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Monday, June 20, 2011

The Student Loan Bomb

Today, the headlines scream about the $14 trillion and growing national debt. Something much smaller but also scary has caught my attention in recent months. It seems that credit card debt has kept falling due to our continued economic uncertainty. It now rests at about $850 billion dollars. But, in the last year, it has been passed by student loan debt. Several independent projections place student loans to be at approximately $1 trillion dollars by year-end 2011.

Why the huge increase? Well, tuition costs have been outpacing inflation very strongly for the last 20 years. And, since 2008, the drop in home values has made it more difficult or even impossible for many parents to cover costs by taking out a home equity loan. As of now, the average student graduating from college has about $24,000 in loans and $2,100 in credit card debt. Some say that by next year, the average loan amount will exceed $30,000.

I went online and checked out a few private sources for student loans. If you have borrowed $30,000 you pay $350 a month for 10 years to pay it off. That will be a real strain for some young people starting out. They may need to buy a car, get an apartment, and maybe a bit of furniture. Will they have $350 a month left over to pay off the loan? Many will have to move back in with Dad and Mom at a time when they really would value some independence.

Some students at top schools or those who go on to graduate or professional schools easily borrow six figure sums. Unless they get a terrific job right out of school, they will be paying off loans forever. There will be people who will not be able to purchase a home until they are fifty and others may still be paying off their student loans when it is time for their own children to go to college. Or, they may work at a job that they hate for many years simply to pay off the debt.

The current group of millennials are in a box—they will have to wait far longer than previous generations to buy a home, start a family, take a chance on launching a business and, importantly, save for their own children’s college education.

The awful truth is that some will default on these loans. Debt will completely run their lives and one minor train wreck will derail their financial future. College loans from government programs cannot be discharged in bankruptcy but many will have difficulty meeting the payments unless the employment situation turns around very dramatically.

What is going on? To me, it is simply one more re-set in our economic reality. For the last few generations a college degree meant a guaranteed lifetime in the middle class or upper middle class. Not so any longer! Home prices could only go up and now we see the fallacy of that belief. Others felt salaries would always rise each year and we all know that is no longer true. And, consumers of all ages cannot continue to go deeper into debt. Taking on heavy debt for education does not seem like a great investment anymore either.

Some schools will have to adjust as well. An experienced educator has told me that she believes that small liberal arts colleges had better find some big seven figure donors and fast. If they don’t, parents will rebel at the school fees and lack of lucrative grant packages. Professors may be asked to teach an extra course each semester with no increase in pay. A few may simply close their doors in the next decade. Good state schools will become VERY hard to enter. Parents will see the outstanding value that they represent so the academic environment in them will likely get more rigorous as excellent students line up to enter.

Finally, some people will bypass college altogether which is fine for some but a disaster for many others. Politicians tell us that education is a vital part of our infrastructure much like highways and bridges. It is hard to disagree with that sentiment but if the present trend continues with high fees and large loans, something has to give.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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