College Students are racking up so much debt that Student Loan debt exceeds total credit card debt in the United States
It was reported by Consumer Reports in June 2016 that forty-two million Americans account for $1.3 trillion of student debt in the United States. That is $1,300,000,000,000. That is one big pile of money. If it was a pile of $1,000 bills that would be 84 miles high. We will describe in better detail how student loan debt is so high as it is fed by the seventy percent of today’s college graduates that have student debt.
When studying educational attainment levels in the United States one does not need to look far to understand why college is a part of so many conversations. Nearly fifty percent of all adults (age 25 or higher) in the United States at least started college. That is close to 100 million US citizens.
A Brief History of Student Loan Debt In The United States
In the 1940’s in our grandparents era only five percent (less than 200,000) obtained their college degree and paid their own way. The cost of college was supported by the GI bill for nearly half of the college graduates got a free education as a reward for their military service. The rest of the cost was largely paid by cash by students working through school or their families.
In the 1960’s through the 1970’s the Federal Government began backing student loans and offering Pell grants. This was our parents generation and Pell grants accounted for nearly seventy percent of the cost of college. The Federal Government was also contributing large amounts of funds to public research universities. This allowed the cost of college to remain reasonable. College students could afford to pay cash for the cost not covered by Pell grants.
Since the 1980’s the story has changed. Dramatically.
The upward spiral and reliance on debt to go to college has been skyrocketing.
The average student debt in 1995 was $10k for about 26% of graduates. Ten years later in 2005 the average student debt increased to $18k for about 48% of graduates. Then another decade later, in 2015, the average student debt increased to $35k for about 69% of graduates.
Consumer Reports also reported that more than half of student debtors have had problems making loan payments. It is fair to say student debt is a problem in the United States. Some have mentioned the word “epidemic”.
How Is Student Loan Debt So High?
There are numerous factors that have led to such a high dependency on student debt.
#1. Everyone Is Doing It – It’s the New American Dream
The American Dream has taken on a new life form. The original dream was born from the early American colonization of the great states as they broke away from England was independence and what came with it – land ownership. The right for individuals and families to buy a plot of land, build their own home, and raise a family.
Similar to the fervor created by the mid-west land rush of the 1890’s that created a race for land in what would become Oklahoma in the early 1900’s, we have a new twist on this dream, and it is called the race for the college degree. It has become so much a part of what happens in life after high school that the story in America today involves nearly seventy percent of high school students, or two million students, go off to college the fall after getting their high school diploma.
This demand has led to a college supermarket of over four thousand institutions offering the product of higher education to Americans. These institutions are both public and private, two and four year, non-profit and for-profit.
This also has led to accelerated pricing and greater need for and reliance on debt to fund this new American Dream.
#2. There Are Limited Alternatives
There simply are not a lot of alternative paths to adulthood. Things have changed from past decades such as:
Manufacturing jobs. Factory jobs offered good pay, secure long-term employment and good benefits. In 1970 manufacturing jobs accounted for 25 percent of all jobs where today this number is closer to 10 percent. These jobs are not as common due to the rise of technology and automation and competition from global operations and workers. Sadly, “Made in the USA” is not as common as in decades past.
Military. The path to the military is not as favorable or desirable today as in past decade. The GI bill and college funding programs made serving more enticing in past decades. Today fewer than three percent consider the military and even less join. I am not saying the military is not a good path. Done right and with a plan, the military can provide great training and opportunities. For example, going to one of the military academies or getting a college degree allows military entry as an officer.
Move over diplomas. There are a lot of jobs that used to be available to twenty-somethings either just starting out after high school that are now filled by college graduates and older workers not ready to retire. Companies are valuing the college degree more than the high school diploma and valuing the experience baby boomers are able to bring to the job. This is not good for those who’s highest level of schooling is the high school diploma.
#3. College Loans Are Easy To Get
42 million students have student loans. That large number says it all.
The Federal Government in fact is using the interest earned on student debt to contribute to Obamacare and the Department of Education estimates the Federal Government earns about $28 billion per year from student loan interest and fees.
Students getting Federal government backed loans are not judged or evaluated based on credit score, job experience, major selection, college selection, age, or demonstrated ability to repay the loan.
The scary part is that Federal loans represent 92 percent of all student loans.
The Federal Government offers ALL students Stafford loans – up to $31,000. They also offer Parent PLUS loans.
Subsidized Stafford Loans. The loans may be subsidized for students who complete the Free Application for Federal Student Aid and show a demonstrated need. This means students can attend college with this money and not have have interest accrual and their payback period begin until AFTER they stop attending college.
UnSubsidized Stafford Loans. Students who get unsubsidized loans can also attend college with this money and not have have their payback period begin until AFTER they stop attending college. But their interest begins accruing immediately.
Parent PLUS Loans. The maximum PLUS loan amount is the difference between the college’s cost of attendance and all of the other aid that your child has been awarded. Interest and payback begin immediately upon loan origination.
Standing in line behind the Federal Government are banks willing to lend to students or their parents. They do have more qualifications, requiring parent guarantees and co-signors. They start the payback period right away that includes interest rates that may be as high as 10%.
Some argue that the Federal Government should get out of the student loan business. The belief is that making the banks or private lenders compete for business, they will have more stringent lending standards that will prevent this loans for all handout that is currently taking place.
It reminds me of the “mortgages for all” program supported by Bill Clinton’s administration. The lending standards were lowered and the oversight so minimal that many unqualified people were able to buy a home – with some terrible terms.
Anita Brewer, 34, in 2016 working as a teacher’s aide racked up $60k in student loans. Due to non-payment (missed payments and default status) and an initial deferred payment period she has seen her balance owed balloon to $160k. She cannot declare bankruptcy and faces a lifetime of limitations and the prospect of never repaying the balance due.
#4. College Costs Are High – And Rising Faster
Rising college costs is largely a supply and demand problem and is a by-product of the current pursuit of the American Dream.
Does it seem too far fetched when we think about it? We are a generation of parents pushing our kids to their limits. I mean we have been pushing so many extra curricular activities since they could walk.
Both of my boys participated in the YMCA All-Star clinic when they were four. The boys did a different sport each week for five weekends and were awarded a trophy when they completed. We took pictures, did videos, posted it all on Facebook. That was just the beginning and I am certain all parents can relate.
So when now think about the current situation that has seventy percent, or two million per year, of today’s high school students heading off to college. It is no wonder that the cost of college has risen over 5% annually for thirty years. This is a faster rate of growth than inflation and health care over this same period.
Today the average cost of a public instate residential 4-year public university is $20 thousand. For private university, this cost is double that, or $40 thousand. That’s $100-$200k for a 4-year degree. The annual cost to highly selective private university residential college is $70k. That is a price tag for 4-year undergraduate degree of nearly $300k.
Until something major changes this trend will continue for the foreseeable future.
#5. Some College Students Lack A Plan
Some call the lack of a plan irresponsible. It is pretty normal for most people to not have a plan. And to expect teenagers to have a plan or know what they want to be when they grow up is kind of a reach – to say the least.
As we get older we start to think ahead a bit more and make plans, follow plans, execute plans.
What is happening right now is that high school seniors graduate and then:
- don’t go right to college right away
- start at community college
- go off to 4-year college without a clear idea of what to do
The lack of a plan, indecision and lack of clarity breeds the long-term college student, the late major declaration, the switching of majors at least once, the switching of colleges, and an extended period of time to graduate.
Colleges do not even advertise four year graduation rates any more. They instead promote six year graduation rates.
Many students without a plan do not gain traction and commonly spend more than six years going to college and face higher odds of not getting a degree at all.
This is not all students, just a bunch of them.
Some kids do have an idea. They do have a plan. They have had enough experience before or during college to understand their passion and are pulled toward a life pursuit.
#6. Some College Students Lack Grit
This one may strike a chord in some but is grounded in reality. Many high school and college students have not worked a “real” job. I am talking about a job that requires showing up every day to work a shift, on time, properly dressed, following orders and executing a job function to help the business succeed. For an extended period of time.
Students that have experience working hard and earning money learn the value of a dollar. This exercise is almost something I would call a rite of passage to adulthood. The earlier this can happen the better. Students who juggle working a job with school work – even better.
Research shows that students who balance school and a part-time job are more responsible, have higher grades, and learn the importance of time management.
Grit. A powerful four letter word. Employers want it. They seek it out. Students that show they have it will have an advantage.
Two words of advice: develop grit.
Big Student Loan Debt, What’s Next?
There is no sign that this college loan debt will slow down anytime soon. There will likely be some change. But without a big change, there will continue to be high annual college inflation costs.
The best thing we can do is recognize the current trend and actively decide to manage it – responsibly.
If you as a parent have the funds to cash flow the cost of “any” college your child can get into, that is awesome. You or your family have made some right moves in your career and have put yourself into position to pay the way for your child to make their mark, wherever they can get into.
If, on the other hand, you the parent have to get loans or take from your retirement or borrow against your home to fund the college experience for your child(ren) – then you may want to meet with a professional financial advisor to discuss your long-term financial impacts.
While I am a major fan of higher education, I am more a fan of “responsible” achievement of higher education. More specifically I am fan of using higher education as a means for advanced or specialized training so that you are equipped with the tools and experience you need to gain meaningful employment and improve your quality of living as an individual and as a family.
This is a survival of the fittest world we live in. There is little mercy for those that do not put themselves into position to succeed. There are no handouts or freebies. The opportunity in this country is unlike all others, but it is up to the people to go after it, to go get it.
For students who must pay their own way and borrow for their college experience, then you will want to proceed carefully. There is a right way to get your 4-year degree.
Next week I will write about How To Go To College And Graduate With No Debt.
Remember to be awesome.