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April 25, 2012

Student Loans Deterring Marriage, Children

Total student loan debt in America recently exceeded $1 trillion and is now higher than credit card debt. It’s a mind-boggling figure, and one which has led some economists and commentators to claim it’s simply the latest financial bubble waiting to burst. Others editorialize about what all that debt says about the state of higher education in contemporary America. Lost amid these discussions, however, is the impact this debt is having on the life decisions of an entire generation.

They are mostly young twenty- and thirty-somethings who did everything they were told to do. They went to college. They worked part-time while studying. They graduated with good grades (not really that hard to do in many college majors given rampant grade inflation and soft subject matter, but never mind for now). And they got buried under an avalanche of debt it may take a lifetime to dig out of. The Wall Street Journal provides a deeply personal account of the terrifying financial situation faced by many recent grads. Take, for example, Jodi Romine:

Between the ages of 18 and 22, Jodi Romine took out $74,000 in student loans to help finance her business-management degree at Kent State University in Ohio. What seemed like a good investment will delay her career, her marriage and decision to have children.

Romine’s $900-a-month loan payments eat up 60% of the paycheck she earns as a bank teller in Beaufort, S.C., the best job she could get after graduating in 2008. Her fiancé Dean Hawkins, 31, spends 40% of his paycheck on student loans. They each work more than 60 hours a week. He teaches as well as coaches high-school baseball and football teams, studies in a full-time master’s degree program, and moonlights weekends as a server at a restaurant. Romine, now 26, also works a second job, as a waitress. She is making all her loan payments on time.

They can’t buy a house, visit their families in Ohio as often as they would like or spend money on dates. Plans to marry or have children are on hold, says Romine. “I’m just looking for some way to manage my finances.”

The delay of important adult milestones, like buying a house and starting a family, will have serious repercussions, not just for all the Jodi Romines out there, but for American society at large. Why, then, are student loans treated so differently from other loans?

Both private and government loans, however, lack “the most fundamental protections we take for granted with every other type of loan,” says Alan Collinge, founder of StudentLoanJustice.org, an advocacy group. When borrowers default, collection agencies can hound them for life, because unlike other kinds of debt, there is no statute of limitations on collections. And while other kinds of debt can be discharged in bankruptcy, student loans must still be paid barring “undue hardship,” a legal test that most courts have interpreted very narrowly.

The truly horrifying aspect is the realization that Jodi Romine might be one of the lucky ones. According to a recent study conducted for the Associated Press, “half of young college graduates [are] either jobless or underemployed in positions that don’t fully use their skills and knowledge.” The college degree that was supposed to be the ticket to a decent middle class job has instead led to a surfeit of Starbucks baristas. And what’s the most common piece of advice for these young job-seekers? Go to grad school (and rack up even more debt).

Still, it is worth pointing out that American higher education is not stagnant. Colleges are beginning to provide improved loan counseling. Online education is evolving rapidly, and startups are proliferating as young entrepreneurs rush to meet the surging demand for affordable higher education. These developments may not help Jodi Romine very much, but hopefully they represent an inflection point from which future college students may begin to see benefits. After all, one generation of Jodi Romines is one too many.

Posted in Blue Social Model, Education, Quick Takes
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  • thibaud

    As financial aid is increased, the colleges simply increase tuition accordingly, negating the effects of the aid. The increased tuition goes largely to fund administrative salaries and country-club style amenities, neither of which has any impact on the quality of education.

    Federal and state aid to colleges should come with a large and unbreakable string attached: administrative costs must be reduced as a percentage of overall budget to some agreed-on ceiling or else the college will have to reimburse the difference to the state.

    A good target for rollbacks of administrative costs would be the level that prevailed in 1975, before we had nearly years of cost increases at 3x the inflation rate.

  • thibaud

    correction to above: “… before we had nearly _40_ years of costs increases at 3x the inflation rate.”

  • f1b0nacc1

    Considering that the typical target for a student loan is 18 years old, has no assets, and very little earning potential, it isn’t hard to understand why the conditions surrounding student loans are different than other types of loans. What sane lender would fork over $50k+ to the sort of people that you find on most university campuses without some extraordinary guarantees that they will actually see their money returned?

    The example provided in the article above is a superb argument against altering the student loan regime in any way. Here are two reasonably honest individuals with what seem to be good work ethics, and they are only able to repay their debts by dint of enormous sacrifice and privation. Just look around most campuses…do you really believe that this sort of determination and honesty are sufficiently abundant to ensure payment of the enormous debts being run up?

    To be blunt, ‘normalize’ student loans (i.e. alter their conditions to be consistent with ‘normal’ loans), and you will see mass defaults, typically through bankruptcy. Loan originators will exit the market, and the ability of students to finance college educations will evaporate. If this end point is your goal (and I see it as an altogether desirable one, the Higher Ed bubble is a huge problem) fine, but don’t pretend that it is anything other than a way to kill off a big chunk of the higher ed establishment.

  • MarcH

    “They are mostly young twenty- and thirty-somethings who did everything they were told to do”

    Not exactly. These kids were the 9-11 generation. They received powerful messages to enlist after 9-11. They also got a strong message that, if they did, they’d receive generous GI Bill and other aid.

    I have little sympathy for college students who were eligable but failed to serve, took part at all in the zeitgeist of “Bushitler” and are now carping about their loans.

  • Anthony

    One trillion dollars in outstanding student debt WRM, implies network of interests (banks, colleges/universities, lenders, govt. guarantors, etc.) over decades advantaging themselves at expense of financially naive aspiring students and perhaps parents. The intention of providing student loans may have been noble cultural consideration but advent of securitization of debt along with other corollary interests turned noble idea into big business – with the least able being prey.

  • Soviet of Washington

    An alternative is to make the school be responsible for some significant percentage (20%?) of the loan if it defaults. Then they’d have some skin in the game.

    Of course, the likely outcome of any significant change to the current system is a collapse of the college bubble. Not necessarily a bad thing if it kills all the ‘studies’ departments and administrative bloat in the process.

  • Jbird

    Get the government out of the student loan business!!

    There is already a framework for private student loans. Yes, some people will not be able to get or afford loans. That will limit some choices (community college for 2 years & military service will become more popular choices), but it will also push more and more students & parents to shop based on price and this will have the benefit of suppressing runaway prices and encourage educators to add value and innovate. Federal student loans have only served the interests of the colleges who can charge essentially whatever they want to pay professors not to teach and bloat their administration ranks and useless major offerings because students can get $10′s of thousands in loans every year. Higher Ed, much like healthcare suffers from a manipulated market based on 3rd party payers that does more harm than good

  • Jbird

    f1b0nacc1- a private loan system that makes parents the primary borrower or at least the co-signer solves the problem of defaults and bankruptcies. Driving around the Washington DC area, it’s always striking to me how many universities you can pass in less than an hour. Students who can’t get loans will put downward pressure on prices. Some Universities may start offering their own loans. Others may just reduce costs and prices. A little competition and innovation is a good thing.

    MarcH: the problem pre-dates 9/11. I had children and a career when the towers fell and had already racked up, between me and my wife $60k-ish. The problem was when my wife and I went to college, our parents weren’t experienced with the new paradigm for college. They had paid a couple grand for all 4 years, my grandfather paid something like $100 a semester to go to college. Also, for an 18 year old, the money isn’t real. Getting a student loan is what you were expected to do. It’s what everyone was doing. Was it naive of me? yes. I’m not blameless, but I was 18. what did I know about money? Not much.

  • Mrs. Davis

    don’t pretend that it is anything other than a way to kill off a big chunk of the higher ed establishment.

    Sounds like a feature, not a bug.

  • R McDonnell

    We need these young adults in the workforce as soon as possible. Rather than letting them accrue 10s if not 100s of thousands of dollars of debt for a license to work, they should be in the workforce when they’re 19, 20, etc. Let’s make it so that colleges are no longer a prerequisite to get a job in this country.

    Let people in their late 20s and older determine if they want to take on the expense of education to earn an advanced degree.

  • John Barker

    I have seen this disaster in the circumstances of my young relatives and their parents who are choosing between retiring their children’s loans or funding their own retirements.

  • f1b0nacc1

    JBird,

    Your point is well taken, but ultimately incomplete. Certainly forcing parents to cosign or take on the loans in their own names would reduce the risk, but the number of parents sufficiently creditworthy to do this is very, very small compared to the number of students out there. Remember, the average cost of a college education these days is roughly that of a small home, and the number of parents (particularly those with multiple children) who can afford that extra cost is limited indeed. Add to this the problem with students from broken, dysfunctional, etc. families (or simply parents who aren’t interested in paying for little Justin or Jenna to spend 4 years drinking, screwing and imbibing the latest trendy ‘-ism’), and you will cut the ground out from underneath the overwhelming number of colleges and universities. I don’t necessarily see this as a bad thing (quite frankly, 90% of the current student population could be dismissed without loss, as could the ‘institutions’ that purport to serve them), but the political consequences of such a policy would be problematic at best.

    Even if such a policy was somehow implemented, what happens when the little darlings start defaulting? Do you really think that hundreds of thousands or millions of parents are going to sit quietly as the loans that they took out for their kids educations destroy them financially? They will scream loudly, and our governing class will fall over each other to find a way to make them whole at (wait for it….) OUR expense…

    As long as we indulge in the (delusional) belief that everyone should attend college, financial ability to do so notwithstanding, and that the colleges and universities are actually providing a useful product for most of their customers, this problem will remain unresolved. There is very little need for any more than 2-3% of the population to ever see the inside of a university, and the sooner that we understand this, the better…

  • Tom Gates

    Between undergraduate and law school we shelled out close to $380,000 for our Son.They were good schools and my wife and I were determined to give him what we had been fortunate enough to receive in our day at a tenth of this amount. We felt is was not his fault that due to our circumstances we had to pay the full sticker price on everything. We feel like we paid for the education of 2 or 3 others. Redistrubution of wealth is nothing new to us. I was pretty angry when I found out today that Elizabeth Warren is paid $430,000 to be a law professor at Harvard plus a 20 year interest free loan. This cannot last, what goes around, comes around.

  • thibaud

    @ Tom – “this cannot last [re high salaries for HLS profs].”

    It will certainly last at Harvard and the other top-tier schools. Whatever one thinks of their faculties’ political views, these schools have both the money and the (well-deserved) reputations that justify paying their professors top dollar. I don’t know whether Warren is stellar, but $430k isn’t too much to pay a tenured prof at one of the world’s premier professional schools, one whose parent has a $25 billion+ endowment. For HLS, that’s peanuts.

    Any shakeout in higher-ed will not affect HYPSM and the other top-tier US institutions.

    Interestingly, as admissions have become more competitive, more and more gazillionaires are making multi-million dollar gifts to their alma maters in order to help them compete for top students with lavish merit scholarships. USC for example, is rapidly improving and will continue to climb the ranks, in part because it can now give a free ride to some 40 students each year thanks to John Mork’s $100 million gift. Chicago has always been excellent but now it too is becoming more affordable thanks to similar gifts. I’d expect many more of the better schools to follow suit, and tap the latest crop of US billionaires in coming years for gifts tied to aid to students.

    When the shakeout comes, the fallout will be among the private for-profit diploma mills mainly, as well as that vast swath of mediocre or worse little US private colleges that charge HYPSM-style tuitions for useless degrees.

  • Brett

    I personally like the idea of phasing out subsidized students, while also “normalizing” them (i.e., making it possible for students to default and declare bankruptcy on them). It will [be bad] at first for students who now don’t have that loan money to pay for tuition, but it will also put huge pressure on colleges and universities to lower tuition costs or face not being able to fill their classrooms.

    It also might encourage them to find alternate ways of helping students to pay for their classes. I’d love a vastly expanded “Work-Study” program, for example.

  • f1b0nacc1

    Brett,

    Be VERY careful what you wish for. If the student loan gravy train (which essentially permits unlimited price increases as a result of the extremely low price elasticity engendered among potential students) is terminated, schools will be faced with an enormous drop-off in revenues. This, in and of itself, isn’t such a bad thing, but the likely response might be….

    Schools have very high fixed overhead costs, notably tenured faculty, administration and suppport, physical plant, etc. Given the priorities of the administrations of these schools, as well as subgroups (the diversity mafia, for instance), it is unlikely that any cost-cutting that goes on will not be done at the expense of the school’s educational mission. Hence we are a lot more likely to see savage cuts in academic departments in order to preserve funds for the football team or (worse!) the various diversity deans. Should you doubt this, I suggest you look at how the UC system is handling its current round of fiscal stress.

    Of course it is likely even deeper cuts will be necessary for most institutions, in which case you may see wholesale shutdowns of departments or even schools of studies. Then there is the problem of how to deal with senior (very expensive) faculty, most (if not all) of which is tenured. Bankruptcy, which would be the only effective way of escaping some of these obligations, might become a common practice…

    None of this troubles me terribly much, as I would like to see the Higher Education system reduced by roughly 90% or better, but my rather radical tastes in this matter are unlikely to be widely held or happily endorsed….

  • Jbird

    f1b0nacc1: I agree the model has to change, but the average student loan debt at graduation is $23,186. So, there are plenty of outliers, but a system the allows or requires a 18 year old to borrow $74k may not be the best way to go. Who knows which way innovation will take us, perhaps schools start lending the money, maybe lenders take grades and majors into consideration rather than assets. Your position of a 90% reduction is rather extreme and not necessary (our high school system is no longer good enough to support this). Things will change though. Maybe an accounting or physics major doesn’t need to pay $3,000 for a Shakespeare class so they can graduate. Sad, but true. maybe more students have to work part time or even full time while being a part time student rather than going full time and spending off hours in a very hedonistic campus life. Doesn’t sound like a terrible idea to me. The point is, things are going to change, it’s really just a matter of how much money are we going to waste trying to prop up the old system beyond it’s natural life.

  • f1b0nacc1

    Jbird,

    We don’t disagree too much about much of this, but perhaps my more radical solution is closer to your thoughts than you might realize. For instance, why have accounting majors at all? We could easily move to a skills/achievement-based system (the “merit-badge” approach strikes me as terribly useful), which would provide much of the professional training that degree programs do now, without creating massive barriers to entry that have nothing to do with the acquisition of work-related skills. Some fields (physics was a good example) might not work well with this approach, but lets be honest…how many physicists (to say nothing of Grievance Studies majors) do we really need?

    College degrees are seen by students and their parents as a means of ‘getting your ticket punched’ to join the middle class. The percentage of students actually interested in education for its own sake (as opposed to ensuring that they won’t get their hands dirty in their future job) is miniscule (spare me the heartwarming anecdotes, I used to be a university dean, and I have heard them all), and the expense to our society as a whole is outrageous. Let higher education return to what it was before WWII, and save us all a great deal of money that we cannot afford, not to mention ending the massive distortion of the hiring practices in the workplace.

  • thibaud

    fibonacci (nice nick, btw) – what you describe sounds like the German system, which as I understand it, relies heavily on employer-supported co-op programs combined with an extensive, robust vocational ed system at the secondary level.

    Aside from the absurd, “everyone must go to college” myth, what is preventing the US from moving more in the direction of the German model that delivers such excellent results for them?