Wednesday, August 17, 2016

Our Student Debt Bomb

You waive goodbye to your parents as you pull out of the driveway. The family sedan packed to the brim with all your belongings. Your destination is college with plenty of studying, football games, intramural's, and some partying mixed in. In the end you come out a logical, more enlightened person. Ah feels like yesterday that I was still in college.

Going through college involves plenty of ups and downs. Coupled with being broke almost everyday, the fun you have with new friends, and exciting new experiences make for an all around great time. Yet the best time lies ahead they say. That is until student loan bills start arriving a few months after you graduate. It's a nice big old reality slap in the face.

The way I like to see it is your real education in life starts after you graduate.  Not because most people start paying off their student loan bills. But this is when most people get real life workplace experience you can't learn in a textbook.
Of course there are plenty of other degree's you'll earn in different areas of life, but we'll save that for another day.

So how did we reach this portly $1.36 trillion dollars in student loan debt? Clearly this doesn't happen overnight, although in 10 years we added over $880 billion worth. If the average degree costs $50k we have 17.6* million new degrees minted in ironclad** debt the last 10 years. Pretty nice return for the bankers(thanks to the Clinton's), but only 1.76 million new degrees on average each year which is paltry.  Remember that jobs problem we have? Well within that data are over 2 million unfilled jobs in Professional/Business Services & Education/Health Services. Easy to speculate most of those jobs require a degree, but clearly debt is not the answer.

Yes I know I still haven't answered why we have such large amounts of student debt.  I'll tackle that now.

There are a variety of reasons why student debt has exploded the last 30 years, and even more so the last 10.  Fortunately some smart people did this amazing research which was published last year. If you're wondering yes I find this interesting to read!

Here are some highlights from the study.

From 1987 to 2010, sticker price tuition and fees ballooned from $6,600 to $14,500 in 2010 dollars. After subtracting institutional aid, net tuition and fees still grew by 78%, from $5,790 to $10,290. To provide perspective, had net tuition risen at the rate of much maligned healthcare costs, tuition would have only reached about $8,700 in 2010...

Very interesting to see that college costs have outpaced healthcare costs. Seems to me people need to put more focus on this area.

...Falling within our notion of supply-side shocks, state and local funding for higher education fell from $8,200 per full-time-equivalent (FTE) student in 1987 to $7,300 in 2010, all while underlying costs and expenditures were rising

I think it's no shock here that government assistance for college costs has been falling.  States especially are the first to cut back on higher education costs when budgets get tight, or in most cases budgets deeply in the red. Oddly in instances where student grant aid was increased it contributes a 17% rise in tuition costs.

Looking at individual factors, we find that expansions in borrowing limits drive 40% of the tuition jump and represent the single most important factor.

Well there it is in black and white. Hard to argue with that statement now.

Let me summarize this all really quick.  Student debt alone the study found was not the only contributing factor to rising college tuition.  In fact rising wages from degree holders, federal and state grants/aid changes, and general cost increases are contributing factors.  They just happened to find that student debt, and borrowing limits were the largest single factor.

Why would that be the case?

Schools, despite most of them being public universities or  non-profit driven, still respond to market demand the way a regular company would.  When borrowing is expanded it makes the pool of eligible students that can now afford tuition larger. In response they increase their tuition to absorb the influx of paying customers to match supply/demand. Also it's their duty to extract maximum amount of "profit" from each student to carry on as an entity.

The study cited the increases in borrowing limits here.

To grasp the magnitude of the change in borrowing capacity, first note that real aggregate borrowing limits increased by 56% between 1987 and 2010, from $26,200 to $40,800 in 2010 dollars.

This recognizes the changes in subsidized and un-subsidized loan programs by the federal government along with expansion of private loans.

Then let's not forget the 1997 Higher Education Act enacted by the Clinton's made it completely impossible for students to erase their debt in bankruptcy.  They gave bankers a home run with that law. Ironically who are Hilary's biggest donors? Oh and Bill was the one to repeal the Glass-Steagall Act.

In conclusion before we send our kids off to college this semester let's try to think about the financial decisions we make to allow this opportunity.  College is a great experience, and is supposed to allow you better opportunities in life.  Just remember not all degrees are created equal.  Two people can go to the same school, and pay the exact same amount for their degree. Except one comes out with a degree in Engineering, and the other a degree in Anthropology.  The Engineer is likely to make 6 figures or more in the first year of work. Our Anthropology major on the other will likely be stuck with a job under $50k for quite awhile, and that's if they can even find a job in their field. Pay for the Anthropology degree with debt and you've just exacerbated your financial well-being.

Of course don't forget that MAD Consulting offers college planning for a very low price, and is included in our industry leading $29.99 monthly subscription for individuals. We can help you forecast college costs for any institution your child wants to attend, and setup the appropriate investment vehicles. It's never to late to start thinking about your child's future.  If you want to help pay for your child's education then start now. Don't send them off only to end up being locked in debt shackles. If you have student loan issues then contact us so we can analyze the situation and determine the best route to eliminating your debt.

*assumes the degree is paid for entirely with debt.
** Per the Higher Education Act of 1997 student debts were no longer dischargeable in bankruptcy. Once again thank you Clinton's.

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