The Educated Indentured Servant

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.

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