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.

43 comments
Khaleef @ KNS Financial
Khaleef @ KNS Financial

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.

Roshawn @ Watson Inc
Roshawn @ Watson Inc

@Steve,

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.

Steve
Steve

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."

Matt
Matt

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".

Jessica07
Jessica07

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.

Honey
Honey

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.

Invest It Wisely
Invest It Wisely

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.

Honey
Honey

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.

Roshawn @ Watson Inc
Roshawn @ Watson Inc

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.

Steve
Steve

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.

Invest It Wisely
Invest It Wisely

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.

Honey
Honey

@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).

Briana @ GBR
Briana @ GBR

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

Invest It Wisely
Invest It Wisely

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?

Honey
Honey

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.