Student Loan Debt: A Future Problem
By John Brummitt
In the United States, student loan debt has reached an all-time high of $2.3 trillion dollars. Borrowers owe 70% more upon graduation than graduates did only a decade ago. This has lifted the loan delinquency rate higher than any other type of household debt in the U.S. What is the cause of this debt escalation? Higher education costs.
Education costs have risen 420% since 1990, outpacing medical care expenses by over 100% and doubling the pace of all other consumer prices. The value of a college degree has not kept up with that pace, nor does having a college degree provide any protection to the holders from stagnant wage growth.
In a recent study, the National Association of Colleges and Employers found starting salaries for new college graduates have risen by just 0.1% per year after adjusting for inflation. Despite these alarming statistics, the New York Federal Reserve found young people have not been deterred from going to college. They simply increased borrowing to pay for college. This creates a heavy debt load for the millennial generation and will weigh heavily on the economy moving forward.
From 2003 to the present, student loan growth has increased 550%, according to the New York Fed Consumer Panel/Equifax. This translates into 70% of college graduates leaving school with over $37,000 in student loan debt, creating an average monthly payment of $351 per month. If you were to invest that same amount at an earnings rate of 5%, you would have over $50,000 in just ten years. Starting a career with a monthly debt payment of $351 can be a huge handicap for recent graduates and will limit their ability to purchase homes and move out of their parent's homes. This, in turn, will slow down home expansion in the U.S., a large driver of the economy.
The National Association of Realtors reports that 71% of non-homebuyers cite student loan debt as their primary factor in delaying the purchase of a home. The delay in purchasing homes will also affect the economic benefits that accompany young people setting up new homes.
The increase in the number of young adults delaying household creation has jumped to 32% for those aged 18 to 34, up from 21% in 2006, according to FactSet. This creates missed opportunities for the U.S. economy. The increased number of delayed purchases cut 1.5 million home sales, reducing the need for new and existing home sales.
Student loan debt also reduces discretionary spending by new graduates. Student loan debt reduces ability to purchase vehicles and limits personal spending. It also retards business creation, limiting borrowers in their efforts to create new enterprises. Again, this will reduce the benefits of college graduates on the overall economy.
As the percentage of students taking out student loans to pay for college continues to increase, we will see a greater uptick in the loan default rate. Currently, one in ten student borrowers is at least 90 days behind on loan payments. More than 50% of 2009 college grads have defaulted, missed more than four months of required payments, or face higher loan balances than they had five years ago.
Why does all of this matter to the individual without college debt or with college plans on the horizon? From a micro investment standpoint, a growing opportunity in student loan asset-backed securities could make for a profitable alternative investment. With the number of loans increasing, these asset-backed securities will be readily available to diversify individual and group portfolios.
On a macro level, rising student debt and its consequences will prolong the slow growth environment we have experienced in the United States for the last decade. While student loan debt is not an imminent risk to our economy, it will curb our potential for economic growth. Without changes to policies or consumer education, the student debt problem will continue to be a drag on the economy.
If you or your child is headed to college or currently in college, consider the total cost of education and weigh it against the potential income value it will produce in career choice. Factor in scenarios to help prepare for the debt load and challenges that may arise during the college years. Make preparations in advance to ensure you or your child finish college in a better financial position than most students.
Minimizing loans and debt load during these years will increase the potential of a successful career and long-term financial stability.
About the Writer: John Brummitt became director of the Board of Retirement in January 2016. He graduated in 2011 with an MBA from Tennessee Tech University. A 2004 graduate of Welch College, he has been with the Board of Retirement since the spring of 2006. Learn more about retirement options: www.BoardofRetirement.com.