The Ramifications of Burgeoning Student Debt
New college graduates these days face the same financial challenges that young workers have faced for the last several generations. As they enter the workforce there’s the cost of an apartment, perhaps a used car if public transportation is lacking, and of course their personal preferences for entertainment. At some point during their evolution they may begin to think about marriage, starting a family, and possibly buying a home. And perhaps most importantly, at some point they begin saving for retirement. Unfortunately, a number of recent economic trends – such as slow wage growth and higher required down-payments for home buyers – are likely to delay some of the above milestones. But the biggest culprit to impact young Americans’ ability to achieve these financial goals is the growth in student loans.
According to The Institute for College Access & Success (TICAS), a non-profit policy research group in Oakland, two thirds of the graduating class of 2011 – the latest year for which data are available – had student loan debt. For those with loans, the average amount of debt was $26,600. And that only reflects student debt at public and private non-profit four-year colleges. According to Forbes Magazine, over 90% of students getting two-year degrees at for-profit schools carry debt. The average debt load at a public two-year institution is $7,000. College loan debt is now the second highest form of consumer debt behind mortgages.
I can see two possible long-term trends resulting from this situation. One is a decline in the number of Americans owning their own homes. Indeed, rental markets in those cities that have had the greatest job growth in the last several years are exploding. And while housing markets in those very same locations are also doing well, much of the latter growth is being driven by foreign and by institutional investors, not to mention low interest rates.
Probably the most concerning trend is the potential for young workers to put off saving for retirement. The $300 per month that they could be stashing away into an IRA will instead go to paying off their college loans. And the consequences of delaying retirement savings can be dramatic. If you begin saving $300 per month starting at age 35, earn 7% per year on your savings, and retire at age 65, you will amass a total of $366,000. Contrast that with someone starting instead at age 25, who will end up with more than twice as much ($788,000). Imagine how much more comfortable the latter nest egg would make you
What can a college student do? First, consider the return on investment (ROI) of the chosen university. PayScale.com, a website that reports pay scales for various types of jobs, reports on the ROI from over 500 schools. They calculate it by surveying alumni to estimate lifetime earnings, measuring the costs of getting a degree, and comparing that to the earnings of non-college graduates. Although the data is limited and fraught with assumptions, it’s the most rigorous approach I’ve seen towards analyzing the college investment decision. See my previous blog on this topic: Is a College Degree Still Worth It?
Next, students should try to utilize federal loans before considering taking out riskier (and more expensive) private loans. There are a number of features of federal loans that make them beneficial, such as income-based payback caps as well as the opportunity to have the loan forgiven in 25 years (or 10 if you work in a public or nonprofit company). But they do have their drawbacks: federal loans cannot be dismissed through bankruptcy.
In the end, keep in mind that retirement planning, just like debt management, is a necessary part of sound financial planning. Even if it’s difficult, every month you put it off will cost you!
Here’s a link to the TICAS white paper: http://projectonstudentdebt.org/files/pub/classof2011.pdf