The views expressed this week are those of this author only. They are not necessarily the views of the author’s employer nor any other author at Chemistry-Blog.com.
Update: Here’s a great Student Loan infographic.
My personal views on student loans have changed dramatically since I graduated high school in 2001. I’ll tell you my $100,000 story later in today’s installment.
If the assumption is that you need to go to college, and if costs are rising faster than inflation, then you’ll have to get there through any means necessary. If it can’t be cash-flowed, it will have to be borrowed. Parents could take out a home equity line on their home, there were several private student loan lenders, or you could borrow from the taxpayers with federal student loans.
Your federal student loans could be subsidized (meaning the taxpayers paid your interest while you were still a full time student) or unsubsidized (meaning you were responsible for your interest payments while you were in school. If you didn’t pay your interest payments – which you didn’t have to – then all that interest would be capitalized and become part of the principle once you graduated).
I’ve already mentioned Obama’s push for America to lead the world in college graduates by 2020. And to help do so, he has called for some $150 billion in increases in federal subsidies for student aid. In the last 10 years or so, the government’s spending on student aid has roughly doubled. Most student loans are federally insured. If the borrower defaults, the taxpayers are on the hook for the balance.
But this isn’t so much to balk at, right? I mean, student loan debt is good debt, right? I’ve already touched on the dramatic increase in tuition (up almost 450% since 1982, four times the rate of inflation and twice the rate of medical care). But consider: student loan debt has increased more than 500%. And that’s not since 1982… that 500% increase is only since 1999. In the same time, disposable income has increased 73%. Total student debt has surpassed the $1 trillion threshold. There is now more total student loan debt than all of America’s total credit card debt. Default rates are for some reason calculated as percentage of borrowers who started repaying in a particular year, and defaulted within two years. As of FY2010 (so borrowers who started repaying in2008), 9% of those student loans are estimated to be in default, highest since 1997.
This may actually be contributing to the higher education bubble as an unintended consequence. In the late 1980s, then US Secretary of Education William Bennett made the argument that increased access to cheap student loans allowed schools to increase price without seeing a typical drop in demand (it allows higher education prices to ignore demand elasticity or maybe even become a Giffen good).
And yet we still borrow. And borrow. And borrow. You can even borrow more than is required for tuition, room, and board. I know, I’ve done it and pocketed the rest (more on that later). Is this a good thing? Is this a positive trend? I argue no. I argue this is a really really bad trend.
So why don’t we stop, or at least curtail borrowing? Well, the FAFSA makes it really easy to borrow. It’s a pretty straightforward form to fill out. We also have a deeply rooted belief that it’s worth it no matter what the cost. We’re not comparing schools based on cost, we’re comparing based on prestige and amenities; cost be damned. The cheaper schools are usually your “backup” schools. It was for me.
And we just don’t have any firm grasp on the reality of how much debt we are accruing. I don’t have to worry about it for 4 or 6 or 10 years… what’s the big deal. By then I’ll have a “big people” job (and probably a new car… and maybe a house… and maybe a credit card balance…) and I’ll be able to afford the payments, besides, I can pay it back over 20 or 30 years.
To make all this even more unappealing, student loan debt is non-bankrupt-able. If you crash and burn and lose everything and are forced into bankruptcy, all debts can be forgiven… except student loan debt. Not only that, but the US government can garnish your wages without suing you first and winning a judgment. It’s really bad news to get in over your head in student loan debt.
None of this talks about why you’re taking out this student loan, or whether your degree plan is a smart one. What are you studying? Does your degree program have a real, actual job market when you graduate (besides adding to the excess supply of college educators)? It’s really sad to see students go some $20,000 in student loan debt for a degree that has no marketable value.
Due to the government actively promoting these loans to students who really shouldn’t be leveraging themselves so far into debt at such a young age, some have called the government a predatory lender. And there’s really no incentive to curtail borrowing. Because they’re federally insured, the lenders know they will get paid. Why would they stop lending? They’re guaranteed any money they lend out.
These detractors contend that if the government is going to get involved in encouraging students to attend college, why don’t they just outright subsidize college education? Just increase money for need-based grants instead of saddling students with a payment book for decades. I know, I know, they’ll lose the interest. But if the government’s going to attempt to manipulate the market – just go ahead and manipulate it.
The government at least does realize what a problem this is becoming. Several weeks ago, Obama issued an executive order regarding student loan debt. He ups the timeline for installation of new income-based payment amount and forgiveness periods. Payment will be capped at 10% of income, and debt outstanding after 20 years will be forgiven. Both of these changes were already in motion to be enacted in 2014; Obama’s executive order puts these changes in place in 2012.
The more substantial change in the executive order will loosen consolidation guidelines. It’s estimated to lower the effective interest rate on loans up to a half a percent. Or is it a substantial change? The Atlantic ran the numbers and calculated a monthly savings of between $4.50 and $7.75. $28.50 per month if your student loan debt is $100,000. So even though the government recognizes the hardship student loan borrowers are facing, the executive order seems to do very little to actually help the borrower out.
I think it’s probably clear by now that I don’t think it’s wise to leverage your education. The “return on investment” is hardly guaranteed – with ROIs varying wildly depending on what useful or useless degree you earn and what job market you graduate into. And it’s just not necessary, especially for an undergrad degree. Honestly, no one except your fraternity brother’s uncle’s HR department cares about your pedigree. In 2011, the average student graduating with a bachelor’s degree is just over $27,000 in student loan debt, up from just over $17,500 a decade ago.
That much debt is just not necessary. Get a job while you’re in school. Apply for 100 scholarships your junior and senior year (even if you’re rejected for 95% of them, the 5 you do earn can really cut down your tuition bill). Or, gasp, go to a cheaper school (I know cheaper is relative given how fast costs are rising anyway…). There really are ways not to graduate with a huge debt balance.
I’m certainly not preaching this from a perch of moral financial superiority. My story is just about the exact opposite. I graduated high school in 2001 and enrolled in a private, religious liberal arts school in the Midwest. Honestly, I have no idea how much tuition room and board was. I knew I was taking out some student loans to help offset my parents contribution to my education, and I knew I was going to have to pay it back “sometime,” but I honestly can’t tell you how much those loans were for.
So I graduated undergrad in 2005 with just over $17,000 student loan debt. I had no idea what the balance was at the time (I now know it’s lookup-able). I didn’t bother to look, because I was enrolling directly in graduate school after undergrad, which means payments were deferred even longer! I was earning a stipend for graduate school, so I didn’t need to take any more loans. Then my new wife (not a chemist) decided to leave the workforce and get her master’s.
When she went back to school, we were losing our primary income and gaining a tuition payment. So what did we do? We borrowed the tuition payment… and a little extra to keep our monthly disposable income the same. No big deal. It’s good debt, and certainly not worth cancelling the cable TV over, amiright? Same thing the next semester (with a bit of cost-of-living increase padded in). And the next semester. We had no frickin clue what we were doing. We were financing a lifestyle (a grad-student lifestyle, but a lifestyle nonetheless). Really, it was no different than putting our lifestyle on credit cards. We just called it something different (student loans) to make ourselves feel better and keep us in denial.
I don’t think I checked my student loan summary once until this point in the story (now I check it every few months). When I finally checked the summary for my wife and me, I was absolutely stunned. Between the two of us, between “normal” undergrad loans and (in retrospect) irresponsible graduate student loans, we racked up a combined $100,000 in subsidized and unsubsidized student loan debt in 7 years. Just like that. It was SO easy.
And the stupidest part? I brought a small pile of cash into the marriage. I saved extra money during high school and college and built up a little money market mutual fund account. Nothing huge, but more than enough to cash-flow my wife’s master’s degree. But I didn’t, because “I’d earn a better interest rate on the investment than I’d lose on the loans.” I was playing the interest-spread game. Yeah, how’d that work out for me, six digits later?
Well, after we recovered from nearly passing out at seeing our student loan balance, we made some changes. We stopped borrowing immediately. We cancelled the cable (and movie dates, and new wardrobes, and haircuts. My wife gives great haircuts with a 5-guard). We cash-flowed the remaining semesters of my wife’s graduate education, made do with my measly grad student stipend, and if we needed to supplement income, we cash-flowed that too from my tiny war chest.
My wife graduated her master’s program December 2009, almost a year before I defended my Ph.D. She got the “big people” job first. We kept our lifestyle where it was (it wasn’t much fun, but we were used to it), and threw everything we could – her entire paycheck and whatever other cash we came across – at her $52,000 of the student loan debt. We made our last payment on her student loan debt March 6, 2011, 13 months after our first payment. We were thrilled to send that last payment in. So thrilled.
I graduated August 2010, and we started repaying my loans right around the time we finished paying my wife’s loans. By the time I graduated, my student loans totaled some $51,000. At this point, we both had “big people” jobs, but we kept our lifestyle at grad-student level and again threw everything we could at the student loan debt. We are so proud to say that today
my student loan balance has just over $7,500 remainingWE’RE DEBT FREE!! (as of 1/19/12). It’s been a long and sacrificial road, but we are so close to the end!
I’d like to say we did it all on our own… but we didn’t. As a wedding present, a family member gave us Dave Ramsey’s book Financial Peace (and subsequently we bought The Total Money Makeover). It really changed our financial life. It helped us prioritize our finances, and we really haven’t had any money fights in our marriage – which is pretty awesome. Whether or not you’re in financial trouble, whether or not you’re having money fights with your spouse, I cannot recommend Dave Ramsey’s program enough. Even if you’re doing great with money, it’s worth a half hour to browse around his website.
Student loan debt is a huge problem in this country. It’s a huge problem because of the expectations and ‘conventional wisdom’ surrounding the ‘necessity’ and ‘prudence’ of taking out student loans. I really hope that conventional wisdom changes in this country. Tomorrow, we’ll look at what the country would look like if the higher education bubble did collapse.