Dealing With Student Debt

Dealing With Student Debt

As of the third quarter of 2015, student debt in the U.S. has soared to nearly $1.25 trillion. That’s trillion with a “t.”  As little as ten years ago it was only $350 billion, less than half the amount of credit card debt held by consumers.  Today it’s 70% higher.  Why is this happening and what can be done about it?

The problem is two-fold. First, corporate America has determined that a four-year college degree denotes a better job qualification with a commensurate higher salary.  Certainly in some fields (especially in science, technology, engineering, and mathematics, aka STEM) this is true, with college expected to bring prospective employees’ skill sets up to a level that enables them to become productive quickly, allowing  companies to avoid the huge time and expense needed to train them.  But there are many jobs for which a college degree does not offload this development cost from businesses.  Take automobile sales, for example.  A non-college graduate comes to the table with just as much knowledge as one that’s holding a degree.  Both still need to learn about the products and about effective selling techniques, neither of which is generally taught in universities.  Despite that, the graduate will almost always be considered better qualified for such a position.  There’s also the perception in our society that a college degree imbues the possessor with an aura of greater intelligence, culture, leadership, and other positive qualities.  (In reality it doesn’t necessarily confer any of these attributes.  Just look at Donald Trump).

Which leads to the second part of the problem: there are simply not enough four-year college seats available for the volume of students coming out of American high schools. With the demand for a college degree so high, this supply/demand imbalance has caused prices for colleges to skyrocket at well over twice the rate of inflation for the last thirty years or so.  The result is obscenely high college costs that have become unaffordable for a larger and larger proportion of the population over time.   The federal government has expanded various loan programs over the years as a way to help mitigate this problem, but the level of debt that students are forced to take on in order to attend college is making it more and more difficult for them to be able to save for retirement, for a house, or in many cases for anything at all.  The NY Times cited the situation of Amanda Danner, a 26-year old analyst whose biggest monthly expense – ordinarily rent or mortgage expenses – is actually her and her husband’s combined student debt payments.

The good news is that larger companies are seeing the problem and getting involved. Some in the financial services industry such as Fidelity are offering a new workplace benefit that will pay down the principal of student debt held by their employees.  Although the amount is small – Fidelity covers up to $2,000 per year, and some employers offering this perk cap the cost to $10,000 lifetime – the value to the employee can be big.  In Danner’s case (she works for Fidelity) it will shave four years off her repayment period.

The federal government is also contributing. One current problem is that an employer’s contribution to an employee’s student loan is taxed as income to the worker.  Several bills in congress would make this perk tax-free, similar to the existing benefit for employer tuition reimbursement.

If you are a young employee carrying a large student debt burden, especially federal loans, the Federal Direct Consolidation Loan program may be a way not only to help you stretch out the payment period but additionally to help with flexible repayment schemes such as Pay As You Earn (PAYE) and Income-Based Repayment (IBR). There’s also a Public Student Loan Forgiveness program that eliminates your loan balance in as short a time as ten years if you work in the public sector or for certain charitable organizations.  None of these solutions, however, will reduce your interest rates.

In the end, though, there needs to be a way for young adults to gain access to an appropriate level of education without having to sacrifice their ability to save for retirement or for other needs. While technology is enabling alternative lower-cost approaches such as online learning, its acceptance needs to become more widespread, and the stigma of not having a degree from a prestigious school needs to be overcome.  Despite the best efforts of government and private industry, without the latter two changes the problem in my opinion will continue to grow.

2 Responses

  1. Alan Silverstein says:

    Interesting observation that ridiculously rising higher education costs are due to a supply/demand problem. So why don’t we see more private colleges being created on the supply side? And if existing colleges are doing value-pricing, that is, charging what the market can bear rather than a small markup over the true underlying resource costs, where is the extra profit going? Just into bloating administrator salaries? Building on-campus stadiums ($220M) like in Fort Collins, CO?

    • Artie says:

      Good question and I do not know the answer. One might infer that new entrants to the market are perceived as second-class and have failed to establish themselves as viable alternatives to existing universities. It remains to be seen if the substitution effect in economics plays out in the education space (where viable lower cost alternatives appear and become established).

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