When discussing the student debt crisis, most people focus on the rapid growth in outstanding debt and several recent milestones. For example, student loan debt exceeded credit card debt in 2010 and auto loans in 2011, and it passed the $1 trillion mark in 2012.
But these milestones don’t tell us much about the impact of all that debt on the students who must borrow to pay for a college education.
Average student loan debt at graduation has been growing steadily over the last two decades. In 1993-94, about half of bachelor’s degree recipients graduated with debt, averaging a little more than $10,000. This year, more than two-thirds of college graduates graduated with debt, and their average debt at graduation was about $35,000, tripling in two decades.
Student loan debt is increasing because government grants and support for postsecondary education have failed to keep pace with increases in college costs. This has shifted much of the burden of paying for college from the federal and state governments to families. The government no longer carries its fair share of college costs, even though it gets a big increase in income tax revenue from college graduates.
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Since family income has been flat since 2000, students must either borrow more to pay for college or enroll in lower-cost colleges. That shift in enrollment, from private colleges to public colleges and from four-year colleges to two-year ones, has also been responsible for a decline in bachelor’s degree attainment among low- and moderate-income students.
What the Numbers Really Say
In a recent policy paper, I defined student loan debt as affordable if half of the after-tax increase in income that a student gains from obtaining a college degree is sufficient to repay that student’s loans in 10 years or less.
For example, the average starting salary for a bachelor’s degree recipient in the humanities was about $45,000 in 2015, according to the National Association of Colleges and Employers. That compares with about $30,000 in average income for high-school graduates—or a $15,000 difference. After considering taxes, the net increase is about $9,000. Half of that ($4,500) is about 10% of gross income and would be enough to repay roughly $35,000 in student loans over a 10-year repayment term. This is also consistent with my rule of thumb that total student loan debt at graduation should be less than the borrower’s annual starting salary.
Given this definition of affordable debt, I analyzed data from the Baccalaureate & Beyond Longitudinal Study and found that the percentage of bachelor’s degree recipients graduating with excessive debt grew from 9.8% in 1993-94 to 14.4% in 2007-08. If the percentage has continued to grow at the same rate, about 16.7% of college graduates are now graduating with excessive debt.
However, even this percentage underestimates the problem. That’s because it includes all students who graduate with a bachelor’s degree—even those without any debt at all. If we look only at students who borrow to attend college, it appears that more than a quarter (27.2%) of them are graduating with excessive debt.
The Lasting Impact on Students’ Lives
I also found that students who graduate with excessive debt are about 10% more likely to say that it caused delays in major life events, such a buying a home, getting married, or having children. They are also about 20% more likely to say that their debt influenced their employment plans, causing them to take a job outside their field, to work more than they desired, or to work more than one job.
Perhaps not surprisingly, they are also more likely to say that their undergraduate education was not worth the financial cost.
Unfortunately, there are no similar studies that can be used to analyze excessive debt for other college degrees, such as associate degrees, certificates, and graduate or professional-school degrees. It is also not possible to evaluate the financial impact of student loan debt on students who drop out of college, even though they are four times more likely to default on their loans.
What Can Be Done?
Increasing national awareness of college spending is the first step in exercising restraint. It is therefore imperative that the federal government and the colleges and universities begin tracking the percentage of their students who are graduating with excessive debt each year. This information can then be used to improve student loan counseling.
Colleges must also be given better tools to limit student borrowing. For example, college financial aid administrators must be permitted to reduce federal loan limits based on the student’s enrollment status and academic major. Students who are enrolled half-time should not be able to borrow the same amount as students who are enrolled full-time.
Finally, our colleges must also help students better understand the debt they are taking on, by making the distinction between loans and grants clearer in their financial aid award letters.
Mark Kantrowitz is one of the nation’s leading student financial aid experts. He is the author of several books about paying for college, including Filing the FAFSA, Twisdoms about Paying for College, and Secrets to Winning a Scholarship. He is publisher of Cappex.com, a website that helps students achieve their college dreams, and previously served as publisher of the FinAid, Fastweb, and Edvisors websites.
Erin is a sophomore at Kent State University currently majoring in Advertising. She is a finalist of the Student Debt Relief scholarship program, and needs your votes. If you like her advice on how to avoid student debt while attending school, please use the above social icons to like, tweet, +1, and share her essay across the social networks. The finalist with the most social shares will be awarded $2,000 to help pay for their education.
How to Avoid Student Debt
by Erin D.
When it comes to accumulating debt, college students take the cake. We borrow money from the government so we can pay for pretty much everything. As soon as we sign the promissory note we are set with loose instructions; all loans must be used for school expenses. Realistically, as soon as you go to college most everything becomes a school expense. The basics such as tuition and books are covered in our loans and then we are left with the rest. If there is any left over money they is. A lot of us go hog wild when we get our reimbursement checks. That computer you needed? Covered. Rent for the next five months? No problem. What about my food, I need to eat to live and you can’t go to school if you’re not alive? Hold on, how loose are these conditions? As students, some of us become overzealous about using our loan money, so much so that we go looking for things to spend it on instead of immediately sending it back to our servicers. Knowing this borrowed money doesn’t have to be paid back until after you’re out of school for a while seems like a gift, but using all of our loans doesn’t really set you up for real life. Instead of leaving college with a mountain of debt, I have personally found a few ways to limit my borrowed money.
Way back in high school, when teachers started hounding students about finding a career plans, I was presented with an opportunity I couldn’t pass up; post-secondary education. Taking college courses while attending high school was definitely a program worth taking advantage of. Even only fulfilling one year of required college courses while in high school, was one of the best choices I could have ever made. Not only am I entering college already having credits, I managed to save myself a couple thousand dollars in tuition and book fees. Post-secondary education was not the only precollege financial planning I managed. As soon as I was accepted to my college of choice I began filling out scholarships. Fortunately, my high school found most local scholarships for us students, though, I took the scholarship search a step further and looked to the internet. I found every scholarship imaginable and completed as many as I could.
While finding donors to pay for some educational expenses I started saving money. For every paycheck I received, half of the money would go into a savings account. This account was meant for college and any other costly things. Saving money since I was 16 made a pretty good stockpile for school expenses. Unfortunately, I was unable to save every penny I made, otherwise I would have been able to go through college free and clear. While in college I continue to save money. Much to my displeasure I had to call upon the help of student loans. Don’t get me wrong I’m glad they are there, I just wish I could have avoided borrowing any money. Needless to say through college I continue working, attempting to cut down the amount of money I need to borrow.
While taking out loans I try to avoid borrowing unsubsidized loans as much as possible. Seeing as the government pays the interest on subsidized loans I try my best to save unsubsidized loans as a last resort. Since taking out loans became a necessary evil, throughout my college career I have been paying back as much of my loans as possible on a monthly basis. Some months I pay more than others, it all comes down to how well budgeted I stay throughout the month. Budgeting my monthly expenses has
become one of the most useful tasks I put in place for myself. The budget includes food, rent, gas and any necessary monthly living expenses as well as savings money and money to pay towards loans. While in college I find myself creating small financial goals to aim for. These goals have kept me well on track throughout my educational experience. At this point my savings are not solely going towards my educational expenses but going towards more extravagant spending such as buying a car or putting money towards a house. I have found during my college career that applying for scholarships is never a bad idea. No matter how far into my education I get I continue to apply for new scholarships because the worst thing that is going to happen is that I won’t receive any extra money.
After I complete my schooling, be it a bachelor’s degree or anything more, my first few years out of school are going to be spent diligently working to pay off my loans. At that point in my life I’m sure I will have many more financial goals to achieve yet paying off my borrowed loans is one of my top priorities. As often as possible I intend to pay extra on my notes making then disappear sooner than later. Before and during college I have worked on building up a savings, I intend to continue post-college. These savings as the previous, will be used towards larger expenses. These savings will also be used to create a financial security blanket for myself. Just in case my car were to need to be replaced or I have some sort of medical emergency I will be nice to have extra money stashed away.
As a college graduate I believe I will find staying on a budget may be a good habit to keep. Frugality will ensure that I don’t blow through my paychecks as soon as I receive them. I have found out from my peers that as soon as people graduate they get their first “adult” paycheck and realize they are making more money than they ever did before which encourages more spending than they did before. I’ve learned from them that excessive spending is not the way to go even if you do make more money than you think you’d ever need.
Keeping my debt to a minimum is one of my biggest concerns. By building up a savings for large financial situations I have managed to avoid debt, as well as by attending college courses while in high school. Throughout my college career I will continue to live frugally and pay off as much of my accrued loans as possible keeping my interest at bay as possible. By reaching financial goals such as savings and staying on a budget I plan to stay on track towards keeping all debt as low as possible.