College: A High Stakes Gamble
An article earlier this week gave some pretty shocking statistics on the burden of student loans: 39% of all student borrowers have an unmanageable debt burden when they finish school; for blacks and Hispanics, the ratio is even higher (55 and 58%, respectively).
Even with the debt, the economic benefit of a college degree is clear: males 25 and over with a Bachelor's degree earn an average of almost $64,000 a year; those with only a high school diploma make just $34,000. But what about those students who take a shot at college, only to find they are unable to complete their degree?
Statistics show that almost half of students who start a four-year degree program have not graduated in six years. If the debt burden is unmanageable for the students who actually do graduate, what must it be like for the students who give college a try but don't make it to graduation?
Adult males with some college but no degree earn an average of $37,500 - just a few thousand more than their peers who never even attempted college. When you look at it this way, going to college is suddenly a very risky proposition - for those who don't succeed, you're very likely to be significantly worse off than if you'd never tried at all, since your years out of the work force and the significant debt you've incurred won't be offset by a meaningful income difference unless you graduate.
It doesn't take an expert to realize what the result of these forces will be. Marginal students will decide that the shot at a college isn't worth the financial risk, and the education gap in the country will continue to grow, with wealth levels following suit. So much for the middle class.
I'll bet that 39% is growing every year.
And still yet, what about the ones who finish college only to find they can't find a job in their field? They end up taking a job that pays less. Did the education payoff? They certainly benefited from the education, but they did it in such a way as to enslave themselves to a payment plan that reduces their options. There are so many life changes in young adulthood, how can they possibly afford to have no options but to work to pay off a debt? It isn't how much you make, it is how much you have left over after you pay your expenses and obligations.
We need to rethink the way we are educated for college level degrees, or find ways to make that education available to all as we do up to high school. Intellectual capital is important to the wealth of our nation. That includes financial literacy.
Jim Anderson
www.lighthouseonline.net
February 18, 2006 2:35 PM | Reply | Permalink
I think those numbers may be a bit misleading. Anyone who takes six years to finish college is going to be in the workforce --
albeit perhaps at a reduced percentage -- for some or all of that time. So in lifetime-earnings terms the hit isn't quite so bad.
The ultimate problem, as Jim Anderson notes, is the way that educational debt limits young adults' options. They either have to find a relatively high-paying job right out of college, or else live indefinitely on rice and beans in cramped quarters. Want to become a schoolteacher instead of a corporate trainer? Too bad. Want to work for Legal Aid instead of the fattest private firm you can find? Ain't gonna happen. Want to practice the old style of medicine where you actually know your patients? Forget it.
The US faces a paradoxical condition where typical wages and benefits are simultaneously too high for many employers to afford and too low for many prospectice employees to live on. The counterproductive method we use to finance college education is one of many contributors to this oddity.
February 18, 2006 4:46 PM | Reply | Permalink
Why is a debt of $17,600, the "average loan burden of graduates" according to Kamenetz, a "shocking statistic" or an "unmangeable debt burden"?
A $17,600 Stafford Loan payable at 7% would call for 120 payments of around $204/mo. And smaller monthly payments are available if longer payment periods are accepted.
According to CNN/Money the 2005 Class's average starting salaries ran anywhere from $2500/mo. to $4000/mo. and higher. Presumably, working graduates' incomes will go up over the life of the loan. I'm not sure why this debt should be considered unmangeable.
February 18, 2006 6:59 PM | Reply | Permalink
I'm not sure why this debt should be considered unmangeable. ?????????????????
Well, where do I start. The rising cost of housing, healthcare coverage, cost inherent in the job search in an economic era where the service sector is the pre-eminent source of new jobs, 1st generation of americans to extend their debt burdens in their early twenties, the predatory nature of american business, and very little education and preparation beyond simplistic "good" & "bad" experiences for young adults with which to practice.
I would ask you to examine your situation and experiences rather than project a misinformed belief onto others about what appears to be manageable and what is not.
JMAC
February 18, 2006 8:26 PM | Reply | Permalink
Would I be correct in thinking, Johnny Mack, that on some logical basis -- and you might want to let us in on your analytical process -- you have concluded that an average debt of $17,600 is "unmanageable"?
Perhaps, you'd like to inform us of the level of debt you would consider, in the words of the poster, an "unmanageable debt burden."
February 18, 2006 9:32 PM | Reply | Permalink
The average debt is really pretty irrelevant here, because neither the average debt nor the average starting salary is what the people in unmanageable situations are facing. The low end of the debt distribution is occupied in significant part by people who are using educational loans as a money-management tool: if someone offers you money that you won't have to pay off for as long as four years (and then only with a 7% interest rate) it makes a heck of a lot more sense to take it than to carry additional credit-card debt (or for that matter, to sell your stock holdings or cash in your treasury bills). So for a more-or-less middle-class student whose loan is supplementing parental support -- and who faces pretty decent job prospects as a privilege of class -- that average loan balance isn't such a big deal, unless they decide to work for a nonprofit organization in a depressed area.
A typical poor student, in contrast, is going to have a higher debt burden (because they have fewer resources other than the loan) and faces a more difficult job market. Even moreso if they're black or hispanic, since discrimination in hiring is still alive and well (see the studies showing what happens to the same resume sent out under a stereotypically black vs a stereotypically white name).
So talking about the averages really isn't very interesting. (And that "average" $200 a month in repayments may be small to some people, but to others it's rather more than their monthly food budget.)
February 19, 2006 10:00 AM | Reply | Permalink
JMAC
Well said Paul W.
In terms of a response for Ellen, I am not sure my life's experience or privilege wields some sort of authority on this issue and I am less inclined to state in a definitive idea about what a manageable debt burden is for others. More aptly, I am inclined to believe students, young adults, the elderly, minority populations, and the middle class when they attribute their debt burden to be unmanageable.
It is precisely these people who are consistantly accused of overspending, being financially immoral, not being a "winner", or some other personal defect that we need to listen to.
A $17,600 Stafford Loan at 7% has multiple equivalencies & meanings which cannot be boiled down to a simplistic accounting of "its only $204/month" "who can't afford that" mentality.
February 19, 2006 4:41 PM | Reply | Permalink
Well, since neither you nor Paul W are prepared to state what an "unmangeable debt burden" would amount to or in the alternative, what percentage of graduates carry a debt burden which is unmangeable, I guess neither of you is prepared to enter into a rational discussion, and I don't intend to join in your faith-based one.
February 19, 2006 5:36 PM | Reply | Permalink
Ellen,
The issue is the use of the word "presumably". You know what they say about the word "assume"? Break the word down into ass-u-me and you get what happens when you "presume." Nothing is for certain. When you start thinking that you know what the future holds, you are presenting yourself as a clairvoyant. Can you really tell the future? If you think you can, you are foolish. While we may be able to play the odds, based on past experience, you can never really know.
Graduates are just starting out. It is risky to begin a new career in debt, especially with no emergency funds in the case of sudden unemployment or medical problem early on. (It also prevents them from taking low paying positions that are essential to society, such as teaching in the public schools.) Isn't it Congress who has sent the message that not planning for those emergencies, which cause bankruptcy, is irresponsible and abusing the bankruptcy system?
When you make decisions based on assumptions, you take the risk of being wrong. It is the unexpected and the unknown that makes the debt unmanagable. It is simply foolish to expect people to make going in debt a part of becoming a member of the educated in society. That sets everyone on the wrong path financially. Isn't that irresponsible according to Congress?
Jim Anderson
www.lighthouseonline.net
February 19, 2006 7:05 PM | Reply | Permalink
So, Jim, what's the number you have in mind? How much student loan debt is too much student loan debt? At what amount does it become an "unmangeable debt burden"?
N.B. The words "unmangeable debt burden" aren't mine, by the way. They're the poster's. If you don't like them because you find them vague and lacking content, take it up with her.
February 19, 2006 8:32 PM | Reply | Permalink
I don't claim to know much about this topic. But, for my simplistic take.
Perhaps the most effective investment risk management strategy is diversification. Education is, in part, an investment. But there's no clear way to "diversify" your education investment. (Not even a JD is the magical key to "whatever job you might want," contrary to popular opinion.) Indeed, more generalized degrees are often less desirable. (My college offered a "general studies" degree for the truly desperate. Try explaining that at a job interview.) And even that strategy won't allow you to include in your portfolio the prospect of fruitful employment without a college degree. (The educational equivalent of emerging markets securities, I suppose.)
Let's say you think debt prospects are scaring some students away from additional education. Perhaps that's only appropriate, but perhaps it isn't. Let's say you think the consequences of wrongly believing the former are worse than the consequences of wrongly believing the latter. Then there's a plausible argument that a decent risk pooling scheme (such as Australia's) would be a revenue neutral way to make students more free. Free to choose how to educate themselves, and free to choose the most productive and satisfying career for themselves.
This doesn't necessarily mean that the federal government should directly subsidize college students. Private enterprise can presumably come up with some way to offer an innovative diversification product. On the other hand, innovative risk markets are notoriously bad at developing naturally. For instance, they often lack the means to overcome the initial problems of small risk pools and an untested ability to live up to guarantees. Americans have historically used government to help business provide such guarantees in key industries and sectors -- from lending railroads government bonds to sell as their own (effectively loaning the government's credit rating) to allocating funds for terrorism risk reinsurance. So such industry support could be one item in the bag of tricks to manage college education in America, in the interests of having a skilled workforce, and in the interests of making students more free to lead the lives they choose to lead.
February 19, 2006 9:44 PM | Reply | Permalink
While I sympathize with the real burdens faced of many student loan borrowers, I think Ellen has a valid point here. How much is too much is a valid question. And only when we engage this valid question are the unfair and unwise and growing student loan burdens facing many poor and minority student loan borrowers likely to be addressed.
February 20, 2006 10:24 AM | Reply | Permalink
Ellen,
Your question is based on the idea that borrowing is necessary. I disagree with that idea, that was my point of my last post. Giving you a number that seems reasonable to the average person is to buy into the idea that it is a necessary part of the equation in getting an education. So how about anything over $0, and any loan that charges interest?
Debt is like cancer, once you get it started, it grows, unless you surgically remove it. Taking on debt is foolish IMHO, so I would consider any debt "unmanagable". It changes the economics of the cost of education, and it drives a steady increase of tuition and fees through inflation. With the technology available today, the cost of education should be dropping, not rising.
Jim Anderson
www.lighthouseonline.net
February 20, 2006 1:49 PM | Reply | Permalink
What about the college grads who land jobs at less than the average salary stated? Around these parts a public school teacher with a masters degree starts at $28K. Oddly enough, the competition is fierce. It may take a year of part time work as a substitute (at about $7/hr) to work ones way into the good graces of a principal and get hired. How many young teacher-wannabes take out college loans without realizing that this is where they're headed?
February 20, 2006 3:00 PM | Reply | Permalink
While I don't know a ton about student loans, I do know that there are better approaches available. I recall one Congressional proposal several years back that would require student loan borrowers to repay the government a percentage of their income (1 or 2 percent) for 20 years or so, whether they became teachers (at $20k/yr) or stock brokers (at $250k). That way, no one would be overburdened by student loan debt and the loan program's books could be balanced as large payments from high earners compensated for smaller payments from low earners. I don't know what happened to that idea, but the benefits seem pretty overwhelming. college becomes affordable while taxpayer costs remain low.
February 20, 2006 5:34 PM | Reply | Permalink
Or, worse yet for the nation, how young people who want to be teachers look at the loan balances they'll be repaying and decide to be lprivate-practice awyers or marketing managers or financial consultants instead (three perfectly honorable career paths but not necessarily what the country could use more of)?
In addition, many jobs that help shape our culture, in the advertising, publishing and film/tv industries, may be reasonably rewarding at the upper echelons, but pay so little for the first 5-10 years that most people repaying loans will be shut out. Wherever you see post-college internships as a de facto requirement for getting into a dominant company or an entire field, you can be pretty sure the top spots will ultimately be reserved for people whose parents paid their way through college.
February 20, 2006 6:04 PM | Reply | Permalink
JMAC
Ellen, the issue regarding having a rational conversation about what debt is manageable is as Paul W stated irrelevent, especially in terms of averages or overall debt balances.
The central issue relates to debt to income ratio. The 30-40% range can be a dangerous place for young debtors, manufacturing workers working in decelerating industries (auto, plane etc.), the elderly and minority populations- all of whom are more likely to experience one of several key structural problems that middle class americans face with debt: 1) illiness or injury 2) Job loss 3) death 4) Low wages 5) Increasing cost of energy, housing, and retirement.
Since most people have access to unique & differing resources, openness to discuss their values behind many of these topics around money is highly personal. It is a silly exploit to attempt to fit people neetly into a box of manageable and unmanageable just so you can wrap your mind around the extent of the problem.
I believe this is consistent with Dr. Warren's reaction to Schor's myth of overconsumption or immoral debtors. It is not enough to find a number of people who are/are not legitimately burdened by debt to define a label. What is required is understanding the depth of how debt is used as an economic weapon whereby the uneducated and underresourced are exploited by corporations because it is more profitable to exploit than not to.
February 20, 2006 7:26 PM | Reply | Permalink
As I've said, the phrase "unmangeable debt burden" isn't mine. If for whatever reason you don't accept it, your disagreement is with the poster. Take it up with her.
February 20, 2006 9:01 PM | Reply | Permalink
Did you even read the article linked in the second word of the original post? It leads to an editorial column in the Christian Science Monitor that never explicitly defines what is an "unmanageable debt burden" but does state that the 39% figure (and the higher percentages quoted for minority students) come from the student loan industry itself.
February 21, 2006 2:48 AM | Reply | Permalink
You've been looking for a number to define the "unmanagable debt burden" being discussed. To quote the article, here is the definition intended by the originator to this reference. The number that makes this true is different for every person. But the financial aid standards in our colleges and universities factor in student loans as part of the aid package, and underestimate the true "cost of education" which makes even the loan package and grant money given insufficient. As a result, students make up the difference any way they can, if they persist to graduation. That means borrowing. It would be interesting to see the statistics on the credit card debt levels of graduating seniors who have registered and bought their books with a credit card.
"For hundreds of young people across the country whom I have interviewed over the past two years, unmanageable debt burden has a specific meaning. Before they ever get to college, it means downsizing their choice from a public university to a regional state college, to a community college, or a trade school. While they're in school, it means working more hours (an average of 30.5 per week), going to school part time, and being more likely to drop out. About half of those who start at a four-year college don't finish within six years. Debt burden is a major risk factor for persistence.
If they do manage to graduate, it means putting off buying a house or starting a family. It makes saving difficult, so a car repair or an illness lands them in credit card debt. It stops people from taking entrepreneurial risks, going to graduate school, working in low-paid social service professions, or moving to a city with better job opportunities but a higher cost of living.
In short, debt neutralizes many of the positive effects of education."
Jim Anderson
www.lighthouseonline.net
February 21, 2006 7:55 AM | Reply | Permalink
Did you even read the article . . . .
Sure did. And did it occur to you to ask yourself why the student loan industry, those rapacious bloodsuckers, is suddenly so self-critical? Why it's chastising itself for inducing students to take on too much debt? Sort of like ExxonMobil complaining that Americans are driving too much, dont you think?
It's our obligation to look to the facts underlying a conclusion and especially, a conclusion which is being offered by an industry that's got its hand out for further government subsidies. Having an attack of the vapors is no substitute for critical thinking.
February 21, 2006 8:44 AM | Reply | Permalink
One thing not discussed often enough is the unfair credit requirements placed on those who need financial aid. At most schools, you must take a mininum of xx credits to qualify as a full-time student and the reason you want to qualify is to received appropriate amounts of aid.
If you are a person can't afford to go to school fulltime and need to work, you are essentially left out of the loop. Aid is calculated based on the full-time tuition price. If you take less than the average amount of credits and are still full-time, you are getting screwed because you will have to make up those credits by taking more semesters which cost more. If you take LESS than the minimum amount, you likely will not qualify for the same grants or scholarships.
Schools focus on getting students in and shoving them out the door every 4 years. Anything more than that, and they do not accomodate. I'm sure I could speculate why they do this, but my conclusion would still be that the whole formula and process still needs to be either reworked, or more options available.
February 21, 2006 1:43 PM | Reply | Permalink
I have to admit, I don't really agree with the original authors conclusions however.
Marginal students will decide that the shot at a college isn't worth the financial risk
What is a marginal student? I just don't understand this statement. Someone who really wants to go to college will really want to succeed. Those who are in a lower class of intelligence have state school options available to them at a lower cost (read: less risk.)
Statistics show that almost half of students who start a four-year degree program have not graduated in six years.
Link please. Also, what are drop-out rates related to years in school? I suspect that for each year in school, drop-out rates decrease significantly. You're going to know after 3 or 4 semesters whether you can go the distance. Also, in these statistics, do all of these students eventually graduate or is this a lumping of those that do and those that don't? Is there a breakdown by societal class?
I'd really like to see examples of unmanagble debt. If we're talking about those who don't end up graduating (hence making much less money) and have sizable debt, these cases really need to reviewed a bit more carefully. If there is a chance to quantify "chances of graduating," that would be helpful. I have my own opinion on that, but I'll refrain for later.
February 21, 2006 2:09 PM | Reply | Permalink
The estimate that 39 percent of student borrowers have "unmanageable debt" has been questioned, especially the methodology used to arrive at it. The estimate comes from a 2002 State PIRG study. As with many things that have been discredited, it has taken on a life of its own. The fact is that no one really knows how many people have unmanageable debt. The factors are too variable.
The other finding in the studies that have looked at the State PIRG report is that the indicators of unmanageable debt don't show that the problem has worsened all that significantly over the last decade.
February 24, 2006 5:24 PM | Reply | Permalink
You write as if a College degree is a guaranteed difference between $34000 and $64000 a year. It is no such thing. You are assuming the mean should shape the expectation, while ignoring the "bell curve" that surrounds the data with some people making $0 and some people making millions.
You are also looking back at the century we just passed through: a booming oil based economy, a booming population, a deep need for manufacturing in order to re-build after the war, government inscentives for supporting a middle class, and a boom in higher education rates that continue to this day--dramatically increasing the minimal value of a degree due to the increasing supply of people who have them.
Second, you are not looking at the plummer that takes a vacation every year in Hawaii and the Biomedical engineer that lost (his) job in the early part of the decade that is now making due selling Dreyers Ice cream with debt in near permanent forebearance status. There is evidence all around us of those who prosper without the benefit of education and those who struggle because of accumulated debt.
Third, debt is not unbearable if the difference is between $34000 and $64000 a year in average lifetime earnings. It is manageable for the people who pull off the $64000 to millions range and less manageable to the larger group in the under $64000 range.
Fourth, most of what people learn in College has no direct application to what determines their success in real life: the ability to work well with people, to gain trust, to learn useful things on the job, to be able to spot and access opportunities, to articulate ideas persuasively, to solve unique problems analytically, to be allowed to stay with the same company or industry and build favorable relationships over a long period of time. Good timing is also useful since a great student in a bad market flips burgers whereas and average student in a great market can still get a good job...and careers are sensitive to initial conditions.
Fifth, college mostly qualifies people to work in one of four tracks: sales, personal services, technical/analytical, and further education. College is not required for sales if you are willing to start in the harder sales jobs. College is not required for many service jobs if you show up when a hiring manager needs to fill a position. One can get into technical jobs without college through things like open source projects and a reputation for brilliant, albeit unpaid, work. Education is only manditory for most opportunities requiring even further education.
Best to say the jury is still out when it comes to the clarity of the benefit of a college education. For many it is a leg up. For an equal many saddled with debt it can turn out to be a leg down. It is definately a high stakes gamble. And it could even be true that people with smart skills when it comes to people and markets succeed despite college, even though institutions of higher education are more than happy to take credit if it will grow the pool of applicants and tuition rates in years to come.
June 6, 2006 7:09 PM | Reply | Permalink