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In terms of financial value, has a college degree reached its “tipping point?”
Since the end of World War II, obtaining a higher education has been touted as one of the surest paths to a higher income and better financial life. Supporting this idea, various government programs have been established to make it possible for more people to afford a college education. Included in these programs are grants, scholarships and work-study options, but the most widely-used assistance plans are student loans, which allow individuals to borrow money in order to finance their education on very favorable terms. (Not only are government-approved student loans generally issued at lower interest rates, but most do not become due until after several months after graduation.)
President Ronald Reagan was not an economist, but he was fond of repeating several economic adages that succinctly expressed his views. Among those most frequently recited: “If you want more of something, subsidize it.” This statement has proven true in higher education; more Americans are attending college – and more Americans are using government assistance to do it. But subsidies, government or otherwise, have other consequences as well.
When the demand for something increases, the price usually goes up as well. A 2008 report from the National Center for Public Policy and Higher Education found that “published college tuition and fees increased 439% from 1982 to 2007 while median family income rose 147%.” In other words, the cost of a college education over those 25 years had tripled in relation to family income.
Because higher education costs more money, the Center’s report adds that “student borrowing has more than doubled in the last decade.” The public service web site www.finaid.org acknowledges borrowing is now almost inevitable: “Few students can afford to pay for college without some form of education financing. Two-thirds (65.6%) of 4-year undergraduate students graduated with a Bachelor’s degree and some debt in 2007-08, and the average student loan debt among graduating seniors was $23,186.”
As the cost of education and the amount of borrowing necessary to finance it both increase, the financial value of a higher education begins to decrease relative to its cost. A February 2, 2010 Wall Street Journal article titled “What’s a Degree Really Worth?” presented some calculations that the financial advantage of a college education had diminished by almost 60% in the past decade.
Various data collected from 1999 through 2002 and used in publications by the Census Bureau and the nonprofit College Board showed a college education paid off in an average lifetime earning advantage of $800,000 to $1 million, compared to those without degrees. However, using current numbers reflecting the disproportionate increase in costs compared to incomes, the American Institutes for Research, another non-profit, found the lifetime advantage had diminished to $280,000.
Beyond the possibly diminished advantage in lifetime earnings, the increase in student loan indebtedness may present greater financial dilemmas for college graduates. Student loans are unique financial obligations, and their negative financial impact can last a lifetime.
Particularly in a tight job market, repaying student loans can be a financial hardship when one is just beginning a career. In response, lenders may offer options to postpone or modify payments, but forbearance on large sums can make future payments positively overwhelming. In a February 13, 2010, Wall Street Journal article (“The $550,000 Student-Loan Burden”), Mary Pilon detailed how the student loan debt of a family practitioner ballooned from $250,000 to $550,000 in the eight years after her graduation because of deferrals and charges.
Since most student loan debt is secured debt borrowed from the federal government, it can almost never be erased, even by filing bankruptcy. As www.collegescholarships.org says on its website: “Student loans are rarely forgiven since they are guaranteed government funds dispersed with low interest to all kinds of people with no credit history. You don’t epect the IRS to forgive you on all taxes that are owed, so expect the same treatment with your student loan.”
Jeffrey J. Williams, a professor at Carnegie-Mellon University, writes that student loans “stipulate severe penalties and are virtually unbreakable, forgiven only in death, not bankruptcy, and enforced by severe measures, such as garnishes and other legal sanctions, with little recourse. (In one recent case, the Social Security payment to a person on disability was garnished.)”
Even if you can make regular payments following graduation, the terms are heavy. “Student debt is a long-term commitment — fifteen years for standard Stafford guaranteed federal loans,” says Williams, author of The Post-Welfare State University. “With consolidation or refinancing, the length of term frequently extends to thirty years—in other words, for many returning students or graduate students, until retirement age.” Having student loan payments at age 55 or 65 is a sobering thought.
Because of these sizable long-term obligations, “College student loan debt has revived the spirit of indenture for a sizable proportion of contemporary Americans,” says Williams. “Because of its unprecedented and escalating amounts, it is a major constraint that looms over the lives of those so contracted, binding individuals for a significant part of their future work lives.” Pilon agrees, saying “in practice, student loans are one of the most toxic debts, requiring extreme consumer caution.”
Conclusion: Education Good; Debt Bad; Preparation Essential
In almost every instance, more knowledge and greater skills are valuable, even if the financial calculations seem to indicate the benefits aren’t as great as they used to be. The critical financial questions about a higher education are whether it’s worth mortgaging a significant portion of one’s future to acquire a higher education, and whether using student loans is a preferred method of financing.
In addressing these questions, there is another dynamic. The person who will be most affected by this decision is often financially inexperienced and possesses limited resources. Bruce Necker, writing a “President’s Page” opinion piece in the March, 2002, issue of the Michigan Bar Journal, related that
“One of my friends, a successful obstetrician in Grand Rapids, told me that if she had to do it all over again, she would forgo her medical school education rather than strap herself for her entire life, to decisions she made as a 22-year-old before entering the profession. I hear the same tale from young lawyers. Borrowing is the easy part. Repayment proves to be more difficult.”
In reality, these hard financial decisions about college education are greatly determined by earlier financial decisions made by a student’s parents or guardians. If they haven’t made preparations for college funding, the choices for their children are limited: athletic or academic scholarships, need-based financial aid, or loans. Scholarships are available to a uniquely gifted portion of the population, and need-based funding has decreased with the economic decline. That leaves either loans – or forgoing college.
IS COLLEGE EDUCATION ON YOUR LIST (OR YOUR CHILDRENS’)? IF SO, NOW IS THE TIME TO EXPLORE FUNDING ALTERNATIVES TO STUDENT LOANS.
