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College Degree: Gateway to Middle Class Prosperity or Financial Burden?

While many students and their families pursue a 4 year college degree for the imagined financial security and solid middle class living, the cost(s), both to pay for the degree and the long term effects of earning the degree, may be greater than the return.  Generations have been raised to expect that their standard of living can and will surpass their parents.  However, with annually increasing college costs and the ease of borrowing student loans amongst the current generation can be creating a ripple effect of unintended consequences for our future prosperity, and not fulfill the expectation to exceed their parents’ wealth.  Creative Marbles Consultancy analyzes a recent report by Bloomberg News, American Dream Eludes With Student Debt Burden: Mortgages, addressing the value of a college degree for long term prosperity, which as our regular blog readers know we’ve been continuing to highlight. (See the links throughout our commentary.)  In this blog post, the italicized quotes are from the Bloomberg News article followed by Creative Marbles Consultancy’s commentary and thoughts.

A worker with a bachelor’s degree had a median weekly income of $1,066 in 2012, compared with $652 for someone with a high school diploma, according to the Bureau of Labor Statistics. The unemployment rate for a college graduate was 4.5 percent, compared with 8.3 for people with only a high- school degree.

The above statistics add credence to the belief that a college degree is the means to a stable financial future, as students and their families often share with us.  However, a closer look at how families are paying for the college degree can add complexity to the simple logic that college equals a “better paying job” until retirement.  (Plus, as we posted earlier, the underemployment rate for new college graduates and types of employment available even with a college degree may not be the middle class, salaried jobs of past generations; therefore, stable employment.)  Increasing student debt and parent debt for higher education (i.e. PLUS Loans) can handicap new college graduates from fully reaping the fruits of their college degrees, by limiting their ability to accumulate wealth.

Two- thirds of student loans are held by people under the age of 40, according to the Federal Reserve Bank of New York, blocking millions of them from taking advantage of the most affordable housing market on record. The number of people in that age group who own homes fell by 4.6 percent in the fourth quarter from the third, the biggest drop in records dating to 1982

“Buying a home and having a family are the hallmarks of middle-class American life,” said Robert Lawless, a professor at the University of Illinois College of Law in Champaign. “The hope is still alive, but for now a lot of people are being forced to rent because all their money is going to pay off their student loans.”

 “…it’s a shame when going on and getting a degree means you can’t have that American dream.” –Luke Nichter, History Professor at Texas A & M University (He and his wife have a combined $245,000 in student loans and make payments of $2550 monthly.) 

“We went to school like we were told to do, to join the middle class and be good citizens,” said [Tiffany] Loftin, who lives in Washington. “But, if buying a pair of glasses comes down to me missing my payment, I wonder if I’ll ever be able to live that life.”  [Ms. Loftin missed her student loan payment last month, as she used the money to purchase eyeglasses.]

The desire for a college degree, when financed by debt, may have unintended consequences.  While potential borrowers may consider the salary needed to pay back the actual loan amount, s/he may not consider the “opportunity costs” like moving back home with mom and dad or delaying the start of one’s own family.  Potential borrowers may need to ask more questions about future employment, their ability to repay the loans and the trade-offs they’re willing to make in the future for their college degree–not an easy forecast to make for anyone, let alone a 17-18 year old teenager/emerging adult.

The issue [student debt’s consequences] is being exacerbated by an explosion in the $150 billion private market for student debt with interest rates for some existing loans surpassing 12 percent. Unlike mortgage holders, borrowers have little hope of refinancing at lower rates. Interest on some new federal loans is set to double to 6.8 percent in July if Congress doesn’t extend the current rate, as they did last year. 

Almost a third of borrowers in repayment are 90 days or more overdue on their loans, public and private, according to the New York Fed.

Others tarnished their credit histories with missed payments as they tried to find post-graduate work in a weak labor market.

The lifetime of consequences for assuming loans is not limited to not being able to purchase a home.  At the same time the average principal amount borrowed increasing annually,  and interest can create additional financial burden, as interest capitalizes quarterly, adding to the amount owed.   For example, the average student debt for the Class of 2012 was $26,600.  At a standard repayment of 10 years at a fixed 6.8% interest rate, borrowers will expect to pay back $36,733.64, which includes $10,133.64 of interest, in $306.11 monthly chunks.  

Combined private and federal student debt doubled since 2007 to $1.1 trillion, according to Consumer Financial Protection Bureau and New York Federal Reserve data, as parents became less able to fund educations in the years following the 2008 financial crash.

In the good years, parents frequently used home equity loans to pay for college, which made the interest payments tax deductible.

“Families experienced significant reductions in their home values and maybe dealt with unemployment and the loss of value in their retirement funds,” said Rohit Chopra, student-loan ombudsman for the CFPB, a regulatory agency set up in the wake of the credit crisis. “That meant parents had to shift the costs of higher education to their children, which meant higher student debt.”

At the same time families are experiencing a downturn in personal wealth, many state governments are reducing funding to public universities to balance their budget, causing tuition to rise annually.  The decrease in state funding is also shifting more responsibility of paying for college to families.  Both the annual, sometimes double digit, rise in college tuition and the increasing burden for college costs on family’s shoulders can add even more pressure on students to borrow.  Thinking through the possible consequences, both the gains on the investment and the delayed or altered lifestyle, in assuming student loans can help potential borrowers and their families be confident in their decisions.  Since student debt, once assumed, is nearly impossible to be relieved.

While a bankruptcy can wipe out housing and credit card debt, there’s no absolution for student loans. Since a 2005 change in bankruptcy laws, student debt can’t be discharged, barring reasons such as severe and permanent disability. Lenders can garnish income tax refunds, wages, and even Social Security checks to get repayment.

Plus, the Federal Department of Education spent nearly $1.4 Billion on collecting overdue student loans in 2012, leaving little room for delinquent borrowers to find a way to manage their debts.  Also, total student debt has topped $1 Trillion possibly diminishing the overall wealth of an entire generation, regardless if the individual has student debt or not.  If peers are unable to purchase homes and all the subsequent lawnmowers, paint, extras for homeownership, plus begin developing equity in a long term property investment, where will the confidence as well as the means to consume?  Thus, less goods and services will need to be produced, possibly leading to less job opportunities…And, the potential for the shrinking of a generation’s wealth is before all borrowers are required to begin repayment.

About 37 million people have public and private student loans according to the New York Fed. Almost half of those loans are in deferment, meaning borrowers don’t have to make payments while in school or while going through financial hardship such as unemployment. However, in many cases interest keeps accruing during those periods, adding to the loan’s principal.

The relative ease of borrowing for college (i.e. no collateral needs to be promised, nor credit history assessed and for Federally guaranteed loans, no co-signer), plus the increasing need for families to borrow money to pay for college, complicated by a challenging job market for recent college graduates may be challenging family’s thinking that a college degree is a gateway to middle class prosperity.  The youngest adults may be challenged by servicing their own debts for college, as well as supporting the growing retirement generation of Baby Boomers, further restricting middle class wealth.   While an educated, middle class workforce may be the needed engine for future economic expansion, what (if any) is the breaking point in the costs the current and upcoming generations of college-going young adults are willing to bear?