December 19, 2014

Can ‘True Love’ Survive Student Loans and Lack of Employment?

Graduates

In “Youth Vote May Support More Economic Freedom” I wrote:

This [lack of employment] has hit young people the hardest. The median age for a first marriage has increased two years since 2007. And the rate of couples having children has decreased significantly.

Rising debt from college loans is one of the reasons for delaying marriage and children. The average debt burden at graduation is about $25,000. Part of the blame for this effect is the government’s student loan policies. In my column “Is Federal Student Aid Among the Best or Worst Government Programs?” I quoted Richard Vedder, Professor of Economics at Ohio University, who wrote:

Related to this problem, colleges themselves have no “skin in the game.” They are responsible for allowing loan commitments to occur, but they face no penalties or negative consequences when defaults are extremely high, imposing costs on taxpayers.

In fact the federal government now has a monopoly in providing student loans. Loans boost enrollment demand forcing the cost of education to rise much faster than inflation. And colleges need not worry about the student’s ability to pay it back nor even if the curriculum they are getting is worth the cost of the loan.

Loaning money with insufficient chance of repayment sounds a lot like the Community Reinvestment Act (CRA) where the government forced banks to make mortgage loans with insufficient chance of repayment. The CRA caused the financial crisis and brought down some of the largest financial institutions. No one could have anticipated the unintended consequences would be so catastrophe, but now we are making the same type of mistake.

It could even be that college loans are like the housing bubble.

Michele Lin writing for the International Business Times in an article entitled, “Rising Student Loans: The Next Debt Time Bomb set to Explode” recently wrote:

Since 1978, the price of tuition at U.S. colleges has increased over 900 percent, 650 points above inflation, while tuition grants have been slashed from 70 percent to 34 percent. Student debt, on the other hand, has increased 511 percent since 1999, a rate that is twice as steep as the growth of housing-related debt.

In February, an interesting anecdote came out of the Fed Chairman Ben Bernanke’s semi-annual testimony to Congress: His son, who is in medical school in New York, is likely to rack up $400,000 in student loan debt in the process of getting his degree.

Warning of the rapid growth in U.S. student loan debt, Bernanke called for ‘careful oversight’ from regulators. …

According to the Financial Times, the criteria for federally guaranteed student loans are not as stringent as for other kinds of debt, and many loans have already been securitised and sold off to investors.

The problem is colleges get money based on what they cost. So there is an incentive for them to cost more. And when they cost more they recruit better faculty and build better facilities. There is no incentive to cost less. As a result, college is less and less of a worthwhile investment.

Another aricle by Elizabeth Dwoskin on Bloomberg Businessweek entitled, “Will You Marry Me (After I Pay Off My Student Loans)?” supports the statistics I quoted in my article:

In 2007, the median age of a first marriage for males was 27.5 years old, and for females, 25.6 years old, according to IHS. By 2011 it crept up to 28.7 and 26.5, respectively. Fertility rates, defined as births per 1,000 women aged 15-44, decreased significantly from 69.3 in 2007 to just below 65 last year. …

The lack of job prospects for young Americans isn’t dulling the pain. This age group has been hit harder by the downturn than others. That has caused many more young adults to enroll in school, thus saddling themselves with even greater student loan burdens, IHS says.

The Obama administration is trying to ease the pain. Late last year the president issued an executive order mandating that outstanding student debt be forgiven after 20 years, down from 25 years, and that student debt payments not exceed 10 percent of a graduate’s income, a drop from 15 percent.

Oddly enough, our attempts to override these economics make the market for higher education worse. Janet Lorin’s Bloomberg Businessweek in “$100k in College Debt, And That’s Without Interest” explains how colleges have no incentive to compete on cost.

And Karen Weise explains in “Student Loan Delinquencies Are Worse Than You Think” that:

Students may be struggling with debt more than we knew, according to a team of five researchers at the Federal Reserve Bank of New York. They explain that borrowers were late on $85 billion in student loans in the third quarter of 2011, which at face value is about 10 percent of the $870 billion in total outstanding student debt.

The researchers say student borrowers particularly struggle to repay their debt because many of them are recent college graduates, who are more likely to be unemployed or earn less than older borrowers. Pay for college grads is sharply down over the past decade, according to an upcoming study by the the Economic Policy Institute.

As a country we did not look at the consequences of easy debt to buy a house and now we are not looking at the consequences of easy debt to buy an education. Here are some additional articles on the consequences of government largess subsidizing Big Education:

  1. Will My Student Loans Keep Me From Ever Finding Love?” by Caitlin Abber: “There was a two or three-year period in my life where I legitimately thought no one would want to be with me because of my student loan debt.”
  2. Call Me Maybe When Your School Loan Is Paid In Full” by NPR’s Jennifer Ludden: “Avoid legal marriage so that one party won’t be liable for the other’s student loan debt.”
  3. Safety Net or Windfall?” by Jason Delisle and Alex Holt: “contrary to benefiting low-income borrowers, the pending changes to IBR will actually provide generous benefits to borrowers with higher federal loan balances – those with graduate or professional degrees.”
  4. Obama’s Student Loan Program Is a Windfall for the Rich Study Says” by Nicole Goodkind: “This is the more you borrow the more you can have forgiven.”
  5. End U.S. Student Loans, Don’t Make Them Cheaper” by Richard Vedder in Bloomberg: “The federal government should get out of the student loan business.It should provide educational vouchers (similar to Pell Grants) directly to students (not schools), and make those vouchers progressive (very low-income students receive the most, fairly low-income students a little, and middle- and upper- income children nothing).”
  6. Attorney struggles to pay off student loans to enter cloistered monastery“: “Having already been accepted into the Dominican convent in Menlo Park, Calif., Tara Clemens has been forced to put her religious vocation on hold until she pays off the debt.”

Such a well-intentioned program steals our youth, our love, our happiness, our faith and our self-esteem.


Photos of Graduates, Graduates and Graduates by Suzi Walker, used under Flickr Creative Commons license.

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About David John Marotta

David John Marotta+ is the Founder and President of Marotta Wealth Management, Inc. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. Favorite number: e (2.7182818...)

Comments

  1. Investor’s Business Daily had an editorial entitled, “College Crunch Coming, And Obama Doesn’t Have Answer” which read in part:

    Last week, the College Board reported that the net college cost — that is, the sticker price minus all the offsets — has risen for the first time since 2003. …

    Sticker prices continue to rise faster than the cost of living. Prices for tuition and fees at public four-year schools, for instance, rose 5.2% annually in inflation-adjusted dollars from 2002-03 to 2012-13. Costs at private colleges rose more slowly, at 2.4% a year, but they were high to begin with, having risen faster in prior decades.

    These numbers point to the most important fact about college — that whatever an average student ends up paying, the cost of a college education is soaring. And someone foots that bill if the student doesn’t.

    Taxpayers shell out more for aid. Increasingly, the students go deeper into debt. And if it’s not the student borrowing, it’s the federal government putting future taxpayers on the hook.

    Borrowing from the future pretty much sums up the Obama administration’s approach. During the president’s four years in office, federal financial aid has risen by about $50 billion a year.

    Part of this gain came from a near doubling of Pell Grants, aimed at lower-income students, to $35 billion.

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