Thursday, August 30, 2012

Degrees in Debt

College classes are beginning and my concern with the issue of student loan debt is beginning to rival my worries about the federal debt.

Student loan debt now exceeds $1 trillion.  Here is a debt clock that shows the appoximate amount outstanding on student loans up to the minute.

What is most troubling is the continuing growth in student loan debt despite the somber economic environment.  All other major forms of private debt obligations have decreased over the last four years as people have gotten more fiscally conservative with their money.  In fact, overall consumer debt has been reduced by over $1.2 trillion since the Fall of 2008.  However, student loan debt has increased by over $400 billion.  This is 72% higher than it was four years ago!

Student loan debt is now greater than auto loans as well as credit card debt.

Source:  New York Federal Reserve and
What is more troubling is that payments currently are only being made on just 38 percent of student loans according to Education Department data.  Five years ago, 46 percent of these loans were being paid down.  The balances are unpaid either because the students are still in school, the borrowers have deferred payments of they have simply stopped making payments.

This statistic should not be surprising as we look at unemployment rates of recent college graduates.  54% of recent college graduates are either unemployed or underemployed according to this AP story
About 1.5 million, or 53.6 percent, of bachelor's degree-holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years.
Out of the 1.5 million who languished in the job market, about half were underemployed, an increase from the previous year.

Broken down by occupation, young college graduates were heavily represented in jobs that require a high school diploma or less.

In the last year, they were more likely to be employed as waiters, waitresses, bartenders and food-service helpers than as engineers, physicists, chemists and mathematicians combined (100,000 versus 90,000). There were more working in office-related jobs such as receptionist or payroll clerk than in all computer professional jobs (163,000 versus 100,000). More also were employed as cashiers, retail clerks and customer representatives than engineers (125,000 versus 80,000).
Underlying all of this is the fact that there is no segment of the U.S. economy that has seen costs grow at a faster pace than tuition and fees for higher education.  Health care increases look modest when compared to the increase in the cost of a college education over the last three decades.  College costs have increased at more than twice the rate of health care over that period. 

In the last ten years, tuition and fees at 4-year public colleges and universities for in-state students have increased an average of 8% per year as state budgets have been squeezed by Medicaid costs and public sector retirement costs.  Increases at private colleges and out-of state tuition as public schools have been a little more modest but, in each of the last three decades, college costs have far exceeded the rate of general inflation irrespective of the type of school. 

What has driven these increases?  Three main factors appear to be at play.

First, colleges have shown little interest in controlling the costs to their students as this quote from one of the leading college administrators in the United States in The New York Times reveals. 
“I readily admit it,” said E. Gordon Gee, the president of Ohio State University, who has also served as president of Vanderbilt and Brown, among others. “I didn’t think a lot about costs. I do not think we have given significant thought to the impact of college costs on families.”
Second, colleges have embarked on a massive facilities binge in the competition to attract students that is reminiscent of the old-fashioned defense arms race between the U.S and the U.S.S.R.  Dorms that resemble the Taj Mahal, recreation centers that look like they could be an Olympics venue and dining halls that are fit to serve meals straight from The Food Channel.  It all costs money and tuition and fees need to go up to pay for the luxuries.  Bucking the trend is also career suicide to the college adminstrators should they fail to enroll the necessary numbers to fill their incoming classes.  Nobody wants to lose a good student and the tuition money that comes with her because they did not have a rock climbing wall in the rec center.  As a result, costs go up and up and fewer and fewer student and parents can afford the tab.   A student loan seems to be the only option.

Third, and probably most important, is that college costs could not go up without a supply of money to pay for it.  Just as is the case with health care costs, college costs have become heavily dependent on the flow of federal money.  Health care costs generally tracked overall inflation in the economy until Medicare and Medicaid were introduced and normal market forces were disrupted beginning in the mid-1960's.  The same has been true with student loan money.  As more student loan funds became available the easier it became for colleges to raise tuition costs.  Ironically, a program that was designed to assist students to afford college seems to be making it more unaffordable with each passing year.

The Obama campaign has attacked Mitt Romney for his recent advice to a student "to shop around" when asked what he would do to make college more affordable for him.  I can't think of any better advice.  That is the best way to bring costs back into line.  Liberals seem to think that every problem can be solved if we just had more money to throw at it.  Experience shows that doesn't work.  In fact, it might actually make matters worse.

One of the key issues in this year's election is whether the under-age 30 voters are going to wake up and smell the coffee.  Not the scents from sitting around Starbucks using the Wi-Fi connection looking for a job.  I am talking about coming to the realization that their destiny right now is to spend a lifetime paying a mountain of debt with very little hope to do much more with their life.  Paying off their education loans.  Paying interest on $16 trillion in federal debt that grows by $3 billion every day.  Paying for the Social Security and Medicare for their parents with little hope that it will be there for them. Paying the retirement and health care for millions of retired public sector union employees.

The under-30 demographic still provides President Obama with his highest approval ratings.  This makes no sense when you look at the facts.  There is nobody in America that will bear the brunt of a continuation of the policies of the last four years more than these younger voters.

I thought Paul Ryan's best line last night really hit the nail on the head.

College graduates should not have to live out their 20s in their childhood bedrooms, staring up at fading Obama posters and wondering when they can move out and get going with life.

This ad by Crossroads Gen tells the story very effectively.

I have often remarked to my wife over the years when looking at young people who seem to lack direction, purpose or motivation that "everybody eventually has to wake up and smell the coffee".  It happens for some earlier than others.  All you can hope is that they wake up while they can still do something about it.  Before they have done irreparable harm to their career prospects or life.  For those under age-30, this election might be the last one where they can hope to do something about it.  2016 and beyond might be too late for them.   

My advice to young voters is the same as Mitt Romney.  You need to shop around.  You cannot afford to fail to do your research this time.  The costs to them of making a mistake is simply too big.

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