The Growing Weight Of Student Debt

31112813 - student loan burden Jeff wrote a good article last week about recent changes to federal student financial aid and some possible strategies to help finance college education.
His article addressed some things to consider in the years prior to applying for financial aid, things that may affect the amount of aid available to a student. It is important to understand that when a student is awarded financial aid, the total “package” can come in the form of both grants and loans (debt). And although the inclination often is to try to get as much aid as possible, this week, I want to talk about the potential negative effects of carrying too much student debt after graduation.
Jeff and I both have our oldest kids entering their sophomore year in high school, and so college is the next big hurdle in our families’ financial plans. My husband, Seth, and I are trying to plan so that our son, Max, will not be burdened with an inordinate amount of debt when he graduates.
To be clear, student loans don’t necessarily need to trigger panic. In fact, having a small amount of student debt after graduation can help young adults build credit. It can also be beneficial with respect to taxes. What should trigger panic, however, is the amount of debt many students are graduating with, and their growing inability to repay it.
According to Morningstar, student loan debt is the only consumer-related debt sector where delinquencies have increased since the financial crisis. The official delinquency rate for student debt more than 90 days past due, according to Morningstar’s June report, was 11 percent in the first quarter of 2016. However, if direct and federal family education loans that are in deferment due to unemployment or financial hardship are included in that number (that are assumed to be 90 days past due or deemed discretionary), the real rate is closer to 17 percent.
Why is this? The main issue is that more than a quarter of students who take on college debt are graduating with just too much of it. Back in the early ‘90s, approximately 50 percent of those who graduated from college did so with debt, but their debt averaged just over $10,000. This year, not only has the percentage of those graduating with debt risen to 66 percent, but that debt averages a whopping $35,000. Talk about starting off in a hole . . . our kids could spend many years trying to dig themselves out of that one.
The reasons for this increase in college debt are pretty obvious. College is getting more and more expensive every year, and the amount of available government grants is not keeping up with the rising tuition costs. As a result, the burden of paying for a college education is shifting more to individual families. But because family income has been flat since 2000, people are needing to take out more loans to pay that tuition.
One solution to this problem is for a student to attend a less expensive school. The Brookings Institution completed a study that found that the five-year default rate for 2009 borrowers was 47 percent for students of for-profit schools, 38 percent for students of two-year institutions and 27 percent from “non-selective four-year institutions.” That same paper, published by Morningstar Credit Ratings, states that enrollment at for-profit colleges quadrupled between 2000 and 2010, after marketing to “a lower income demographic with the promise of higher-paying jobs.” Unfortunately, for many of those kids, those higher-paying jobs have been unattainable.
Many students, however, choose a school for a specific program, or location, or even the “feeling” they have when visiting a school, rather than its cost. And, unfortunately, students are often led to believe they can afford to go to a specific school, simply because they can borrow the money they need to pay the tuition. This leaves many students and their families in excessive debt when they graduate. Mark Kantrowitz, a leading student financial aid expert, defines student loan debt as “affordable” if, the college degree obtained as a result of the debt leads to an after-tax increase in income that is sufficient to repay that student’s loans in 10 years or less.
He gives the following example:
“The average starting salary for a bachelor’s degree recipient in the humanities was about $45,000 in 2015, according to the National Association of Colleges and Employers. That compares with about $30,000 in average income for high-school graduates—or a $15,000 difference. After considering taxes, the net increase is about $9,000. Half of that ($4,500) is about 10percent of gross income and would be enough to repay roughly $35,000 in student loans over a 10-year repayment term.”
Another factor in the cost of college, that people sometimes overlook, is the cost of travel to and from school. With so many colleges and programs to choose from in New England, every college graduate (and their parents) should ask themselves whether or not it makes sense to fly back and forth to school because he or she wants to ski in Colorado during the winter, or enjoy warm weather year-round.
I understand that we all want our kids to have the best possible college experience and to go to their dream school, no matter the cost or the location. However, it is important to remember that excessive debt can negatively affect a college graduate in many ways. Often times, a graduate is forced to take a job that is outside of his or her field of study, simply to be able to afford to pay back loans. This is unfortunate, considering that many times a student chooses his or her school for that very course of study that he or she cannot afford to work in. College grads burdened with excessive debt also will often postpone things such as buying a house, getting married, and even having kids. Many times they even move back in with their parents!
So, in order to start your kids off on the right foot after they graduate from college, it is important to understand the benefits of any financial aid packages offered, while also considering the cost of any debt resulting from those packages. I know we will be doing the same thing when it comes time for Max to go to college because he is not moving back in with us after he graduates . . . our girls already have dibs on his room!
As Jeff always says, be vigilant and stay alert, because you deserve more. Your kids do, too!
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