Why student loans are insidious.

Insidious: causing harm in a way that is gradual or not easily noticed; awaiting a chance to entrap; harmful but enticing; having a gradual and cumulative effect.


Student loan debt is a ticking time bomb in the economy. These numbers tell the story:

  • In 2008, 206,000 Americans graduated from college with more than $40,000 in student loan debt.
  • In 2010 the average college graduate had accumulated about $25,000 in student loan debt.
  • In 2012, 71% of all students graduating from four-year colleges had student loan debt, with the average debt per graduate totaling $29,400.
  • In 2014, the total outstanding student loan debt surpassed $1.2 TRILLION.
  • The total number of Americans with student loan debt is 40 million.

As a result of these actions, student loan debt is currently the second largest source of personal debt in the United States. The only personal debt category that is larger is mortgage debt.  And this makes student loan debt a big problem for the economy.

HOW DID WE GET HERE?

Here are some of the reasons why student loan debt has skyrocketed in the last decade:

1. The cost of attending college has skyrocketed.

The cost of college has increased faster than the price of any other item in the economy. As you can see in the image below, college tuition has increased at a greater rate than the CPI or housing. And it’s not even close.

College Tuition
To illustrate this increase, I recently found my ACT score sheet. Near the bottom of the sheet, it stated that the estimated yearly tuition at North Dakota State University was projected to be $900. That was assuming a full-time class load of 15 credits each quarter, and there were 3 quarters per year. That’s right, tuition was only $300 per quarter in 1983. If we adjust that $900 for inflation using the BLS inflation calculator at www.bls.gov/data/inflation.calculator.htm, we get an inflation-adjusted yearly tuition of $2,139.18 in 2014 ($1,069.59 per semester).

What was the actual in-state tuition at NDSU in 2014? $6,604 for the academic year (2 semesters).  That’s not counting student fees, which add another $1,336. That may not seem so bad, but it is still more than triple the inflation-adjusted estimate based on the tuition cost in 1983.  But hey, the Bison just won their fourth FCS football championship in a row! Hail the Bison!

2. The demand for a college education has increased because “you need a college degree to be successful.”

Government, colleges and universities, and the media like to perpetuate the idea that a college degree guarantees success in life. For most young people, that means a high salary, a nice car, and a big house. The most common statement is that a college graduate will make almost $1 million more over their lifetime than someone who didn’t go to college.

This number ignores income taxes that will come out of your salary, and is distorted by the excessively high salaries of the top graduates who are paid the most.  And what young people aren’t told is how much they will actually make once they get a job. Here are just some of the facts about the post-college job market for today’s graduates:

  • Graduates fresh out of college often receive starting salaries of $31,000 or less.
  • More than one-third of recent college graduates are working in jobs that don’t require a college degree at all.
  • The unemployment rate for college graduates younger than 25 years old was 9.3% in 2010.
  • More than 1 million college graduates are unemployed today.

I fell into this trap myself.  My projected starting salary once I completed my degree was $35,000 per year.  My real starting salary: $23,000 per year.  Which just happened to be the same salary I was making before quitting my job to go back and finish my undergraduate degree two years earlier.

Good luck paying for your car, house, and family on that salary.  Oh, and don’t forget that you still have to make those payments on your student loans.

3. The recession has resulted in more people going back to college to escape unemployment.

College administrators know that anytime the economy enters a recession, enrollment will go up. People who can’t find a job or who want to switch to some other profession (often in the belief that a college degree will result in a higher salary) go back to school.  60% of these students take out loans to cover their college costs.  Most of these students end up taking out larger loans than they really need to cover the cost of attendance.  They often end up using the money to pay for their living expenses as well as their books and tuition.  After all, it’s easier than finding a part-time job to pay for those expenses.

In a double-whammy, colleges and universities increase tuition the most during recessions (source: Going Broke by Degree by Richard Vedder, page 3).

4. Student loans are extremely easy to get.

How do you get approved for a student loan? Here are the steps:

a. Go to fafsa.ed.gov.

b. Fill out the required information.

c. Once you have completed the FAFSA, the government decides your eligibility for financial aid as well as how much “aid” you qualify for.

d. The college/university financial aid office contacts you and asks you how much you want to borrow. They will often offer you more than you need to pay for school.

e. You tell the financial aid office the size of the loan that you are going to take out.

f. The college/university deducts your tuition from the loan amount and sends you any funds remaining.

Notice that unlike other loan application processes, there are no credit or background checks. And you can’t shop around for the best interest rates. You are stuck with what Uncle Sam gives you.  It’s so easy to get over-your-head in debt this way, a caveman gecko could do it.

5. The federal government is peddling student loans like dealers peddle drugs.

I’m not exaggerating to make a point. In November of 2010, U.S. Secretary of Education Arne Duncan visited T.C. Williams High School in Alexandria, Virginia and encouraged students to take out student loans with these words:

“Please apply for our financial aid. We want to give you money. There’s lots of money out there for you.”

I wonder if Arne told them that they would be expected to pay all of that “free” money back.   In an ironic twist that was missed by Mr. Duncan and others attending:

The event was the kick-off of a joint push for financial literacy by the U.S. Department of Education, the Federal Deposit Insurance Corporation and the National Credit Union Administration.

Why is the federal government so eager to load young people up with debt? Because they are one of the three entities (along with the colleges/universities and Sallie Mae) who benefit from the issuance of student loans.  The federal government made $41.3 billion off of student loans in fiscal year 2013.  Not too shabby:

The $41.3 billion profit for the 2013 fiscal year is down $3.6 billion from the previous year but it’s a higher profit level than all but two companies in the world: Exxon Mobil cleared $44.9 billion in 2012, and Apple cleared $41.7 billion.

And it’s only going to become more profitable:

student-loan-debt-sallie-mae

Now you know why the Department of Education is pushing high school kids to go into debt.  Don’t expect the new Republican Congress to help out student loan debtors, either.  After all, House Speaker John Boehner told student lending executives a few years ago that he has them in his two trusted hands.

The federal government isn’t the only one peddling student loans.  People who should know better, like Ken Clark, CFP, are also advocating them:

 First and foremost, it’s important to realize that student loans can and should be used to help meet a student’s reasonable living expenses (above and beyond tuition) while in school.  The government fully expects this and encourages it. (emphasis added)  You can use these loans to help pay for room, board, books, and so on.  You can even use them for things that are indirectly related (but still necessary) to a college education…child care, transportation, overseas travel, and technology are all fair expenses for which to use student loan proceeds.  (The Complete Idiot’s Guide to Paying for College, page 58). (emphasis added)

Yeah, perpetual payments for that Spring Break you can’t remember and that kick-ass gaming computer are totally worth it.

Ironically, this is the same Ken Clark, CFP who wrote The Complete Idiot’s Guide to Getting Out of Debt and The Complete Idiot’s Guide to Boosting Your Financial IQ.  That pffft! sound you hear is Mr. Clark’s credibility shrinking to nothing.


What does this mean for student loan debtors?

1. They are delaying their futures.

Recent college graduates are delaying the following things because of their student loans:

  • 44% have put off buying a home
  • 14% have delayed marriage
  • 28% have delayed having children
  • 55% have delayed saving for retirement

You need good credit and/or a decent income in order to pay for those things.  Recent college graduates have neither.

2. They are educating themselves out of the job market.

If one degree is good, two must be better right?  Wrong.

Can too much education hurt your chances of getting hired? Some workers and recruiters say it can, especially for entry-level jobs.

Carrie Reiling, an editor in Irvine, Calif., said she had difficulty finding a job in the Washington area several years ago with a master’s degree in international relations. “My salary and job expectations were in line with the nonprofit associations in which I wanted to work, and I had three D.C. nonprofit internships under my belt and some international experience, but I just couldn’t seem to find anything,” she said.

She waited tables and worked as a receptionist for more than a year, before she finally got a job with a government contractor.

After a few months at that job, her supervisor shared with Reiling that she had been wary of hiring her because of her master’s degree. Why? “They didn’t want me to leave after three months,” she said.

Reiling isn’t alone in discovering employers might view her credentials as a negative.

***

In some cases, it comes down to money. “Why hire a grad student for 40K-plus when you can hire a recent undergrad for 30K?” Warren said.

Why, indeed.  Especially since you can pay a new graduate peanuts and they will kiss your butt and call it ice cream.  And even if you only have a bachelor’s degree, it might not help your job prospects all that much:

Over 317,000 waiters and waitresses have college degrees (over 8,000 of them have doctoral or professional degrees), along with over 80,000 bartenders, and over 18,000 parking lot attendants. All told, some 17,000,000 Americans with college degrees are doing jobs that the BLS says require less than the skill levels associated with a bachelor’s degree.

underemployment-chart

 

3. They are facing perpetual debt slavery.

I told you how easy it was to get student loans above.  Now I am going to illustrate how easy it is to get behind on your student loans.

Here’s how it works. Let’s say you are the average college graduate owing $25,000 in student loan debt. Your interest rate is 3.4%, and you have chosen to pay your loan off over 10 years (120 monthly payments).  According to my calculations, your monthly payment would be $291.05 (208.33 in principal and $82.72 in interest). If you successfully complete your payment plan with no interruptions, at the end of the repayment period you would have repaid $34,925.72. The total cost of your loan was $9,925.72.

That doesn’t sound too bad, does it? Well, look at it this way. If you get a job that pays $31,000 per year, that’s a gross income of $2,583.33 per month. But we still have to account for payroll deductions for taxes. Assuming that you pay federal income tax at the 15% rate and FICA and Medicare taxes, your net income will be only $1,998.21 per month. Now subtract your student loan payment of $291.05 and you are left with only $1,707.16 to live on. Keep in mind that this calculation doesn’t include state income tax deductions which would reduce your net income even more. It also doesn’t include deductions for health care insurance or 401k plans.

What if things change? For example, what if Congress lets the interest rate adjust back to 6.8%? In that case, your monthly student loan payment would be $402.23 and you would have only $1,595.98 to live on. Can you see the problem?

And what about those poor suckers people who have taken out $40,000 in loans? At an interest rate of 3.4%, their student loan payment is $465.68 per month.  They are left with $1,532.53 per month to live on. And at an interest rate of 6.8%, their payment balloons to $643.56 per month. They would only have $1,354.65 to live on every month!

That’s if the graduate makes all of his payments without missing one over the entire ten year period. God forbid he become ill, have an accident, or lose his job. Missing payments for any length of time will result in a longer repayment period, late fees, and added interest charges. Not to mention the resulting decline in his credit score, which will make it more expensive to buy a house or car in the future. And a poor credit score can now result in him getting turned down for a new apartment or job as well.

Those are just my hypothetical examples, but something similar seems to be happening in the real world.  Nearly half of student loan borrowers have payments equal to more than 10% of their salaries. And 10% of borrowers have to use more than 20% of their salaries to pay for their loans. (Source: No Sucker Left Behind)

Students are also falling behind on their payments. The student loan delinquency rate is currently over 10% and has been increasing for the last 10 years.

Student Loan Delinquency

In addition to that, about 14% of all students that graduate with student loan debt end defaulting within 3 years of making their first student loan payment. In the past few years, default rates on student loans have increased every year.

Student loan defaults

And this is where the federal government’s true motivations are revealed.

WHAT HAPPENS ONCE YOU DEFAULT

If something happens and you just can’t pay, the pain really begins. For starters, you can’t have your student loan debt discharged in bankruptcy.  And once you default on your loans, well, this graphic describes the process:

student-loan-scam

Student loans are more than insidious.  They are the financial version of herpes.  Because once you have them, you have them forever.

 

 

 

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Categories: Borrowing, College, Economics, Education, Financial shenanigans, Job Skills, Liars, Opportunity Cost, Propaganda, Student loans, Tuition

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