Tag Archives: student debt

What to Pursue; Money or Fulfillment?

Barack Obama was recently berated in the Wall Street Journal’s opinion section in regards to his federal debt forgiveness programs related to student debt. One such program is a limit on how many years after graduating that your debt can follow you. For some jobs sectors, such as government employees, this can be as little as ten years. Another aspect of Obama’s program is limiting the percentage of your income that has to be paid towards student debt. With the numbers of those enrolling in this program increasing, the articles main criticism of the program is that it is becoming increasingly costly for the taxpayer.

While the author has a point in that the more people who sign up for this program, the more expensive it is, this is the case for many government programs including food stamps, welfare, etc. The writer also claims that it is a negative point that such programs incentivize going into lower paying fields if the government will forgive their student debt faster. While this may be the case, isn’t it better to have people in some positions who otherwise wouldn’t have been able to afford to take a lower paying job if that is what they want to do for work? I know some grad school students and phd candidates not only get their tuition covered, they get a stipend for living expenses. While this isn’t the case for any undergraduate programs (that I know of), going easier on their student debt can incentivize and allow more people to pursue fields with lower pay that they find more fulfilling even though it may not require an advanced degree.

The article takes a tough stance on fields of study that don’t have high pay and whose graduates are likely to need help paying back their student debt because their chosen career doesn’t allow them to make enough money. I took issue with this because for many people, their preferences are such that personal fulfillment and happiness at work is much more important than earning a high salary. Most of these people understand that when they choose their field of study in college that they may not make as much as an engineering or finance major. My point is that high levels of debt is a major cause of unhappiness and stress, and while programs that help forgive debt can be expensive, they are a drop in the bucket in terms of the United States’ federal budget and federal debt but if they allow students to pursue passions that they otherwise wouldn’t have, then isn’t it money well spent?

Student Debt Hurting the Economy

Ever since it became relevant, most economists have seemed to believe that student-loan debt plays an insignificant role in the economy. However, the immense growth in student-loan debt in recent years indicates that its effect will soon demand attention, as it puts a damper on the US economy. An article in the Wall Street Journal (Student-Loan Debt Slows Recovery)  indicates that average debt has increased 25% in the past four years. Today, the average student-loan debt is $29,400. However, many of us know that attending a university like the University of Michigan can leave us with a debt of over $100,000 (even as much as $200,000).

The Federal Reserve Bank of New York reports that Americans have accumulated $1 trillion in student debt. Compared to the $10 trillion in mortgage debt, this may seem insignificant. But the biggest impact this is having on graduates is on their inability to accumulate credit, get loans, buy a car/house, get married, etc. Just when graduates are expected to go out into the real world and shape their lives, they are faced with these credit concerns which inhibit their potential.

Increasingly, graduates are choosing to default on their loans. According to the New York Fed, at the end of the quarter 12% of student debt was delinquent, compared to 7.6% four years ago. “The Fed defines delinquent as debt that hasn’t had a payment in at least 90 days.” More and more, graduates are deciding to simply stop paying their loans- presumably because they are not financial capable, not because they don’t want to.

On its road to recovery, the US needs the boost in consumption, which student-loan debt is hindering. A Bloomberg article, Fed Student-Loan Focus Shows Recognition of Growth Risk, reports that the Fed is noticing the restriction that student-loan debt is placing on car and house sales. More importantly, the article suggests that Fed is recognizing the overall negative impact of student loans on the economy.

So what can be done about this? I do not suggest that people not go to college. Nor do I suggest that graduates keep defaulting on their debt (it is only making their situation worse). Instead, I think the US should follow the wise example of most of the developed world, where college is much more affordable. Western Europe houses many of the world’s top universities, and their tuition is nowhere near top American universities’. Many universities charge a much more reasonable tuition based on household income, something the United States should also consider. I believe some things should not be capitalized on, and education is one of them. Not only would students benefit from lower tuition costs, but the economy would be alleviated from the huge burden it currently faces.

Why College Graduates are Useless

Is student debt good for anyone?  The answer seems to be a resounding “NO!”  Recent research reveals that high levels of student debt not only hurts students, but universities, creditors, and the greater economy as well.  By stifling economic activity and dragging the savings rate in the United States even farther below the Golden Rule savings rate, student debt has the potential to greatly reduce the quality of life in the United States.

Before looking at the effects of high student debt, it’s important to understand where this debt comes from.  A study by Mark Perry, a professor of economics at UM, found that on average, college tuition has grown at a CAGR of 7.45% since 1978.  Compare this value to housing prices, which have grown at an average CAGR of only 4.3% during the same time period (WSJ: “Degrees of Value: Making College Pay Off”).  Certainly, the average CAGR of incomes has not experienced such astounding growth, and some 40% of college graduates end up in low paying jobs that don’t even require a college degree (see my post: “Employment is on the rise, but is it the employment we want?”).  Consequently, more and more students are forced into debt as they attempt to bridge the gap between income and tuition costs.  Today, the average college graduate has $29,400 of outstanding student loans.

This rise in student debt has negative impacts on three main groups: (1) college graduates (2) creditors, and (3) universities.  In this blog post, I will address the impact this debt has on college graduates (I plan on analyzing the other two groups in a later post).  Certainly, the negative impact on graduates is obvious.  Stifled by excessive amounts of debt, college graduates cannot pursue the “American Dream” as freely as they’d like.  A study by the Consumer Financial Bureau found that many Millennials, because they are limited by student debt, delay home ownership, fail to save for retirement, and cannot take out small-business loans due to poor credit scores (USA Today: “Millennial’s ball-and-chain: Student Loan Debt”).  While this is certainly a shame for graduates, this limited economic activity is also a shame for the larger economy.  As we continue to recover from the Great Recession, limited economic involvement is not what we want to see; we want college graduates to buy houses and to save for retirement, as this type of activity makes economies thrive.

In this way, irony strikes again, as higher education seems to have the opposite effect as we would like.  Rather than increase economic activity, universities, by creating student debt, are suffocating it – at least for Millennials.  Furthermore, this post doesn’t even touch on the ways student debt prevents universities and creditors from contributing to economic growth.  To me, Millennials’ limited economic involvement is a cry for reform.  Somehow, students need to be able to attend college without crippling themselves with unmanageable amounts of debt.  But while the problem is obvious, finding a solution certainly is not.