As the end of spring dawns and summer approaches, many high school students proudly wear their caps and gowns while crossing the stage with their sights set on college. Hoping for a brighter future it seems almost inevitable to acquire debt to finance your college education. The Chronicle of Higher Education estimates that over 60 percent of the 20 million students who attend college each year borrow money annually to help cover costs.
US student loan debt is now looming at over $1 trillion, and we are forced to evaluate the role student loan debt is playing in our quality of life. A study conducted by the Federal Reserve Bank of New York found that 30-year-olds with student loans are less likely to have debts like home mortgages than 30-year-olds without student loans and the same is true for 25-year-olds and car loans. In addition, Pew Research Center found that the measure of debt to income for households under the age of 35 has ballooned to 1.5-to-1 in 2010 from about 1-to-1 in 2001. Meaning that most people carry more debt than the annual income they bring in.
Student debt is even having an impact on graduates getting married. A survey conducted by the American Institute of CPAs showed that 15 percent of respondents opted to postpone getting married as a result of their student loan debt.
The growing reliance on student loans along with the lagging economy and job market is creating a new breed of thirty-something that bet big on their college education and subsequently don’t have enough cash to make investments in assets that can appreciate in value. To make matters worse there is a debate on Capitol Hill about whether or not the interest rates for government-issued student loans will double this July. The 3.4 percent federal student loan rate is expected to go up to 6.8 percent later this summer. Students and graduates with existing student loans would not be impacted, just those applying for future federal loans. With borrowing rates for banks so low, it’s a wonder why student loans are expected to be issued at a premium.
On the bright side, the President along with members of congress are discussing ideas to keep rates down. However, most of the ideas are based on linking student loan rates to market rates like the treasury rate, which would mean student loans could fluctuate up to as much as 10.5 percent, considerably more than the aforementioned 6.8 percent. Some have even proposed allowing rates to be adjustable for the life of the loan, similar to the adjustable rate mortgages that aided in the financial crisis.
The uncertainty over interest rates and the swelling debt being accumulated by current and prospective graduates is having a direct impact on household spending and an impact on the overall economy. Kevin Carey, the director of Education Policy Program at the New America Foundation, a research group in Washington says it best in The New York Times, “It is a new thing, a big social experiment that we’ve accidentally decided to engage in. Let’s send a whole class of people out into their professional lives with a negative net worth. Not starting at zero, but starting at a minus that is often measured in the tens of thousands of dollars. Those minus signs have psychological impact, I suspect. They might have a dollars-and-cents impact in what you can afford, too.”
Now more than even is it important to teach our high schoolers and prospective college students the importance of finding ways beyond loans to finance education. Students may also want to consider going to state schools or community colleges to keeps costs low, or opting for the less prestigious school offering financial support rather than an Ivy League school that won’t give a dime.
We took a look at what we should be teaching our girls about financial literacy. What should we be doing to manage the student loan crisis we’re falling into?