Dear Editor,
This week’s news from the WSJ tells us that students at historically black colleges (see The Student-Debt Crisis Hits Hardest at Historically Black Colleges) are graduating with disproportionately more debt than other students, who are also graduating with record levels of debt. It’s not surprising then, that black home ownership rates have fallen to a record low of 43% (see Washington Post The Heartbreaking Decrease in Black Homeownership). While the black community seems to have taken the hardest hit, overall student loan debt and the overall reduction in home ownership are most certainly correlated. This is bad for us all.
Low home ownership deprives citizens of the asset most likely to grow their overall family wealth. High debt means lower economic growth, fewer new small businesses being started and I expect it will spawn a related mental health crisis as students continue to deal with the stress of student loans and the impact it has on them for decades to come. America was founded on indentured servants, but their terms didn’t last 20 years or more. 20 years is now the standard for most student loan debt repayments, and that’s if you can afford to pay on-time.
Meanwhile, Congress seems set to increase the age that you can buy cigarettes to 21 from 18 (see Congress to Consider Raising Tobacco-Buying Age to 21) but no one is talking about ensuring everyone who is 18 and taking out student loans understands the lifelong impact, or better yet, making sure it is not a lifelong impact. Most states do not require any financial literacy in high school. How can anyone expect the student loan crisis to change if we don’t address literacy?
So let’s make this very clear, at 18 you will not be able buy tobacco or alcohol, but you can take a bullet for your country and take out enough debt to keep you an economic slave for the rest of your life. Those are the facts. You can discuss the military option with those in your community as many will have served, whether by force through the draft in the Vietnam war or by choice since then. Veterans can tell you what the military experience will be like. But how many people can find someone to discuss the long term implications of their student loan debt, and how many families understand what it means for the rest of their life? Who is looking out for the families? As usual, it seems no one.
Because of all the headlines, I became interested in the student loan debt issue last year and took it upon myself to do some research to see if anyone out there is trying to actually solve the problem. Unfortunately, it was all disappointing news. As it seems it goes in the financial industry as a whole, there is a minimum amount of education being provided and no one is discussing the real math of debt with families and students.
Tom Hundley’s story mimics what I have found in my many conversations with students. With his debt of $39,000 and his mother’s debt of $62,000, I don’t believe anyone has explained to him the long term impact of this decision. The same is true for Theo Dorsey, who will likely be paying on the loans he and his father took out for decades. The attitude of almost all students I have interviewed is also about the same as Tom’s, “I’m still really glad I got to go to Howard”. But if I phrased the question differently, as in, hey Tom, would you like the change that experience for the $200,000+ of your families future earnings, the answer might be different.
Let’s go through the real math. According to Pew Research (see Is College Worth It?), the lifetime additional earnings from a bachelor’s degree is $550,000. For Tom and his mother, if they repay the loan over 20 years at 7% interest, it will end up costing them about $187,932 for the loan and interest. This is typically the maximum amount of information students receive about their loans, but it is disingenuous because it leaves out taxes that have to be paid on earnings before money can be spent on repayment of tuition and interest. In tax parlance, it is an after tax payment. As Tom earns money throughout his life, he first must pay taxes. That includes employment taxes and income taxes. When we calculate the taxes into what Tom must earn to repay the debts, its approximately $260,000 (using 22% fed and State + 7.65% FICA). Is your college education worth $260,000 of your future earnings? That seems hard to justify and I would tell any student or parent the answer is an absolute NO. We haven’t even begun to discuss the additional impacts of this debt on credit score and future financial transactions.
I would bet large sums no one sat down with Tom or his mother and told them that about 50% of Tom’s lifetime benefit from getting a degree will be spent just repaying his debt and interest. That’s worth repeating because there are so many students who need to hear this message: you are giving away the benefit of your education to the institutions and banks and they are happy to take your benefit while selling you on your dreams. And their benefit is guaranteed, the loans are backed by the federal government, so it’s a perfect investment. It’s the opposite for Tom and Pat Hundley, who have to bear the weight of these loans. Its unfortunate and we can do better for students and parents. The efforts to pursue a better life for your family should not result in financial difficulties for decades to come. Parents would walk into traffic for their children, so their willingness to sacrifice for their children is commendable and deserves our compassion. The ease in which we are allowing families to take on debt is shameful.
What should be alarming to us all about Tom’s situation is that it is not unique and other families across the country are making the same decisions every semester. Very few states require a class in personal finance, but we are teaching geometry and Roman history to everyone. Just from the perspective of teaching the guaranteed things in life: death and taxes, it makes sense that finance should be required in every high school and an advanced class on the long-term impact of debt should be required before student loans are issued. How many high school graduates will not have to deal with money in their lifetime? But we argue over the value of teaching finance? How can educators look students straight in the face at graduation knowing they have given them no education on the system of capitalism under which they will spend the rest of their lives?
If we don’t teach the math and impact of the decisions, then how could we expect the decision making to change? That’s the definition of insanity.
If we want to stop this “crisis” it must be done by parents and students. Universities have been given free reign to operate independently and raise tuition without providing any additional education. They hire more administrators, have reduced tenured faculty, and allow way too much research into topics that no one reads or cares about instead of emphasizing classroom time with students. They spend a lot of money marketing their school’s brand and on selling students and parents that they are the best place for that student to follow their dreams. Universities rarely tell the truth about how much graduates will actually earn unless it makes them look good, such as engineering salaries (see law schools being sued for lying) and students have completely unrealistic expectations of their value in the marketplace upon graduation, believing they are months away from the C suite.
The government has failed families by not limiting the amounts of debt, not requiring those than advise families to be their fiduciary and not requiring financial literacy so students understand the long term consequences of their decisions. In a true free market, no one would have loaned Tom’s mother the $62,000 that she admits she will die with as a debt, so this isn’t the fault of capitalism, it is just poor governance and the result of unintended consequences. Our messaging as a society is poor as well. Parents believe their success as a parent is linked to where their child is admitted to a “prestigious school” and students sabotage themselves by believing four years at a university is better than two at a community college and another two at the university because of the “experience”, typically marked by two years of partying without parental supervision. Perhaps if they saw the real math they might think differently. Turns out, where you go to school is much less important than how much you participate while there. Just like most things in life, you get out of it what you put into it.
The good news is that parents and students still have free choice. The number one way to stay out of debt is to “Just Say NO”. This slogan didn’t work for Nancy in the 1980’s, but rebranded, hopefully it can work for student loan debt. There are alternatives for students to still get the degree they want, even from the university they want it from, with significantly less or even no debt. Universities don’t want to tell you that because they have enrollment seats to fill. Universities tell prospective students and parents the best way to realize their dreams is to come as a freshman, otherwise you won’t have as high a chance to get into the program you want. Turns out, they usually have identical programs with a path setup with the surrounding community college, but they don’t share that information because….. they have seats to fill and have no financial responsibility to the parents. The average “financial aide” package students are receiving is not aide. Aide is free and shared out of compassion, these are lifetime, non-dischargable loans that create a heavy burden. It would better be called a Financial Harm Package.
Parents and students have to realize they are being sold – by someone I consider worse than a used car salesman because of the long term implications of debt-- and understand the value of the degree in the marketplace and the long-term cost of debt. If you’re interested in learning about how to reduce or eliminate loans from your college experience and willing to look at the alternatives, we are here to help at www.keepyours.org. Because financial education should be a right and a requirement to protect the young and their parents from themselves. Parents will do anything for their children and that is commendable but using that against them to sell them on $120,000 for a degree that could be obtained for half or less is deplorable and happening daily. But in a free market, students and parents have to start educating themselves because Google says millions search every day for help with student loans, but few are searching how to prevent getting them to begin with. That means this crisis has a long way to run and that is not good for the student, their parents or our country.
Thank you,
David Bradshaw