Sunday, December 30, 2012

Student Loans - The Kiss of Death

As my kids will tell you I am an outspoken critic of student loans.  I believe they are the kiss of death for young people.  It is "easy" money that is very expensive to obtain (watch out for the fees), that are hoisted on to the backs of our young before they are old enough to really understand what they are getting.  

I recently talked to a young person about re-structuring their student loans and determined that  currently they have a non-federally-insured loan with about $66,000 in principal, a term of 30 years and an interest rate of 5.5%.  If they pay on that loan every month for 30 years they will pay over $68,000 in interest.  I (and the author) see that as $68,000 in lost consumption potential or opportunity cost for a large portion of a generation.

Some ask, "How am I supposed to go to school without student loans?".  Instead of telling you what to do, let me tell you what I did.  I did not own a car until I was in graduate school, I lived at home as an undergraduate, I worked part-time, I started working at 12 and worked more or less continuously through my college years, I saved everything, my parents agreed to pay my tuition and fees only at a state-supported University, everything I received as gifts (birthdays, etc.) was saved, I did not eat out very often, I majored in a subject that guarantied me a job when I graduated, and as a result I graduated without any student loans.  When I got out of school I was free to spend my money as I saw fit because I had no student loans.  Did I live like a pauper?  You betcha.  Did I start at a community college to keep the costs down - of course.  But in the long run I was better off for it.  

The article (post) is in italics and most of the bold is my emphasis.  From Global Economic Interest:

I encourage you to visit the original post.  It has some interesting links that are worth a read.

. . . . . Monthly, we report on consumer credit noting that the majority of money flows into consumer credit is due to student loans.

The red line on the above graph is the growth of consumer credit after subtracting student loans.  Currently, not considering student loans – consumer credit is growing at $200 per year for every person 18 years or older in the USA.
Student loans, however, are not obtained by the majority of the population – most is targeted to a small group 18 to 26 years old.  The average debt burden on this segment per capita is growing at an annual rate exceeding $2,000.
Here are some random statistics from the American Student Assistance (ASA) website:
  • close to 12 million – or 60% of all students – borrow annually to help cover costs.
  • there are approximately 37 million student loan borrowers with outstanding student loan – and 14%, or about 5.4 million borrowers, have at least one past due student loan account.
  • among all bachelor’s degree recipients, median debt was about $7,960 at public four-year institutions, $17,040 at private not-for-profit four-year institutions, and $31,190 at for-profit institutions.
  • the average student loan balance for all age groups is $24,301.
The lead NY Times article, however, was not about those who graduated – but about those who dropped out.  Here the ASA website offered the following perspective.
  • nearly 30 percent of college students who took out loans dropped out of school, up from fewer than a quarter of students a decade ago.
  • more than half of students who take out loans to enroll in two-year for-profit colleges never finish. At traditional nonprofit and public schools, the percentage of students with loans who started college in 2003 and dropped out within six years is about 20 percent.
. . . . One significant factor that differentiates the U.S. from other countries:  Many countries educate their young at no cost to the students.  It remains to be determined by other analysis which approach to funding higher education has any economic advantage.  At this juncture it appears that a generation is being saddled with debt they may not be able to repay – and that could well be the deciding factor in the economic analysis.
My weekend posts are geared to identifying specific elements of the USA economic system which are creating growing headwinds for future economic growth.  It is hard to believe student loans are a healthy societal benefit (or investment) in the future.  However, I have difficulty espousing solutions:
  • Is higher education’s purpose to provide specific skill sets, or just provide a broad general education for employers to finish the training? Are we graduating too many “arts” degrees?
  • With reduced funding levels, high school (secondary school) is graduating students with no specific skills.  Should secondary education be teaching specific skill sets such as mechanics, welding, agriculture, etc?
  • Should higher learning institutions be burdened with responsibility for educating in fields where there are jobs? Should the government be involved?  Business?
  • Should students be counseled before deciding their course of study (specifically jobs availability) or taking any student loan (showing how this burdens their future options)?
I do not believe there are any good or perfect solutions – but the current path for the USA is clearly wrong.  The USA is a consumption based economy, and the young entering the workforce are not able to provide economic tailwinds if they enter the economy already burdened with debt.

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