An IECA Member Appeals to Government Leaders on College Affordability
by Jane Klemmer, IECA (New York)Â
I am pleased and encouraged that you (current administration) have started a dialogue with college leaders on college affordability. This issue is very personal for me; preoccupation with paying for college is beginning to affect my sleep. I know that my sleep habits are not your concern. However, it’s not purely about the checks I must write to pay my own daughters’ tuition. No, this anxiety is of the Woody Allen variety. Like young Alvy Singer in Annie Hall, I fear that our universe of student borrowers is expanding, and that excessive debt will ultimately blow our economy apart. I have this recurring doomsday nightmare. In my dream the cost of college and the exponential growth in student debt will send our economy into a tailspin from which it may never fully recover. The magnitude of the student debt bubble could make the sub-prime crisis look like kids play.
While it is difficult to imagine that student borrowing could wreak such havoc on our economy, consider this: The cost of college today has put affordability truly out of reach for most Americans, including many who are comfortably middle class. Yet judging from the rise in applications and enrollment, inability to pay has, for better or worse, had little impact on the pace of college attendance.
Students are mortgaging their futures to attend college. Families naively start this process expecting they will receive financial aid; many “experts” even perpetuate the myth that middle income families are likely to qualify. However, the reality is that the only way most students can foot the bill for college is by borrowing…and borrowing a lot, which for many means tapping both federal and private loans. The good and bad news for students is that the principles of good credit don’t appear to apply when financial institutions dole out student loans. Most students can and will borrow amounts well beyond their ability to repay. Yet ultimately students must face the harsh reality of affordability, which too often occurs the day that first loan payment comes due.
Want to know just how unaffordable student loans have become? Today’s graduates who carry student loans borrowed more than $25,000, on average, and this does not include the PLUS loans taken by parents, and probably even excludes some private borrowing not recorded by the colleges. These same graduates, at least those lucky enough to find employment, had a starting median salary of $27,000 in 2010. That’s about $12,000, or 44%, short of what would constitute an adequate level of income for someone paying off $25,000 in federal student loans. Students should be advised that debt payments to gross income above 8% go beyond the affordability threshold. The “average” student today is paying closer to 13%.
If we don’t get the cost of college under control quickly, here is the nightmare scenario I envision:
- As college costs rise unchecked, students will feel pressured to borrow even more. They will resort to private student loans since their federal borrowing capacity will be tapped out. Private student loan growth has exceeded 30% annually in the past few years, versus single digit growth in federal loans.
- Upon graduation, students will encounter an anemic job market. Many will end up defaulting on their loans either due to a failure to find employment or because their salaries don’t pay enough for them to meet their hefty student loan payments. Thankfully the President has addressed this, with recent changes to the Income-Based Repayment Plan, but as you know, private student loans do not qualify and this is the loan market that is growing so rapidly.
- Unanticipated defaults on student loans will force lenders to file for bankruptcy and/or seek government bailouts on the backs of taxpayers. I don’t have to remind anyone in government how unpopular that action is with voters.
- Some borrowers with private loans will be paying off their student debts over terms up to 25 years. This means that they will probably have to defer buying a home and investing in other purchases that have become staples of our middle class values. They certainly won’t have the cash flow to invest in college funds for their own children, and forget about putting money aside for retirement.
- The housing market will suffer. Senior citizens will not be able to sell their homes to young families starting out. Prices will plummet, far more dramatically than during the sub-prime crisis as now there will be a whole generation of twenty and thirty year olds who won’t qualify for a mortgage.
- Housing, a leading indicator, will only be the tipping point. Other industries tied to home building will follow, plunging the economy into a recession or even worse, a depression.
- Many young people, discouraged by the absence of an adequate return on investment in their education, will come to terms with the hard reality that college may not be in their future.
- Ultimately, the U.S. economy will suffer and fall behind other nations since no one but the very rich will have the means to attend college, except perhaps a few students at the other end of the economic spectrum who are motivated and smart enough to gain acceptance to one of the few well-endowed elite colleges that meet full need. The middle class, along with middle class dreams and values, will eventually disappear. I fear that this has already started.
So please, don’t let my nightmare become a reality. I have no answers on how to address this dire problem. As a concerned citizen who is losing too much sleep, I look to you, our leaders, and those in higher education to restore our American Dream, which includes a reasonably priced college education. The survival of our nation as we know it depends upon it.
Related posts:
I love this post and hate it all at the same time. I, too, lose sleep about the effects of excessive student debt and wonder about how this will affect our economy, but I fear that the student debt is but one symptom of a greater problem. Banks are “addicting” kids to debt at a very early age. Kids see people paying for everything with a credit card and have no idea how to save for something until they can afford it. For today’s children, debt is a fact of life, and they don’t really care about it. If they aren’t borrowing for school, they are borrowing for clothes, spring break, a car, etc. Kids think that banks are their friends. Buy it now and pay it later. Students are borrowing more than necessary to attend “dream schools” when they could be making other choices saving money. It scares me when I hear parents say that a college is like CLub Med and a student say that he or she will only graduate with $40,000 in debt. Nobody is willing to say “no” to these kids. Not the schools, not the banks, and not the parents. I keep asking myself the same question over and over: when did the banking industry become the tobacco industry?
Great post Jane. It is very depressing.