Sanders, Warren, and many of the other Presidential nominee hopefuls have taken grasp of the student loan data, twisted it into a creative looking balloon animal to present to their constituents as a sign that they care and are relatable to the (mostly) upper-middle class personal needs and concerns. The topic of student loan debt has not become a national crisis. Like every political season, the whiff of smoke often is quickly described as a forest fire to garner more attention and collect campaign dollars in their respective coffers. Let’s look at the data impacting many but not all Americans.
$1.49 Trillion
Sounds like a large number right? It is, but like all things we must put into context to better understand its scale. As of the first quarter of 2019, U.S. household debt totaled $13.67 trillion, a 0.9% increase from the prior quarter according to the latest NY Fed Household Debt & Credit report. Student loans accounts for 11% of the total household debt in our country, which is up from 4% in 2006. According to Experian, student debt has risen 116% over the last ten years and is now the second largest debt category for American consumers with over 148 million outstanding loan accounts.
The average American has a little over $35,000 in student loan debt. However, less than 15% of the U.S. population is carrying such a debt burden. While student loans do plague a fair share of Americans, it’s not an epidemic. However, the amount of that debt that is delinquent has been on the decline. Less than 5% of loans were delinquent in the first quarter of this year and that figure has fallen by 6% over the last three years according to Experian. Those loans that are between 30 and 59 days late have dropped by almost 50%. In fact all the past due lookback periods have seen a decline. This isn’t the trend of something you’d consider in a crisis.
Debt
Is a Choice
Unlikely many other of life’s obstacles, taking on student loan debt is a
choice. It’s not an inalienable right to seek a collegiate education. Has it
become a necessity for certain professions? Yes. Do all Americans need to go
into those professions? No. There’s a growing portion of the labor market for
skilled workers that does not require post-high school education. But should
that limit the options available to all Americans, based purely on a financial
need or availability? No. There’s another choice involved here. Not all schools
charge an arm and a leg to its student body. According to College Board, in the
2018-2019 school year the cost for four-year institutions ranged
from $5,400 to $16,610 for in-state tuition. The U.S. average for in-state tuition last
year was $10,230 compared to the out-of-state average of $26,290. If a student
seeks further education, the option of staying in-state can dramatically
decrease the potential debt burden they take on. What about community college,
which many political candidates are calling to be made free (and an idea I don’t
totally oppose as a possible solution for those seeking further education) and
one Obama pushed forward with his American’s
College Promise plan. Tuition at community colleges averaged $3,660 last year
for the 8.7 million students that attended a public two-year college or
community college.
Everything
Has a Cost
There are no free lunches. With a cost comes a potential benefit and it’s up to
the decision maker to decide if the benefit warrants the cost. For a college
education, the benefit is higher future income. According to U.S. labor
statistics the median weekly wage for a worker with a bachelor’s degree is $611
more today than for a worker with just a high school diploma. Those with
college degrees have also seen a slightly stronger growth rate in wages from
2000, rising 34% vs. 31% for non-college graduates. So the trade-off becomes, as
Cullen Roche recently
pointed out, students can take on roughly $24,000 in college costs to earn
$66,500 or go right into the labor market with no college tuition paid (or
debt) and earn $37,000.
Students
Have Options… They Just Aren’t Taking Advantage of Them
There are many methods of ways for students to pay for college. One of them is
obviously taken on debt, debt that many feel like should be shifted from the
balance sheet of consumers and onto the t-tables of the government. Remember those community collages? Well the
same CNBC story also reported that more than half of students that attended a
public two-year college did not pay for their tuition due to usage of grant aid
and scholarships. In 2013 more than $238.5 billion
in financial aid was given to undergrad and grad students. Quite a bit of grant
money actually goes unused each year. In 2017 more than $2.3 billion in
free money for college was left unused. The Free Application for Federal Student
Aid (known as FAFSA) is used to award grant funds based on financial need and averaged
$4,920 in the ’17-’18 school year according to NerdWallet. But over 1.2 million
high school students didn’t even fill out a FAFSA prior to the ’16 school year
which equates to roughly $3,583 per graduate of unused college tuition
assistance. That would have covered 35% of the average four-year in-state
tuition if the proper steps had been taken by the student and his/her family. More than $3 billion is
also available through private scholarship sources. Rather than saddling up
with five to six figures of debt, students are not taking full advantage of the
resources available to them. Will scholarship funds cover the full bounty of
their advanced degree? Most likely not. While saving $5 on a latte is unlikely
to move the needle on retirement planning, taking advantage of thousands of
free scholarship and grant dollars will move the needle for college students.
The
Heart of the Problem And the Solution
Just like each previous time in history where the free market has been
manhandled, wiping out student loan debt doesn’t go to the root of the problem
or bring with it long-term solutions . Because that’s what it is, a problem –
not a crisis. Just like students, the universities and colleges have choices
too. My alma mater, Purdue University, for instance has frozen tuition costs for
the last eight years. In-state tuition for Purdue, a university ranked 56th
nationally and 17th in top public schools by U.S. News, remains less
than $10,000 per student. The problem is not solved by only addressing the symptom
of debt after the student leaves campus. States must take a closer look at how
their public universities are funded and controlling costs and students must
step up and put in the necessary work to help fund their college ambitions.
National action can also be taken, using American allies as possible examples. For instance, England sets a cap on the cost of college; and in 2014 that cap was $14,000. Many countries do fund their student’s higher education. Germany, Brazil, Finland, Norway, and France all pay a portion or the full bill for their young adults to seek further education. Is this the option we should take up in America? Most would say no. At least not until other options have been exhausted.
We Need Financial Education Not A Bailout
If we’re to look at just the large amount of debt brought on by student loans, then what about auto loans of young people? Those under the age of 30 took on nearly $7 billion in auto debt last July alone. Maybe the conversation shouldn’t be around student loan debt but on the mishandling of debt as a whole. Before we as a country act on emotion surrounding the student debt topic, one that I fully agree needs to be addressed, the facts should be considered and the options fully understood. I believe young Americans would be much more benefited by financial education than simply wiping away their debt. Give future generations a more thorough understanding of what debt is (all kinds not just student loan), how it impacts their financial life, as well as other critical financial topics like saving, investing, and budgeting before they venture out into the world. Knowledge is power and financial knowledge is lacking in our education system.
Our country has many problems that we should be focusing on, from drug addiction, health care costs, infrastructure, crime, discrimination, environmental damage, and poverty to just name a few. Not to mention our already unsettling level of national debt we’ve already built up. Student debt has negatively impacted many American’s lives, but it’s not a crisis that I believe warrants an expansion of the government balance sheet to the tune of multiple trillions of dollars. Like anytime the government puts their thumb on the proverbial scale, actions have repercussions and should be carefully weighted ahead of time.
I write this post not to diminish the impact student debt has had on millions of Americans, my wife and I both left school with our share of student loans which we worked hard to pay off. I feel like this topic has been distorted for the benefit of the voting public’s emotions and the focus has and will continue to be shifted away from other topics that I believe are in much more dire need of support and attention.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.
