College: Smart Decision or Money Pit?

Since we were in grade school, our parents and teachers have preached to us that we need to strive for a university education, and that a college degree was the only way to be successful in America. It sometimes seemed like graduating from college was the only measure of a successful person and that we should obtain a degree regardless of cost. Young people are becoming increasingly more cynical about this philosophy and for good reason. The costs associated with attending universities have been increasing at an unsustainable and alarming rate when compared to the Consumer Price Index.

This chart, using data from the Bureau of Labor Statistics shows the growth in the price of a college education compared to the Consumer Price Index (CPI) for all consumers since 1980.

The federal government is contributing to the problem

The federal government is much to blame for this dramatic increase in tuition rates. For years, it has compounded the issue by expanding the student loan programs in an effort to make higher education available to the masses. In their publication, Dysfunctions in the Federal Financing of Higher Education, Mark J. Warshawsky and Ross Marchand argue that there is much evidence to support the theory that “In a simple model of supply and demand, unless supply is perfectly elastic (i.e., there is an infinite supply of spots for students at colleges), an increase in federal financial aid will lead to an increase in tuition.” Universities have little incentive to keep their costs in check when they know there is an endless supply of students who are willing to pay the tuition by taking out loans.

Another example of the federal expansion of student loans having unintended negative consequences is in the case of non-traditional borrowers — “those who enroll in for-profit schools, two-year public institutions, and certain nonselective four-year colleges. … these students tend to be older, often enroll less than full time, are more likely to live independently of their parents (and therefore have higher federal borrowing limits), and are likely to be first-generation college attendees. The number of nontraditional students increased rapidly in the first decade after 2000, apparently in response to the weak labor market and easier and more available federal financing.” While well intended, the federal financing expansion did not have the desired results. Instead, these students “attend programs they are less likely to complete and, after enrollment, these borrowers are more likely to live in or near poverty and to experience weak labor market outcomes.” The only difference is the amount of debt burdening them. The truth is, this has brought more people into college than belong there and allowed them to go into debt for it.

Unnecessary General Education Requirements

Another aspect of how the higher education system is dysfunctional is in the area of general education requirements. Young adults feel that the higher education system is rigged in an effort to make people pay for classes they do not need in the guise of, “the role of American higher education is to develop well-rounded individuals”. For example, making a business major take a course in Botany, or a computer science major take a class in Intro to Music in order to fulfill a humanities requirement seems like an absurd waste of time and money. With the skyrocketing costs of higher education, it is becoming increasingly more difficult to justify these requirements. Our friends in Europe feel the same way and do not force students to take classes that are not relevant to their degree. In Europe, a student majoring in computer science takes programming courses. A student studying to become a doctor takes courses in medicine, and a student studying to become an attorney takes courses in law. European students need not take electives outside of their focus areas. It is a much more efficient way of obtaining a higher education.

The result

The result is record-level student debt, with 2016 graduates having an average of $37,172 in student loans. Unless students have wisely chosen their major, they discover that their degree does not give them the leg up they expected to have when they first decided to finance their education. Students expect that the debt they take on will equate to higher median salaries. The reality is that since 1990, starting median wages for recent college graduates have remained relatively stagnant, while average debt burden has increased 163.8 percent. Another way of looking at the issue is that the median debt as a share of median annual wages for recent college graduates has tripled since 1990. Bottom line: students are going into increasingly larger amounts of debt to pay for college without experiencing the proper benefit for incurring these costs.

Young adults are delaying major life events

Student Loan Hero conducted an online survey in 2015 where they asked young adults questions about how student debt has affected their lives. Here are the results:

· Forty-one percent have postponed purchasing a home because of student loan debt.

· Twenty-five percent have postponed moving out of their parents’ homes.

· Forty-seven percent have postponed buying a car.

· Twenty percent have put off opening their own business.

· Fourteen percent have delayed marriage.

Other studies show similar results:

  • Home ownership for Americans under 35 has decreased nearly 9% from 2005 to 2015, from 43.3 percent to 34.6 percent.
  • When applying for a mortgage, student debt is taken into account by lenders when deciding how much money a person would be permitted to borrow. This often results in people qualifying for lesser mortgage amounts than they would otherwise be offered if they were debt free. This, in turn, impacts their decision to purchase a house.
  • The National Association of Realtors conducted a survey in which they determined that 57 percent of first-time home buyers claim that student debt was impeding their ability to save money.

High student debt not only affects the borrower, it is associated with social and economic costs as well.

· According to Robert Dietz, an economist with the National Association of Home Builders, “growing student loan burdens can have direct impacts in terms of lost sales due to higher debt levels for builders focusing on the entry level market space”.

· Twenty-somethings are putting off starting the family. 2016 marked a new record low for the fertility rate among this demographic.

· High student loans and the need to repay them is steering young people away from lower paying but essential professions like social work and health care, and early childhood education, towards higher paying jobs in tech and financial services. Researchers at The National Bureau of Economic Research state “We find that debt causes graduates to choose substantially higher-salary jobs and reduced the probability that students choose low-paying ‘public interest’ jobs”.

Researchers at the Federal Reserve Bank of Philadelphia and Pennsylvania State assert that there is “a significant and economically meaningful” link: more student debt led to fewer smaller businesses being formed.

Granted, student debt is not the only factor influencing some of these larger economic trends, but it is undoubtedly a factor.

There is a major job shortage in the trades

While many young adults have put their life on hold because of their student debt, waiting to capitalize on their education, there is a shortage of young people in the trades.

Economists are concerned that in the coming years, as the older skilled workers begin to retire, that there will not be enough new skilled workers. They contend that one of the reasons for this shortage is the fact that trades are not encouraged in today’s high schools, and that schools have put too much emphasis on preparing kids for the university. They argue that our public education system is in need of re-balancing, and we need to start recognizing the importance of the trades, and encouraging more people towards these fields.

The Government’s Answer

The federal government has tried to solve the issue that it in part created. It is debatable whether its “solution” is having the desired effect. It has implemented several programs in order to alleviate the burden of student debt.

Income Driven Repayment (IDR)

Under the IDR program, people with federal student debt can cap their monthly payments at 15% of “discretionary” income. After 25 years, the government will forgive 100% of their student debt, and transfer the burden to American taxpayers.

Public Service Loan Forgiveness (PSLF)

PSLF is very similar to IDR. The difference is that the government will forgive 100% of federal student loan debt after 10 years instead of 25 years, as long as the graduate is working for the government or a non-profit.

Problems with these programs

· When the government originally intended these programs to help less privileged students, the people who are taking advantage of these programs are disproportionally graduate students, who are using these programs to pay off massive amounts of graduate school debt from expensive schools. These programs are now further exacerbating the problem, and creating an unfair advantage to the most privileged students; the exact opposite effect that the government was hoping for.

· These programs will cost taxpayers $350 billion over the next 10 years. It will put America in an endless cycle of paying for its students’ bad financial decisions.

· Most Americans are unaware of these programs.

America must be more aware of what we have signed up to do. If we, as a society, decide that higher education is so important for everyone that we are willing to subsidize it, then we can have that discussion. Currently, we are subsidizing higher education without fully comprehending that our tax dollars are paying for students’ poor financial decisions. If Americans knew that their tax dollars were going towards paying off students’ master’s degrees in fine arts, or paying off an ivy league MBA student’s debt, because they decided to work for a non-profit for 10 years, people wouldn’t be happy.

Other programs proposed by some of our country’s leaders include making community college 100% tuition free. It is a further step in the wrong direction. If the government decided that community college should be tuition free, somebody else would be picking up the tab. There is no such thing as a free lunch, and taxpayers would be left with the bill. Federal programs are indirectly responsible for our current mess, and the government has no business expanding its influence in this industry.

Solutions

It will take a holistic approach over decades to resolve these issues. Some of the things we can do immediately are:

Encourage the Trades for those without college scholarships

There is a significant population of younger people who are disgruntled and feel that the cards are stacked against them. They went to college as they were supposed to, are saddled with debt, working low-wage jobs, have little prospects of high-earning careers, and are now wondering what went wrong.

If people are not college material, there are other options. The only thing they need is a little work ethic. There are opportunities for people with zero experience to apply for entry-level jobs in the trades and earn very respectable incomes. My wife, with zero experience, applied and got a job with an electrical design-build and systems integration firm. As she described it “they were simply looking for someone willing to swing a sledgehammer.” All she had to do was pass a simple Math and English test, one which any average high school graduate would have no problem passing.

A week after applying, she was making $1800/week helping a construction crew build out a data center. At the same time, they withheld $2500/year to pay for trade school, which she attended two nights a week. At the end of four years at the firm, she would be a licensed journeyman electrician making six figures, and they would reimburse her for any wages they withheld to pay for the vocational school. Being a licensed electrician, making six figures, with zero student debt is not a bad alternative to the situation some of today’s college graduates find themselves in.

Ideally, more young people would be self aware and know whether college is a good fit for them before going into large amounts of debt. The trades are an excellent way to break the cycle even after college, especially when someone is stuck in a low-wage job.

The only problem with this solution is that many Americans, especially in academia, hold the trades in disdain despite their crucial role. Parents and teachers train young people to think that if they end up in the trades, they have somehow fell short of their potential. We need to change this mindset.

Emphasize Personal Finance Education

We must do a better job at teaching young people to be more financially aware, and to understand the lasting implications of going into debt for school. We need to emphasize personal financial responsibility. Some important principles we must emphasize to young students are:

· Reduce the amount financed for cost of living expenses. This can be achieved by working a part time job during school. Students must take care to ensure a part time job will not distract from their studies and affect their ability to graduate on time.

· Students must be aware of the details about their loans. They must know that IDR and PSLF programs are only available to students with direct federal loans. Students should avoid at all costs any private loans, especially those with variable interest rates.

Timothy R. Ulbrich asserts in his paper It’s Time to Broaden the Conversation About the Student Debt Crisis Beyond Rising Tuition Costs : “Financial aid offices can and should play a pivotal role in these efforts, but the minimum counseling required when borrowing federal loans is not enough. Regular and routine reinforcement of these principles and support and encouragement from the school or college faculty and administration for student participation in financial aid counseling activities is critical to ensuring students take this counseling seriously and reap the benefits of these services.”

Make student loans available in “buckets”, by major.

We need to educate young people about underemployment, median wage, and the impact that a college student’s major will have on these metrics. The underemployment rate in the following data is defined as “the share of graduates working in jobs that typically do not require a college degree”.

In a report published by the Federal Reserve Bank of New York, approximately one third of college graduates, and about 44% of recent college graduates are underemployed. The bank separated the data by major, and they clearly demonstrated that there are certain categories of degrees that are much more susceptible to underemployment and low median wage than others.

Here is a list of the worst 20 majors, based on underemployment rate.

Here is a list of best 20 majors, based on low underemployment rates.

According to this data, if a young student has decided to major in criminal justice, upon graduation they will be working in a job where the average underemployment rate is 75%, and they will be making an early career wage of $34.5k. Granted, this is the extreme case, but if I were a bank, there is zero chance that I would ever consider lending this student the money for their education. The likelihood the bank will get its money back in a reasonable amount of time is not good. At the other end of the spectrum, if a student was majoring in chemical engineering, where upon graduation they would be making $70k, I would happily help the student finance their education. The risk is much lower. The problem with the situation is that banks are no longer involved in the decision making process of whether or not a certain student is an eligible candidate for a loan. Everyone is now directed to the U. S. Department of Education, the new defacto bank for all student loans, and they don’t take into account a student’s major when calculating the risk associated with the loan. They simply issue the loan, and the student is now on the hook to pay it back.

The problem is that students are generally 18 years old when they are making these decisions, and they are typically not emotionally mature enough to grasp the long reaching effects of going into debt for some of these majors. They start taking out student loans, then years later regret the amount of debt they have accumulated on education-based expenses. That is the crux of America’s current student loan crisis: too many students with too much debt without the ability to pay it off efficiently.

In the case of students who are going into debt for degrees in which there is a high underemployment rate and low median wages, we need to counsel them that they will likely be sacrificing their ability to afford a home until a much later time than their peers. They will likely be postponing other major life events, they will be digging out of their student loan debt for a significant portion of their lives, and they will likely have to live on beans and rice in order to achieve their financial goals. Further, when they graduate, they will not be utilizing their degree, and they will likely be doing the same work as people who do not have a college degree. This argument alone should discourage students from going into debt for any of the degrees in the first list.

One thing we could do that would protect young people from making these mistakes is making student loans available in buckets of majors. We should make more student loans available for the engineering fields, and decrease the loans available to students majoring in the first list. The benefits of this would be enormous. First, it would mean that the students who do go into debt for their education would have the ability to pay off their debt faster. Secondly, it would incentivize students to go into the STEM fields and stick with them. Lastly, if these students realize that the STEM fields are not for them, it will incentivize them to find other alternative career paths, such as the trades.

Get rid of General Education requirements and unnecessary electives

On average, most undergraduate degrees require around 50 credit hours in non-core classes, a combination of general education requirements and electives. With an average cost per credit hour in the U.S. of around $600, these 50 credits would cost $30k in tuition alone. In addition, we also have to account for the additional two years of room and board at approx. $10k/year it would take to complete 50 credit hours, as well as the two years of lost salary. Reducing the overall degree requirements to the core requirements would on average save students at least $50k. It is worth having the conversation.

Make Certain “Public Interest” Degrees Tuition-Free

Students going into certain fields, such as teaching, have a unique problem. They absolutely need a degree to work in their field, and they are almost never underemployed once they graduate. However, they are also amongst the worst compensated careers compared to the amount of education they need. We always hear people saying that we need to pay our teachers better, and I agree with that. It seems like this is not going to happen any time soon. I would approach this from another angle. If a student decides they want to major in education, they should get their college tuition free. If the federal government is insistent on injecting themselves into our higher education system, I am in favor of this type of intervention, as opposed to programs like PSLF. It is unfair that we require teachers to have degrees, often masters degrees, and keep their salaries as low as they are.

In addition to teaching, we should extend this policy to other “public interest” degrees, such as social service, guidance counseling, etc. These jobs require degrees, they are vital to our society, but they have relatively low salaries. They should not have to deal with the additional stress that comes with student loan debt. I would propose that we pick up the tab for people who decide to go into these majors. We owe them that.

Summary

The student debt and college cost issues facing this country are serious, but we can solve them. A comprehensive approach of non-stigmatizing the trades, emphasizing prudent personal financial practices, being smart about what majors people should be allow to go into debt for, reducing the number of unnecessary classes, and making certain “public interest” degrees free are some of the steps we can start taking immediately to begin reversing the trend.

References

Warshawsky, M. J., & Marchand, R. (2017). Dysfunctions in the Federal Financing of Higher Education. MERCATUS RESEARCH. Retrieved September 2, 2017, from https://www.mercatus.org/system/files/mercatus-warshawsky-financing-higher-education-v1.pdf

Chart and Table Data for Federal Reserve Bank of New York, the Labor Market for Recent College Graduates. Updated: July 5, 2017. FEDERAL RESERVE BANK of NEW YORK. Retrieved September 9, 2017, from https://www.newyorkfed.org/medialibrary/media/research/college-labor-market/labor-market-for-recent-college-grads.xlsx

Kelley Holland (2015). The high economic and social costs of student loan debt. CNBC. Retrieved September 16, 2017, from https://www.cnbc.com/2015/06/15/the-high-economic-and-social-costs-of-student-loan-debt.html

Nicholas Bakalar (2017). U.S. Fertility Rate Reaches a Record Low. The New York Times. Retrieved September 16, 2017, from https://www.nytimes.com/2017/07/03/health/united-states-fertility-rate.html

Edwards, H. S., Altman, A., Miller, Z. J., & Thompson, M. (2015). But Can America Afford This Approach to Solving Student Debt?. Time, 186(22/23), 92–99.

Ulbrich, T. R., & Kirk, L. M. (2017). It’s Time to Broaden the Conversation About the Student Debt Crisis Beyond Rising Tuition Costs. American Journal Of Pharmaceutical Education, 81(6), 1–5

SLH Staff. 2015 Student Loan Burden Report: One in Seven Americans With Student Loans Have Delayed Marriage Due to Crushing Burden of Student Debt. Student Loan Hero. Retrieved October 20, 2017 from https://studentloanhero.com/press/2015-student-loan-burden-report-student-loan-hero/

SLH Staff. A Look at the Shocking Student Loan Debt Statistics for 2017. Student Loan Hero. Retrieved October 20, 2017 from https://studentloanhero.com/student-loan-debt-statistics/

Jackson, Abby. This chart shows how quickly college tuition has skyrocketed since 1980. Business Insider. Retrieved October 20, 2017 from http://www.businessinsider.com/this-chart-shows-how-quickly-college-tuition-has-skyrocketed-since-1980-2015-7

Shahien Nasiripour & Nicky Forster. 3 Charts That Show Just How Dire The Student Debt Crisis Has Become. The Huffington Post. Retrieved October 20, 2017 from https://www.huffingtonpost.com/entry/3-charts-student-debt-crisis_us_56b0e9d0e4b0a1b96203d369