Student Loans Crisis: Is College Worth It?

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Imagine every grain of sand on a beach was actually a grain of gold.  That is a lot of gold.  Imagine what would appear to be infinite amounts of gold.  Miles and miles of gold.  How much is it worth?  Probably not that much to anyone because if you actually desired gold you would just head to the beach, scoop up whatever you need and then go about your business. This is an aspect of supply and demand.  The more supply available, the less each unit is worth (less valuable).

Now, imagine every grain of sand on the beach was a college diploma.  If you were an employer, how much would you pay for a newly graduated student in salary if their college degree was that common?  You probably would not pay that much to any one particular college graduate simple because their degree was so common that if they demanded a higher wage you would politely excuse yourself and go find another recent graduate who would accept less money for the job.

If that analogy were not enough, how about this one:  Imagine every single person in America had a PhD.  These ultra-high degrees could be in anything such as astrophysics or chemistry, mathematics or psychology.  But, for the sake of argument, imagine all 320 million people living in the United States have a PhD.  Now, ask yourself this question:  Which PhD-minted graduate takes out the trash?

Government Student Loans

The country believes in higher education so much that the government is willing to subsidize education in the form of student aid as much as it can so that all have an opportunity to advance their lives.  Mostly, this is a very noble intent.  On average, an individual with a masters degree will earn $1.3 million more over the course of their lifetime because they are more educated than someone who merely gets a high-school diploma.

Here is the expected earnings ratio by education level:

college earning potential

Mostly, those individuals that earn a college education tend to live a longer, healthier lifestyle. No the college education itself doesn’t increase your life span, it happens to be a common indicator among people who on average may make healthier, smarter choices. Because of that correlation, college educated individuals generally pay lower premiums on insurance.

In general, with a more educated population, this increases the number of enterprises that can be located in one country, which improves the quality of life as those same individuals have first access to innovation, as a function of those businesses being located in that same country.

However, in enabling college for anyone who wants a college degree, this has created a problem. For those unable to afford college, you can obtain a loan from the United States government. The problem is, once you get this loan, you cannot get out of it unless you pay it off. As is the case with other debt, you cannot simply declare bankruptcy and default on your student debt obtained from the government.

Cost Of College

This has lead to even greater problems, namely the cost of that education:

college rise in prices

Additionally, college graduates are not earning progressively higher incomes while their education loan burdens have ballooned out of proportion:

Earnings of College Graduates

Student Loan Debt

And here’s a chart of wage growth compared to student debt growth:

Wage growth vs Debt Growth - College Graduates

Here are some statistics:

  • $1.31 trillion in total U.S. student loan debt
  • 44.2 million Americans with student loan debt
  • Student loan delinquency rate of 11.2%

Here’s how the student loan debt problem looks:

What’s even more alarming is that student loan debt is now greater than the subprime housing bubble of 2008, but certainly this is different right? It’s not.

By 2007, the total value of subprime loans hit $1.3 trillion – does this number look familiar?

According to new data published by the U.S. Department of Education there’s another problem, the burden of the debt has gotten so big that delinquencies have soared. This may in fact be a telling sign of the student loan debt burden is unsustainable.

$137 billion of federal student loans were in default as of December 2016, a 17% increase since 2013, which amounts to more than 1.1 million student loan defaults in 2016.

Here are the key findings from the Consumer Federation of America:

  • Average amount owed is $30,650 per federal student loan borrower. Average amount owed per borrower continues to tick up, rising 17% since the end of 2013, when borrowers owed on average of $26,300.
  • $137 billion in default. For federal loans originated by financial institutions (FFEL) and the US Department of Education (Direct), a total of $137.4 billion in balances were in default, a 14% increase from 2015. This cumulative level of defaulted balances includes loans which defaulted in previous years. Defaulting on a federal student loan comes with severe consequences. Borrowers can face seizure of their tax refund, garnishment of their wages, and an inability to pass employment verification checks.
  • 1 million Direct Loan defaults in 2016. In 2016, 1.1 million Federal Direct Loan borrowers defaulted. Federal law typically defines a federal student loan default as being 270 days past due. Borrowers defaulting for the first time slightly decreased compared to 2015, though borrowers re-defaulting slightly increased compared to 2015.

The risks of this ending poorly are extremely high. But you do remember that you can’t default on government student loans, right?

Here’s what can happen to you if you default on your student loans:

  • Tax Refund Disappears
  • Your Paycheck Is Garnished
  • Your Federal Benefits Are Taken
  • You Can Get Sued

Fun, right?

Is A College Degree Worth It?

So this begs the question, while wage growth is entirely offset by the growth in debt payments, despite the average likelihood that college graduates will earn more over their life time than non college graduates, is a college degree worth it?

It depends. The truth is not so black and white.

The average salary for college graduates per profession:

Average college graduate salary per profession

However, despite the above average numbers per profession the number of low wage earners holding a bachelors degree has been steadily increasing:

Growth of low income jobs among bachelor degree holders

So this goes back to the original question:

Which PhD-minted graduate takes out the trash?

And, if you are considering getting one of these degrees, rated least worthwhile by graduates, you may want to reconsider:

Least worthwhile college degrees

This growth in college education, coupled with the continued decline of US productivity is a concerning trend:

US Productivity Decline

What does this mean? Well, despite the growth in the overall education of people living in the United States, this is not leading to the anticipated growth in productivity for the country as a whole.

Which begs the question: Are current policies and incentives by the government indebting a whole generation of people living in the United States for life, without any return on investment?

Remember, at the end of the day all of these student loans are backed by the tax payers of the United States. If more than 44 million people carrying student loan debt are increasingly not able to find jobs to help them cover the costs of attending college, more people will opt out of getting a college degree and the problem will become self correcting.

Until that happens, with such a large percentage of the population carrying debt it makes you wonder how these people are also going to carry the weight of Social Security, which by some estimates is already slated for bankruptcy at current rates, and the ability to contribute to the United States’ #1 export, debt. Whether you hold student loan debt or not, this affects you.

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