Is There Really a Student Loan Crisis?
The reality of college debt and steps to address it.
It seems like everyone is giving the issue of student loans the Bob Rumson treatment: making you afraid of it and telling you who’s to blame for it.
That’s how you win elections and sell newspapers, but it does nothing to actually help solve the problem.
My question is this: is there really a student loan problem to be solved?
The answer, like most things, is nuanced, and is different for different groups of people.
For some, student loans are a nuisance that drain a few hundred bucks out of their bank accounts every month, but overall are just the price of admission to the next rung on the socioeconomic ladder.
For others, student loans are a permanent shackle around their necks from which there is no escape, weighing down their finances to the point where even covering utility bills takes second place to their student loan payments.
So who makes up these two camps? Let’s take a look.
Getting the Correct Data
There are a few things we need to get sorted out before defining those borrowers who are in crisis. First up is the job market contributing to the demand for college degrees, and thus student loans.
The Downside of a Global Job Market
The percent of college educated Millennials is higher than any other previous generation, which generally indicates much higher lifetime earnings, especially as they advance in their careers.
In fact, Millennials are the most educated generation ever, with 39% of us achieving at least a bachelor’s degree, a full 10 percentage points higher than any other generation since World War II.
However, Millennials are also trying to get jobs in the most demanding job market ever. Even with power starting to shift towards workers during the Great Resignation/Reshuffling, it’s still damn hard to get your foot in the door without at least a bachelor’s degree.
Take this excerpt from a PBS interview about job requirements:
Guest: Even though two-thirds of administrative assistants don’t have bachelor’s degrees, three-quarters of the new job postings for administrative assistants say you have to have a bachelor’s degree to be considered for that job.
So, two-thirds of the people who currently do that job can’t apply for three-quarters of the new jobs in the field. (emphasis added)
Here’s another one.
Guest: Sometimes, a company will require a college degree just because they can.
Sometimes, a company will get 10,000 applicants for one job. How do they winnow them out? One of the easiest ways is just to require a college degree.
Interviewer: Well, this is obviously discriminatory against people who don’t have a college degree, right?
Guest: Well, but you can’t accuse a company of discriminating because they ask for a college degree, can you?
You can’t process people through a database, but you can process their keywords through a database, and a college degree is nothing more than a keyword. (emphasis added)
This is what happens when you are in a global job market and everyone can apply online: you have thousands of applicants vying for the same opportunity, and you need to stand out. One of the easiest ways to stand out is with a college degree.
I like to juxtapose the current job market with a story from my mom’s career, which basically reads like an Old Economy Steve meme.
My parents had just moved to England due to my dad being stationed at RAF Lakenheath. My mom asked about a job on base and was told that she was one of 153 other applicants.
Not wanting to wait 18 months to get a job just to leave in another 12, she got a paper, perused the classified ads, called up a company, got an interview, and started the next week, all as a foreign national.
That type of thing just doesn't happen anymore.
The Size of the Problem
As of late 2021, total student debt stands at just under $1.6 trillion. That sounds like a lot of money, but let’s add some context.
- Credit Card Debt: $860 billion (link)
- Auto Debt: $1.46 trillion (link)
- Municipal Debt: $3.3 trillion (link)
- Housing Debt: $11.25 trillion (link)
- Corporate Debt: $11.4 trillion (link)
- National Debt: $30 trillion (link)
I know that student loan borrowers don’t have their own personal Federal Reserve to print off trillions of dollars and call is “quantitative easing”, but for a national market, $1.6 trillion isn’t unrealistic (caveat: if wages kept up).
Additionally, unlike many other types of debt, no one can ever take away your education.
- Auto debt is funding a depreciating asset (current inflation notwithstanding), with no value creation.
- Credit card debt can fund a variety of items (mostly consumables), but the interest rates are extremely high.
- Mortgage debt funds a normally appreciating asset, but one that also takes lots of money to maintain.
Sure, your wages might get garnished if you get really far behind and default, but the thing you bought will always be with you.
The Personal Impact
Just like the overall size of student loan debt, the average student loan debt gets a lot of headlines. For recent graduates, that number is almost $38,000.
But that number is misleading, as the median student loan debt in 2019 was $17,000. The high debtors (like myself, with $135,000) are skewing the average to the high end.
A similar issue exists with the monthly student loan payment. From a 2017 Federal Reserve research paper, “The average monthly payment among those currently in repayment is $393 with a median monthly payment of $222.”
We can bump those numbers of to $275 and $500, but even this, this means that half of everyone repaying their student loans is paying $275 or less. That’s a much smaller problem than everyone with student loans paying $500, as the (adjusted) average suggests.
Now that we know the size of the problem, we need to discuss who it is affecting most.
Who is Actually in Crisis?
Surprisingly enough, those borrowers with the highest balances are not the ones we should be worried about. Sure, they may be six-figure student debt, but they are also much more likely to have six-figure salaries to deal with it.
Rather, those with the lowest student loan balances are the ones who are struggling the most with paying them off, specifically those who never graduated.
Some College, No Degree
There is a well established relationship between educational attainment and lifetime earnings, which makes sense. In general, the more you know, the more valuable you are to the market. The big problem occurs when you take on student loan debt to get that education but never graduate.
Now you’ve got debt, and even some good education, but not a whole lot you can put on a resume. Employers don’t really like to see and end date for your college education without a degree on the next line.
So now you’re stuck in a low-paying job, paying off debt that didn’t and won’t give you anything in return, trying to figure out where the hell you went wrong.
It’s a horrible situation to be in, and it’s precisely where I found myself at age 21. For the three and a half years I was a college dropout, my student loans dogged the hell out of me, and I barely kept up.
I was late. I was in forbearance. I was late again. I was in deferment. I paid on time, then I was late again. All the while I’m stocking shelves during 2nd shift at WalMart to get that $0.50 shift differential, stewing in my own self-loathing that I would have had a ticket out of this hellhole of my own design had I just stayed in school.
Dropping out with student debt took a big mental and financial toll on me, and I’m a white male who was single and childless at the time. Women, minorities, and adults with children are in far worse situations that I found myself due to lower pay, decreased opportunities due to increased responsibilities, and higher costs of future debt.
The issue is that this group is much larger than most people think, which is why it doesn’t get the attention it deserves.
This might come as a surprise, but “4-year institutions” measure their graduation rates in 6-year increments. Said another way, universities who advertise the traditional four year schedule of Freshman through Senior allot six full years for students to complete their studies.
Here’s another surprise. The six-year graduation rate is around 63%, with just under half graduating from the same place they started.
So after six years, 37% of all freshman are either still in school (probably racking up more student loans), or they have dropped out. This is not a pretty picture of our current higher educational system.
Bachelor’s Degree, Low Income
The next group of student loan borrowers who are in crisis are those who took out loans to complete their bachelor’s degree but are stuck in low paying jobs.
As I touched on earlier, a bachelor’s degree is a requirement for most current job postings, even if not required. This disqualifies all but the most dogged non-degree holders and attracts those with a bachelor’s that are having a difficult time finding other work.
When you are just starting your career after graduation, you generally get the advice that it doesn’t matter what your first job is. Put in your time, pay your dues, and ultimately you’ll make it.
So many new graduates take that advice to heart and take whatever job is offered, hoping for their dream job at the next company.
Here’s the problem: that advice is complete garbage because your starting salary is the baseline for all future salaries during your career.
There are been numerous studies showing the impact of a mere $5,000 increase in starting salary. Depending on the variables, you could be losing out on $1 million or more in lifetime earnings. This advice is especially impactful for women, who are dealing with the double whammy of already lower salaries and the (unduly placed) social expectation of not asking for a raise.
Sure, the first few years might suck trying to pay off your loan, even with that extra $5,000. However, just like investing in your retirement, negotiating a salary early and often in your career will pay off exponentially down the line.
The Sandwich Generation
This term is normally used when people in mid-life are trying to wrap up raising their kids but also end up taking care of their elderly parents earlier than expected. They are sandwiched between two generations.
I apply this to student loans, except the parents are squeezing themselves. The advent of Parent PLUS loans helped create this mess.
When looking at student loan balances by age, you generally see a downward trend, which makes sense. You’ve been paying off your loan and are making more money, so why wouldn’t the balance decrease?
The problem is when you look at student loan balances by age and by year. Balances have been increasing year-over-year for the past couple of decades for every age bracket.
What’s happening is that many parents, who are still trying to finish off their own loans, are now taking our Parent PLUS loans to help with their child(ren)’s education. This is on top of sometimes also taking care of their own parents, adding another financial burden.
What Can Be Done?
While most people with student will ultimately be okay, there are way too many who won’t. There are many proposals for a systemic overhaul of our higher ed system: anywhere from capping the cost of tuition to outright forgiving all student loans.
Anything of that magnitude will either take time to implement or be subject to so much political partisanship that it will never see the light of day.
The biggest thing that would help out borrowers who just can’t make the payments is relaxing the rules to discharge student debt in bankruptcy. For whatever reason, discharging student debt became frowned upon, and the regulations made it almost impossible to get any relief.
However, I see student debt as a bet on yourself, just like companies that take out loans are betting on themselves to earn more money in the future to pay it back. If the company can’t do it, they go bankrupt. If the person can’t do it, they can go bankrupt, too.
Too many people think bankruptcy is a financial death knell, or some kind of shameful deed to weasel your way out of money you didn’t deserve. On the contrary, it’s a basic part of finance, which, for individuals, is an emotionally retching experience.
Bankruptcy is no fun, and anyone who thinks people use it as their first option rather than their last resort have no idea what they’re talking about.
The Takeaway
I will be the first to agree that student loans are a pain. I’ve been in one of the crisis groups and I did everything I could to get out. But there are too many people with too much debt who can’t get out, so we need to offer them more options.
For the rest of us, the pain of student loans suck for a while, but one that is ultimately cured with a little bit of patience and the application of a lifetime of higher income potential.
Don’t take my word for it. The Social Security Administration calculated the net present value (NPV) of the lifetime earnings one can expect with a bachelor’s degree.
The result?
An additional $260,000 for men and $180,000 for women. That pales in comparison to the NPV of just under $40,000 for the average loan.
Remember, this is NPV, so it is in today’s value of money. It is the equivalent of giving a stockbroker $40k in the morning and getting $260,000 later that afternoon.
That’s a trade I’ll make all day.
