in fact, some American doctors are starting to come to Canada because the situation is starting to be relatively better up here!), I think you have to have a passion to spend all that time in learning and in going into debt to do that. Otherwise, you won't be good at it.
Attorneys do make very good money - if they are willing to work for large, unethical coroporations, insurance companies that screw the little guy, wealthy white-collar criminal defense, etc. Much less if they do work that is socially meaningful. Doctors who are specialists probably pay a third of their take-home to debt and another third to malpractice insurance, so most of them do not live high on the hog. Doctors who are family practice make much less and have the same debt load (if not the malpractice obligations).
I make $40K per year working at a public university and am on a 30-year graduated repayment plan. In addition to the $100K in principle, I will pay an estimated $168,000 in interest over that time. I'll pay it back, but I can't afford to have children, give to charity, buy a house, etc. because it was more important to me to mentor the next generation.
Steve, that's a good point, paying down debt is a guaranteed rate of return. To be fair, in both cases (paying down debt and saving for retirement) you are being fiscally responsible. My concern for young professionals like yourself is that so many figure that it is impossible to live without debt, so they keep the student loan (and other consumer debts) around for decades, just like a mortgage. I think if you are careful and circumstance remain constant, i.e. if you can pay off $30,000 a year, you would be done in less than 5 years. Of course, this is assuming that you don't get a raise in 5 years (unlikely).
Additionally, keep in mind that compounding is beautiful (magical even), but having a lot of dollars to invest is also beautiful. Imagine if you were able to invest at least $2-3 thousand a month for 25 years. How much does that accumulate in 25 years at a conservative 8% return? Approximately, $3.1 million! If you don't have debt, but have a good salary and reasonable expenses, it's possible.
Great discussion Steve, and good luck. Feel free to contact me anytime you have a question.
I am a 2010 top 15 law school graduate and was lucky enough both to pass the bar exam and have a job in these tough economic times, both of which I am very grateful for. My big issue is whether to attempt to pre-pay some of my student loan inedebtedness or instead to take advantage of some of the repayment options out there like income based repayment or public service forgiveness after working for the government for 10 years and using the extra money to put into retirement savings. I understand that by not pre-paying my loans I am paying more in interest over the longer life of the loans, but I am also a bit leery of not saving for retirement for the 5-15 years it will take to pay off my 100k plus in debt.
Oh, for the law school, that is a good point. If you are barred from working that certainly does place additional difficulties. I think med school would also be a big burden.
On the other hand, you tend to get paid very well for following a career in law or medicine.
I am considering pursuing an MBA soon, and I will most likely be doing it part-time in order to avoid taking on any debt or losing income as a result of pursuing it.
@Shawn, yes, we are able to repay out debts on our current income, though at the moment we are also paying off credit cards so we're interest-only on the student loan debts. It will take me at least 25 years if my income remains at its current level ($40K/year), though I don't anticipate this.
@Investitwisely, you make some good points. I disagree strongly about asking for help from family members (my dad's retirement savings are pitiful enough without me asking him for contributions to my education, and a friend who recently graduated from law school cannot get a job and now her parents' house is in jeopardy because they leveraged it to help pay for her education). That's not fair, you shouldn't count on your parents for anything after your 18th birthday, I certainly never did.
The working while in school and taking internships is good as far as it goes, though mostly it applies to undergraduate work. All my and my boyfriend's debt is from graduate degrees - law students are prohibited from working while they are in school, and my entire debt is from graduate work (during which time I was working 25 hours a week and had at least partial tuition remission). If I had been extremely frugal I probably could've shaved $15K off my total but I wasn't doing anything crazy. I lived in a tiny apartment and only traveled for professional conferences (I've seen my dad twice since I started graduate school, I think, and my sister not at all in at least 8 years because I can't afford to visit family).
There's more student loan debt because more kids are going through school, but need the additional money for their tuition. It's hard because we say "you have to finish school" but when you think about it, financial aid is sometimes hard to come by (grants and scholarships) and the only other choice is loans. Credit cards aren't as much of a necessity as an education
Ways to reduce student debt:
* Work part-time while in school (this is what I did)
* Do internships while in school (this is what I did)
* Get some help (this is also what I did)
And I have a few more abstract questions:
* Does government guaranteed student debt encourage institutions to raise tuition costs without increasing services?
* Is higher education necessary to receiving a higher income? What are the benefits and tradeoffs?
* Can we shorten overall time spent in school? Could people start college at 16 or even younger? Is the K-12 level fraught with waste and unnecessary material that could be optimized and reworked? Is practical knowledge more important?
Yeah, my boyfriend and I owe $100K APIECE. And since most of the people we know are from grad school, we know tons of people who owe similar amounts. It's insane.
Fair enough, but I believe we are talking about two different things. When I say refer to degree, I really am referring to the "degree" whereas I believe you are talking about the "pedigree" of a school. If this is correct, then I personally share your opinion on pedigree. I think it is absolutely worthless in nearly all cases.
I don't entirely agree with the indoctrination into leftist thought (that wasn't my own personal experience at the uni level; I think it's more accurate to say this of HS), but the rest is spot on.
Too many people think that a piece of paper = smart, intelligent, and educated, and the lack of that same paper the reverse. While this paper IS worth something, if you think the paper determines you, you are mistaken. Your comment is spot on.
At the undergraduate level, sure you are right. However, reading almost all the major works within a discipline and discussing and writing about them with 20 of your peers under the guidance of a tenured professional blows anything you might do on your own out of the water. I was definitely at my smartest when I was a PhD student, and now that I am graduated I still read on my own every single day.
I love that saying "“Live like a student now, or you’ll have to live like one later.”
If you really love law, maybe you go back to it at a better time for your family. A former classmate of mine (biomedical) is in his 2nd year of law school at the ripe old age of 50. It's just want he wanted to do.
Kudos to you and your parents for having the insight to make sure that you didn't graduate with a mountain of debt.
And to add to my previous point, if you REALLY do have a passion for it, then you can start at anytime. When I was doing my research, I read of plenty of doctors that went into the field at a late age, including 40 and up. Granted, it's rarer, but I'd rather have a doctor that started at 40 with a true love for it rather than some 20 something that is hoping to get rich!
@Honey I know a lot of people couldn't imagine how a professional could be in this predicament, but I get it. It always makes me sad that we don't better reward people with jobs similar to yours.
I have worked for two lawyers in the past. One was the counsel to the Inspector General (making over $100K) and the other was private practice individual attorney (apologize for not using the correct terminology...so long ago :). They both advised me against going into law for the money, for which I am very grateful. In fact, they both said that the media glamorizes the lifestyle but that is certainly not always the case.
The situation you are in is the primary reason why I am so against over-leveraging with student loans in the first place: the debt eliminates your choices. We mislead students by telling them "don't worry about the student loans. You will have a fabulous salary, so it is not a problem." You have just pointed out how it can be a very big problem.
In contrast, if you and your BF were each making $40,000 a year and had no (or very minimal) debt, then I would guess you wouldn't feel so constrained.
Thank you so much for sharing your story.
That's so true about attorneys, Honey. My wife is an attorney, but she works for a local government and puts criminals in jail. Nothing glamorous about it and the pay certainly reflects that. It's nothing like you see when they portray lawyers on TV! Instead it's just long hours and very average pay, which makes the requirement to pay for a law degree nearly financial suicide if that's what you really want to do and have to finance that education with loans.
That is a tough call. I currently am working for the government and feel the call to shift to the private sector just in order to be able to pay off my loans quicker, but I am positive I would despise the work. On the other hand, I know that having my loans hanging around for an extra 20-25 years might also be just as stressful as having a job I could not stand.
Congrats on finishing law school, passing your bar, and landing a job! That's great news.
I believe the key for new graduates is to never stop living like a student until you clean up the mess. This was how I got out of debt that was approaching six figures in about 2 years.
If you are certain that the only way you can repay the debt is over 5-10 years, then I wouldn't delay contributing to retirement personally. However, this is obviously a very individual decision. You could consider a very conservative allocation of 15% to retirement and use the rest for student loan repayment and towards very minimal expenses. The goal is to get out of student loan debt as quickly as possible. Alternatively, you could try to increase your income temporarily to help you get out of student loan debt more quickly.
Let me emphasize that your most powerful wealth-building tool is your income. The sooner you free it up from debt, the faster you can become really wealthy. As a lawyer, you will have the potential for an absolutely fabulous income and are statistically more likely to become a millionaire than most other professions. If you are able to harness your income now, the greater your chances are for having a retirement that most could only dream of.
Best of luck,
Oh, the "no work clause." Unfortunately, I am all too familiar with this. As much as possible, you have to abide; however, there are some creative income sources to consider here too i.e. virtual assistant, book-keeping, tutoring, and other things that could reduce your burden while not directly violating the policy. I was very successful with private tutoring, which helped me in my courses for example.
Also, a few years back, I heard Kevin Mcgovern, JD speak about this. He is a Cornell graduate and ultimately started a very, very, very successful VC firm. Anyway, he worked anyway because he had to support himself and his family. He got mediocre grades but thrived nonetheless. I certainly couldn't suggest his path, but I do think that people must be pragmatic with regard to their specific circumstances as well. Thanks so much for the insights and follow up!
I agree and disagree. I actually didn't ask anyone for help so maybe I shouldn't have written it in that way, but my grandmother did kindly help me with the tuition. As I was living on my own and already working evenings and weekends, I did not refuse the help. I have never forgotten what she did for me, and I visit her all the time. I still owe her a vacation or two as repayment, as well/ :)
Your kids are your genetic offspring; they are the continuation of your line. Why wouldn't you want to help them? I don't agree with spoiling them; don't buy them cars and things like that, but helping them with their education is in YOUR interests, too. I will personally help my kids to the fullest extent of my abilities if they are up to studying.
I agree with you that more students are going to school, and schools costs (tuition, fees, room and board) are consistently increasing. Both of these contribute to the student debt problem. With respect to comparing it to credit card debts, credit card debt didn't go down because we stopped using them but rather because there were more debts in default.
Because of the higher than normal unemployment rate, it is hard to say that credit cards aren't as important because so few people (40%) have adequate savings to survive during a job loss or sickness. Even though it is not advisable, people do use plastic money to live during hard times.
I also agree that it is a very hard position that students are in. Clearly, if parents desire for their children to go to school starting those education savings accounts or 529 plans as early as possible are a big help. Also, being realistic about one's budget can help. Perhaps, one may elect to go to a community college for 2 years and work part-time to reduce costs for example. Students can also start entrepreneurial efforts as well. Students also need to be better informed about the process of obtaining student grants and scholarships. I know that these are hard to come by, but it is also a fact that there are hundreds of millions of dollars in unclaimed scholarships and grants available each year in the US.
I think too often we decide that debt is the only solution, but I definitely see your point and have personally dealt with the consequences.
Does government guaranteed student debt encourage institutions to raise tuition costs without increasing services?
1) yes, the schools are in a disproportionately powerful position. They either will get paid by the students or the government, so they can't lose.
2)Is higher education necessary to receiving a higher income? What are the benefits and tradeoffs?
Higher education is not necessary for receiving a higher income but is often associated with becoming a higher paid employee. The data does suggest thought that the absolute value may be smaller than we originally thought. Business owners and sales professionals certainly don't require a degree in order to have extraordinary success.
I think the benefits are that a degree often shows that you have the discipline and intelligence to stick with a "rigorous" program. School can also make you aware of a) what career options are available to you and b) perceivable good fits for you. Additionally, school can show you your strengths and weaknesses.
Direct and indirect (opportunity) costs are the biggest detractors in my book. I think effort must be placed to minimize this (like the suggestions you mentioned).
3)Can we shorten the overall time spent in school? Could people start college at 16 or even younger?... Is practical knowledge more important?
Practical (technical) knowledge and emotional intelligence are clearly important for success. There is often not a direct connection between topics covered in school and are careers. That said, I am not personally for making all college like a trade school (just get the skills necessary for a specific job). I do believe school has value beyond direct applicability. That said, costs must be factored in, regardless of how talented a student is and regardless of the reputation of the school.
Thanks, as always, for raising some compelling points!
Unfortunately, these 6-figure debts are becoming increasing more common. A lot of the people I interact with are from professional and graduate schools as well, and large debts are not rare. I also know several faculty members with student loans on par or larger than many mortgages.
You and your BF can definitely get out of it though. My wife and I did this both before we were married too. My debts were large, and most of them (80%) were student loans, but I'm happy that we are debt-free today (excluding my mortgage). It can definitely happen quicker than you think too. With a decent income and a lot of discipline for a finite period of time, you can definitely work your way through it.
@ Honey, that's true, but I'm sure that a lot more than 30% of adults have been to college (whether they finished or not is a different question), earning AA degrees or even dropping out. Many of these non-BA earners have student loan debt as well.
At first I went at 17 and then dropped out because I could no longer afford it, then I went back (still couldn't afford it) in my mid 20's and took out loans. Honestly, because of my degree and major (Master's in Economics), it was worth it for me, but that's not always the case.
Just about every 17 or 18 year old that I know/meet has dreams of going to college even though they have no clue what they want to do in life. They are just told that no matter what, college is the answer.
@Honey Great point. It's very hard to replicate a world class graduate and professional education. The mere resources that you have at your fingertips is immensely enriching.
I think I would've done what I do now anyway, but I definitely didn't understand the financial ramifications. I'm an English major, for pete's sake!
@Jeremy I would say that my internships for lawyers quickly changed my opinions of practicing law: once I saw that it wasn't like TV (Ally Mcbeal, The Practice, Boston Legal, all of which have been my "favorite show" at one point or another etc.), I developed a different career strategy in a hurry :).
To be fair, I faced a very similar situation: teach for a university or work in the private sector. I love teaching but would take a significant hit (financially and time-wise) if I taught in the traditional university setting. It's hard for me to say which path is correct because I also believe that there is no one right job for me.
Best of luck with your decision.
The unfortunate part is that I do not see how I could possibly get out of the debt in anything less than 5 years. I currently work for the government, making about 57,000 per year and the interest rate on my debt (137,000) is either 8.25 or 6.8 percent (my loans are all federal and I have excellent credit, but those rates are fixed by the government) and so those interest rates end up taking a large toll on my ability to really pay that balance down. But perhaps I am just taking the easy way out and throwing my hands up rather than, like you said, making some hard choices and really paying that balance down aggressively. My one fear is that if it ends up taking me 5+ years to pay off the debt then I will end up missing out on all the compound interest that I could be making on the retirement savings I might otherwise have been making with my excess income during that period. But then other times I think that argument really doesn't hold water because each dollar that I contribute to retirement instead of paying down my student loans is another dollar that will be accruing that 6.8 or 8.25 percent interest, which considering today's market is not a rate of return my retirement savings would likely be earning.
I forgot about the loan forgiveness: if you do decide to work in a public sector to take advantage of this, consider saving whatever you would have been putting towards repayment into a special account. That way, if you decide to leave the job (i.e. better offer or don't like the job), the job won't be able to leverage their debt-repayment over you to keep you there.
Very good point on how an educational degree is a "signal" to employers. It's a shame that getting one is so expensive nowadays for Americans.
I personally found the courses I took in university to be the most valuable, whether practical or more theoretical. Clearly, both types of courses are valuable to the end student.
However, there is a difference between "useful-theoretical" and "useless-theoretical". I would argue that as you go down toward the chain back to high school, the courses become more and more useless. There are many courses I took that I honestly cannot recall a single thing that I learned, simply because I have never ever used a single concept from them.
University, on the other hand, I am very glad to have attended, and I do not consider it a waste at all.
Here's how I personally rank school on a usefulness level:
University / College
Half of elementary
Half of high school.
The rest to me is fat that can be trimmed without compromising education. Why? You just relearn the same things over and over, but slightly more difficult with each passing year. Much of it (learning how to program BASIC, gerrymandered social science classes, etc...) is completely and utterly useless, not to mention not even consistent with reality.
What I truly argue for though is not an elimination of these programs: I realize that my own values are subjective, and I don't assume that other people necessarily see things the same way.
Instead, I propose that there be choice: Instead of the government controlling the schools and the educational cirriculum, let it be chosen freely by the parents. I would argue that one reason why university is much more useful is that it is not strangled down to the same degree as K-12 is.
It is much more relevant to the real world and faces significantly more competitive pressures, though as you know, there are still distortions in place that raise costs and lower services, though not as much as in the earlier years.
@Khaleef, that's very true, I hadn't thought of that! Though it all boggles my mind a little bit - not only did I declare my major my first semester and never change it (BA, MA, PhD all in the same subject), I cannot fathom taking out loans for an undergraduate education when there are so many scholarships and grants that are so easy to get.
There are majors and/or institutions where a BA will boost your earning power enough to justify taking out loans. But as you say, considering that most people don't know what they want to do (or their choice is informed by the glamorization of a high-paying profession on TV) I don't think most people who take out loans fall into that category.
I am very biased on this one because I am very pro-education. I just wish we were more practical in paying for it. Like you said Khaleef, spending 15 years paying back a student loan is unacceptable IMHO.
This is what every non-finance major should see:
Steve, you are far ahead of many others in the game. 137k sounds big (try on a 300k mortgage for size ;)) but just think of it like a mortgage on your future earnings. Your education, skills, and knowledge give you incredible leverage going forwards into the future.
I bet you could kill that debt in 5 years if you really apply yourself on lowering expenses and increasing income, maybe even less! Things will pick up sooner or later (maybe later), and lawyers usually make pretty good money.