The Burden of Student Debt
As of now, the average student at a four year college takes home $25,250 in debt, a sum that will continue to increase for higher education if nothing is done to reform the entire funding system. Half of all students with debt will be paying down their college student loans for the next 20 years and many more will take longer.
$100 billion in federal loans and $10 billion in private loans are administered each year to students seeking funding for higher education. The estimated total for outstanding student debt, combining outstanding rates on both private and federal loans in 2010, is $844 billion dollars.
On one hand, it seems that a college education is required to get ahead and achieve a level of income that can eventually allow you to buy a house, save for retirement, and perhaps even pay for your children’s college. On the other hand, the great amount of debt that students are taking on may prove to be an insurmountable obstacle that ensures that none of these things happen. What are some of the short term and long term implications of an indebted generation?
Contrary to popular belief, in this recession having a college degree has not translated to markedly better prospects for employment. New college graduates have a 9.1% rate of unemployment, relatively equal or even slightly higher than the national average. With a high post-college unemployment rate, many young people are finding it nearly impossible to find a foothold in launching their professional career, let alone securing a job that will at least pay down their student loan debt.
There is much variation within this unemployment figure, however. Architecture, art, and humanities degrees tend to have higher rates of unemployment (13.9%, 11.1%, and 9.4%, respectively). This contrasts with those in health (5.4%) or education (7%). Thus, undergraduate majors can have large implications on lifetime earnings. Those who majored in engineering, computer science, or business are likely to make nearly 50% more than their arts and humanities counterparts. In short, non-technical training has a higher unemployment rate than vocational training, a fact that can- and must- be used in developing appropriate policy going forth.
Young workers (workers between the ages of 16 and 24) have always suffered with higher levels of unemployment. Younger demographics are particularly susceptible to employment levels that rise and fall alongside market changes, since many young people rely on volatile hospitality and retail sectors.
While unemployment rates are lower for college graduates than for those without an undergraduate degree, college graduates often settle for salaries that are minimum wage or hovering above it. For college students entering the workforce in 2009-2010, the median salary was $27,000, down from $30,000 for 2006 graduates. As jobs have become more scarce, college graduates are oftentimes taking jobs that do not require a college degree. In a recent survey of 2009 graduates, only half said that their first job out of college required a college degree. That said, those that did not attend college faced drastically higher rates of unemployment as jobs in food service, hospitality, and other low-paying industries have been taken by college graduates. A symptom of this is clear in a comparison of the number of college graduates who describe their first job as a “career.” For 2007 graduates, 30% described their first job as a “career,” whereas just two years later in 2009, only 22% described them as such.
Paying off Debt
Many of the jobs taken by recent college graduates often do not pay enough for individuals to successfully meet their student loan debt payments. In 2009, the default rate on student debt reached 8.8% and has been steadily climbing since. The Institute for Higher Education Policy posits that for every borrower that defaults on his/her loans, at least two others are falling behind on their payments. Keep in mind that this rate only represents whether or not the borrower defaulted in the initial two years of repayment. If students default after that two-year window, the figure would be much higher. The total amount from outstanding defaulted loans is between $40 and $45 billion dollars.
Schools are subject to losing eligibility for federal loans if their students habitually default on their loans, but only under very extreme circumstances. Colleges in which 25% of students for three consecutive years must default, or 40% in the latest year, or both lose eligibility for federal loans. Because of the nature of default reporting, this figure represents only those schools that are most egregious violators, not those that are able to hide behind the conveniently brief reporting period of two years. If payments are not met and the student is not able to rely on a parent or cosigner to assist with such payments, the student has few paths of recourse.
Student loans, unlike other types of debt, such as a mortgage or credit card, are non-dischargeable, meaning that even if you were to file for bankruptcy, you are not absolved of the student loan debt. Such lack of repayment means that you are ineligible for certain services, including borrowing a car or a house, in addition to being subject to wage garnishment, seizure of tax refunds, or difficulty getting a job due to negative credit reports.
Debt-saddled college graduates may be bringing more than just their monthly payments into their lives down the line. Mounting debt in the face of unemployment or underemployment may have lasting negative effects on future earnings, productivity, employment opportunities, and psychological health.
On a more practical side, the trap of staying in a low-paying job so that you can make your minimum monthly payments may prove to distract you from learning new skills that may help you secure future employment.
In a testimony to the Joint Economic committee in 2010, Columbia economics professor Till von Wachter discussed the future salary levels of college graduates entering the workforce. Because overall wages are down, he said, it might take 10 or even 15 years before students start making incomes commensurate with past generations.
There has also been a decrease in lower-income students enrolling in four-year college programs. Because of their lack of resources, many lower-income students are opting instead for two-year programs that cost less, but will generally prove insufficient if the American workforce is to stay competitive globally.
Many other students facing debt are trying to save money by moving back home. As many as 85% of college graduates plan to move home, a statistic that undoubtedly reflects the uneasy economic situation and the long road ahead to getting our country back on track. With less graduates committing to jobs, paying taxes, paying rent, and, essentially, pumping money into the economy through consumption, there are simply less people that are in a position to participate in an economy that desperately needs more players.
The Obama administration has sought to minimize some of the damage through a new program that is meant to ease the repayment of student loans by lowering the amount due in monthly payments, while also offering a lower interest rate to those that consolidate their loans. Additionally, there has been an emphasis on enrolling in income-based repayment, which limits the risk of default since loan repayment rates are directly tied to your income level.
Judging by the magnitude of this issue, however, it does not feel as though these changes alone will address the much larger issue that we face. Education is becoming both increasingly vital to achieving a certain level of success while at the same time increasingly a prison for so many young people who will find themselves unable to meet other milestones, such as buying a car, house, changing jobs, taking a chance on a project, or following their dreams. It is not the debt itself that is harmful, it is its magnitude.
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