College Students In Cri$i$–The Next Bubble

The graduating class of 2011 have a foreboding footnote on their diplomas: Most Indebted Class Ever–and the 2012 seniors will surpass them. Average student-loan debt for new graduates has reached $27,300, according to Mark Kantrowitz, publisher of FinAid.org. Add to that the loans parents took out for their children’s education, which students, more often than not, pay back themselves, and the number rises to $34,400. That’s a nearly 8% increase over last year and a 36% hike from 10 years ago. As most people know now, with student loans, unlike real estate or business debts, you can’t walk away through bankruptcy. Since employment rates for recent college grads have plummeted in the past two years, as have starting salaries, the possibility of a sharp rise in student-loan delinquencies has led some analysts to predict that this could be the next subprime-mortgage crisis, rippling into the wider economy. Total U.S. student-loan debt, which exceeded credit-card debt for the first time last year, is on track to hit $1 trillion this year.

 

But neither the horrific stats nor the voices of students crushed by debt, including the burgeoning Occupy Wall Street protests in cities and on campuses throughout the nation, are likely to keep the families of high school seniors from seeing a brand-name education as a ticket to a better life. George W. Bush, proclaimed that every American should own a house. When campaigning in 2008, President Obama challenged Americans to increase the number of college graduates from 40% of young working adults (ages 25 to 34) to 60% by 2020. Americans have been told that higher education, much like buying a house, is an investment in the future–even as the cost of college has skyrocketed 500+% over the past 30 years. 

That’s more than four times the growth of consumer prices and almost twice the increase in health care costs.
Meanwhile, according to Lawrence Mishel, president of the nonpartisan Economic Policy Institute, “the wages of those with a college degree have been roughly flat for 10 years, and it’s not really improving relative to those with less education.” 

In other words, almost yearly tuition hikes aren’t leading graduates to bigger paychecks. Coupled with rising debt loads this situation could stunt economic growth in the long term if today’s grads end up being too poor to start a business or buy a house or send their own children to college. 

Granted, a faster growing economy might be able to absorb more of those graduates, but the fear that too many students were spending too much on degrees that may never generate the expected return on investment, is just another example of runaway optimism fueled by decades of Congress refusing to make politics a practice in reality in order to keep the masses complacent and pliable.
Diplomas from institutions like Harvard will still open doors. But what about a degree from a less well endowed school? Those colleges are expensive and that’s where you hear kids going $100,000 in debt to graduate with religious-studies or theater majors. 

Some students’ debt burdens are so big; you wonder what bank would approve the loans or what parent would be willing to cosign them. A student that I talked to online amassed an astounding $152,132 in debt while studying documentary filmmaking at New York University. As I heard many times over the past few weeks, she was so convinced that getting into a top-tier school would eventually pay for itself many times over, that the cost didn’t keep her from enrolling. “You can’t imagine the emotional darkness that descended upon me when I started to understand the full extent of the debt situation I was going to be in,” she told me. She graduated from NYU with honors in 2007. 

To keep up with her $1,200 monthly student loan payments, she spent the past two years working 9 a.m. to 5 p.m. as a lab technician and then rushing home to do phone support for a software company from 7 p.m. to 10:30 p.m. She got so burned out from the long hours that she quit the lab job this fall and doesn’t know how she’s going to fulfill the loan terms, which require her over the next 26 years to pay a total of $350,000, including interest. “It feels absolutely hopeless. I don’t know what I will do in the future if I want to get married or have kids,” she says. “It’s a huge burden to bring to a relationship”. 

It’s these costs, both personal and societal, that worry economists. More than two-thirds of all college students borrow to pay for school, and 10% to 20% borrow excessively, (defined as having monthly loan payments that exceed 10% of a person’s gross income). According to a study published in March by the Institute for Higher Education Policy, 41% of borrowers who began repayment in 2005 became delinquent or defaulted within five years. 

Repayments–and severe penalties that accumulate if borrowers fall behind–kick in regardless of whether students leave school with a degree. The connection between college dropouts and crippling debt makes this growing problem even wcarier. Barely half the students who start college get a degree within six years, and graduation rates at less selective colleges often hover at 25% or less.
Now I know that there is a large contingent of people who simply think that these students shouldn’t have been so naïve to think that the liberal arts degrees for which they were working, would somehow enable them to payoff the enormous debt they were racking up. It’s their fault and their problem. Why should it be a governmental problem?

 

Well, when Presidents of the United States, your parents, your high school teachers, your friends, the media all tell you that this is the way it’s done in America, a young person is inclined to believe it.

 

Just when you thought it can’t get any worse

 

“Student debt is more toxic than mortgages,” according to Mark C. Taylor’s, a religion professor at Columbia University and the author of the higher-education critique Crisis on Campus, “because you can’t walk away from it.” 

Given the dire consequences of defaulting, the government recently created an income-based repayment plan for federal-student-loan borrowers whose debt at graduation exceeds their starting salary. Monthly payments will be lower than they would be under the standard 10-year repayment plan, and although users may end up paying more interest over the life of their loans, anything still owed after 25 years will be written off. Another new program forgives federal loans for borrowers who spend 10 years working full time in public service.
But these options apply only to federal loans. To try to help people like Lyndsey who took out massive private loans, Fordham law-school grad Robert Applebaum started ForgiveStudentLoanDebt.com which is attempting to help erase student debt to stimulate the economy. Applebaum has already secured the more than 25,000 signatures needed to deliver his petition to the President through the White House’s We the People program. He has also amassed many followers on Facebook and at least one fan in the House of Representatives. This summer Michigan Democrat Hansen Clarke introduced a bill that includes a provision about forgiving student loans. 

Closing the barn door after the cows have already escaped?

 

Getting the latter provision passed is a long shot, which helps explain why many higher-education advocates are encouraging the next generation of students to borrow less money in the first place. To help prospective applicants compare the costs of attending different schools, all colleges as of Oct. 29 must include a net-price calculator on their websites. The calculator asks families for detailed financial information and then provides customized estimates of what they will likely pay out of pocket. Industry experts are also focusing on improving the information applicants receive once they are accepted. Kantrowitz testified before a congressional advisory committee that in an online survey last year of some 580,000 students and parents, 61% of respondents said the financial-aid-award letters they received did not include basic information about loan terms like interest rates or monthly payments. Some didn’t even use the word loan, referring instead to a “subsidized Stafford,” which families might confuse with a grant. (It’s actually a loan whose interest is paid by the federal government while the student is in school.) Hence the Department of Education’s current push to standardize financial-aid-award letters so people won’t get lulled into over borrowing. 

Given the enormity of the college debt crisis looming, it’s painful for me to watch Republican debates. Just this past Saturday night, on CBS, Governor of Texas, Rick Perry, who bragged about being a “C” student earlier in his campaign, called for the dismantling or three governmental agencies. Although he could only remember two of them at the time, he did remember that the Department of Education was one of them. The same department that may be in charge of helping students and parents avoid another debt crisis hoisted upon the American taxpayer.
The usual conservative cry will go something like this; Why should I have to pick up the tab for someone elses bad decisions? My normal response would be along the lines that we are the ones promoted the idea for which the students must now bear. 

But it goes beyond simple empathetic reasoning. If anyone thinks that the country is in the financial condition that could stand up under students and parents walking away and defaulting on another trillion dollars of debt, you must be either independently wealthy, part ostrich, or already so poor that you just cannot bear to think about it. Words like catastrophic simply have no meaning any more, but that’s the word I am forced to use.

Too Many Colleges? 

Despite the absurdity of Governor Perry’s brainstorm of eliminating the Department of Education, there could well be just too many colleges that perform the same tasks. In my native Mississippi for instance, there are three to five major(which is a relative term) universities, several small private colleges, and a well intentioned network of much less expensive two-year colleges. For a largely rural and relatively poor state, one would think that the administrations for all three could get by with three-fourths of the cost. But college loyalty is big business and colleges are fully involved in securing the retention of the heritage and brand names with which they are associated.  Attempts have been made to combine the major universities, as they successfully achieved in neighboring Louisiana, but have failed each time. For 75% of the eligible students the two-year colleges would serve their needs for two of the four years their respective majors require. They are fully accredited, located strategically throughout the state and offer an inexpensive alternative for core courses that the major colleges require.

Kantrowitz feels that setting an undergraduate debt ceiling of $45,000 is a safe burden for someone who plans to earn a degree in engineering, computer science or business. He suggests lowering that cap to $35,000 for a student likely to choose a liberal-arts major. But he and other experts warn that the lesson is not to forgo college. It’s, “Don’t go overboard”. College grads still have roughly half the unemployment rate of those without degrees, and their median earnings are about $21,900 more per year, which translates into almost $1 million more over a lifetime. Students also need to make smarter choices. Too many are committing to expensive schools or completing lengthier programs than they need to. Many policy advisers are fanning the college-for-all flames when vocational training or a two-year associate’s degree would be a better fit. If you go to a four-year college and get a degree and can’t use it in the labor market, you’re not really getting much of a return on that investment. 

It’s advice the current generation of graduates wish they had heard earlier. Hopefully, before someone foolishly eliminates the Department of Education, college counselors, high school counselors, banks and parents will stop and realize more fully the extent of the college loan crisis that is devestating graduates, their families, and their futures. If teenagers or their families simply decide that college is no longer worth the expense, and colleges begin closing like manufacturing, retail and all other businesses, then the future of America is truly at risk.

HG

  1 comment for “College Students In Cri$i$–The Next Bubble

  1. jackarm
    November 16, 2011 at 8:05 am

    Lots of wisdom in this article. I think colleges should expand focus on the hard sciences more than the soft ones. sometime ago it became fashionable to say you were majoring in “sociology” instead of something dull like engineering. Liberal Arts graduates took place of engineers, scientists, math majors etc.

    a policy of lower tution to take the hard sciences and pay full tution for liberal arts might make sense.

    Dept. of Education – pretty much out of touch and making no significant contribution. We have to remember – they were on duty and on guard when all these students loans were made. I never remember any guidance or warning from them. They presided over this debacle. No – they are not responsible – because they are responsible for NOTHING – except their paychecks and their benefits.

    Should sudent loans be forgiven. No – and I have skin in the game – my wife is still paying hers – perhaps go to interest free for balance of loan but for God’s sake – not another giveaway.

    We will get thru this – hopefully the bitter taste in the mouth will remain for years and years to prevent a second act.

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