Student Debt: Lip-Smacking or National Crisis?

Dean Kaplan

They say there is no such thing as bad publicity, and I hope that is the case for Jerry Ashton, who’s comment on insideARM from 18 months ago got national media coverage earlier this week.

“As I wandered around the crowd of NYU students at their rally protesting student debt at the end of February, I couldn’t believe the accumulated wealth they represented – for our industry. It was lip-smacking.”

I encourage you to read Jerry’s article, as he showed real insights into the student debt problem long before all the recent media about how the amount of student loans outstanding is approaching $1 trillion and exceeds the amount of credit card debt outstanding. Now we hear anecdotes of individuals with $50,000 to $200,000 or more in student loan debt not able to find a job. The ratio of recent graduates finding a job in their field of study is at an all time low. The unemployment rate for young adults is double the 8% national rate, and the under-employment rate is significantly higher for recent graduates. Many economists project that the current economic and job situation will have a dramatic negative life-long impact on the average earnings potential for these college graduates. A perfect storm.

But almost no one is talking about the spillover effects of this student loan fiasco. We all witnessed how easy mortgage credit led to a dramatic increase in home prices, only to crash when the bubble burst. In my opinion, the unintended consequence of expanding the amount available per student of federally guaranteed loans has fueled an increase in tuition rates that is more than twice the rate of overall inflation. These higher education costs are being paid by all students and their families, not just the ones who are borrowing. And of course, because costs are higher, the vast majority of students need to borrow more than ever to pay for school.

The goal of increased student loan ability was to allow for more people to get a college education. I’m all for that. No doubt that the better educated our work force is, the more competitive we can be in the global economy. It creates more opportunity for those educated individuals and the families they will raise. Theoretically poverty rates should decline and the middle class grows with a more educated population. But I’m sure the people who supported greater availability of student loans did not want to make college education more expensive for everyone and saddle the next generation with an enormous financial burden.

Personally, I suspect that the average inflation-adjusted cost of a college education will decline dramatically within 10 years. The debt-fueled cost increases are unsustainable. The relative level of government loan guaranties will decline. And most schools, whether public, private, or non-profit, will adjust their cost structure and teaching methods so their prices match the money available.

Unfortunately, for those of us with children in college right now (I have two this year), we are probably paying the all-time peak price for a college degree. I was thankful that I was able to restructure my student loans after graduate school into a 22 year repayment plan. I didn’t enjoy writing 264 checks to pay it off, but I took solace in knowing I was getting a good return on my investment. I was glad to read this week that there is a program where debt repayments can be tied to a percentage of discretionary income. While I’m sure it isn’t a perfect program and it could be subject to abuse, theoretically it will tie the cost of a college degree to the monetary value the graduate is able to achieve with their education.

So, for those of you in the collection industry who will benefit from having more debt to collect, all I can say is ‘good for you’. We only do B2B collections, so we are on the sidelines for that service.

For those of you who have children in or about to attend college, my best advice is to make sure they get it done in four years. For my son at a public university, the cost of room and board is far more than tuition. We have to pay for his food, year-round off-campus housing, and incidentals during the summer, whether he was in school or not. He went to summer school two years in a row to get the classes that were not available during the regular school year. Now he will be able to finish in 4 years, and while we didn’t have the benefit of his minimum wage income during the summer, that would have been far less than the savings we’ll realize from not having to pay a fifth year of room and board. And, of course, we hope he’s earning a lot more during that year five as a college graduate than he would have earned this past summer. So, if you need to borrow more to get by without the summer income right now – that’s a good reason to take out a loan while it is still available.