$1 trillion student loan debt widens US wealth gap

A March 27 Associated Press article picked up by Yahoo Finance

http://finance.yahoo.com/news/1-trillion-student-loan-debt-141440433.html

reminded me of a subject that has been on my mind for some time: the ever-growing load of student loan debt that some students carry.

Of the nearly 20 million Americans who attend college each year, about 12 million borrow, according to the Almanac of Higher Education. Estimates show that the average four-year graduate accumulates $26,000 to $29,000 in loans, and some leave college with six figures worth of debt.

The increases have been driven in part by rising tuition, resulting from reduced state funding and costlier campus facilities and amenities. Compounding the problem has been a trend toward merit-based, rather than need-based, grants as institutions seek to attract the higher-achieving students who will boost their standings.

TotalStudentLoanDebt

Picture credit: http://banksandtheeconomy.blogspot.com/2012/07/chart-of-week-growing-student-loan-debt.html

“Student loan debt is the only form of consumer debt that has grown since the peak of consumer debt in 2008. Balances of student loans have eclipsed both auto loans and credit cards, making student loan debt the largest form of consumer debt outside of mortgages.”

The underlying message of the article is that this student debt burden may be part of the reason for the widening wealth gap in the United States today. At a time when new graduates could be saving money or looking towards purchasing a home, they are making loan repayments of hundreds of dollars per month. The Yahoo article cites examples of repayments of $900 and $1,300 per month for some students.

One area these indebted students neglect is saving for retirement. Instead of making the maximum contribution you can afford to a savings or retirement plan, they may make little or…. nothing, while that monthly student loan payment hangs over their head.

Contained in this problem is the genesis of tomorrow’s problem, a whole host of people who will come to the end of their working life with inadequate savings to fund the retirement they expect and may need.

A 2011 Atlantic article puts it this way:

All this college debt could put the U.S. on a slower growth path in the years to come. As Americans grapple with high student loan payments for the first few decades of their adult lives, they’ll have less money to spend and invest. All that money flowing into colleges and universities is being funneled away from other industries where it would have been spent in future years. Of course, this would be a rather unfortunate irony: higher education is supposed to enhance a nation’s growth, but with such an enormous debt burden, graduates might not be able to spend and invest enough to allow that growth to occur.

The Yahoo Finance article generated 4,236 comments (as of March 30) and I scanned through them to see what the responses contained. Many commenters recounted their own strategies for gaining education while avoiding debt, such as working full time and attending school part time, attending a lower cost school such as a community college and then transferring to a more expensive school to complete the degree. One woman spoke of her daughter graduating from Cornell that way.

Others cited the problems of easy credit and lack of financial sophistication by college students. Others placed blame on educational institutions which, year after year, raise tuition, knowing that the “third party payment system” will inevitably support the increase.

It is a complex problem, one worthy of a dissertation, not a blog post and my answers might not fit the majority of students who are struggling with this debt problem. What I and apparently many others fear is that the “student debt bubble” will be a replay of the 2008 Mortgage bubble that the US has not, six years later, extricated itself from.

Advertisements
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s