Fine print, Living with credit

Do huge student loans make financial sense anymore?

Connie Prater

Do you have an outstanding student loan? I’m happy to say that I recently paid off the remainder of the student loans I borrowed in 2004 when I returned to school full-time to get my master’s degree in business administration.

My pay-off amount — a little more than $11,000 — won’t put a dent in the $1 trillion the Federal Reserve says Americans now owe on outstanding student loans. The student loan nut surpasses what consumers owe in credit card and auto loan debt.

The average amount of student loan debt carried is $23,000. It’s not unheard of for students to obtain advanced degrees in law or medicine and carry hundreds of thousands of dollars in student loan debt.

Too big to fail?
It’s no wonder given the staggering amount that families and students are now borrowing to fund college educations that more people are asking: Are college educations worth that amount of debt?

Minnesota teenager Abigail Hansen chose her less expensive state college over the prestigious but tuition-gouging Cornell University on the East Coast. Hansen did the math and figured that paying $150,000 or more for a Cornell education wasn’t worth it. She says some friends have criticized her, but I applaud her decision. It makes sense. More students and their families should be crunching numbers.

Across the country, financial experts are looking at student loan numbers and more than a few are worried. The escalating student debt levels are fueling growing speculation about whether that market will implode just as the subprime mortgage market blew up in 2008.

“If current trends continue, there will be consequences not just for young people, but for all of us,” according to Rohit Chopra from the Consumer Financial Protection Bureau. When that new federal watchdog agency assessed the size of both the private and federally funded student loan market what it found was “sobering.” Chopra concludes what others are beginning to realize: “It seems that this market is too big to fail.”

As the New York Fed points out in its recent study on student debt, the loans are complex and involve several players, including state and federal government agencies, schools, loan guarantors and, of course, students and families. It’s fertile ground for abuses and deception.

Many of the players in the student loan racket have something to gain from students going deep into debt on the promise of brighter degree-holding futures. Remind anyone of subprime mortgages marketed to working class families? Those were people seeking the other great American dream: home ownership. They, too, were easy pickings for the financial sector. Everybody — mortgage brokers, lenders, underwriters, stock brokers and hedge funds — made money pushing bad loans to people who couldn’t afford to repay the money under the terms of the deal.

Those who argue a student loan market implosion is unlikely point out that federal student loans can not be discharged in bankruptcy. Those loans are more likely to be repaid because payment terms can be structured to match the payer’s income and ability to pay. Private educational loans don’t carry such safeguards.

Runaway college costs
Former U.S. Secretary of Education William J. Bennett argues that federal student financial aid has given colleges little incentive to control costs and keep tuition down. Tuition at four-year colleges has continued to rise — fueling the need for larger student loans and more financial aid.

Employers haven’t helped much with this vicious financial cycle. Want ads requiring college degrees for jobs requiring minimal skills and — more importantly — paying barely above minimum wage are common. Those jobs don’t pay enough for young workers to afford to live independently and repay their student loans. Given the state of the American economy and that outsourcing has meant an erosion of wages and high-paying jobs here, many of our college graduates can’t find jobs that pay livable wages.

That may make college a bad investment for many students. But too few people are saying this loudly enough.

I question whether someone graduating with a college degree today will earn more over their lifetime than someone who didn’t go to college. College used to mean higher earnings. It was true when I went to college 30 years ago, but I don’t think the same is true for the majority of today’s graduates. Some grads will earn more; others will  struggle. I’m not sure if they will ever enjoy the prosperity that their parents experienced. The game has changed. We need to lower our expectations and stop insisting that kids go to college.

The more I think about it, the more disturbed I am about the U.S. education system. I think it is right to question the need for a college education given such huge debt loads. I don’t think college is right for everyone and I especially don’t think it’s a good idea to start adult life with a mountain of college debt.

Avoiding collateral damage
I could have dragged out my student loan payments another two years to the final payout date. The interest rates were low and I wasn’t struggling to make the payments. But a part of me wanted to get out of the student loan racket. I don’t know if an implosion in the student debt market is on the horizon. If there is a crisis, I know I don’t want to be part of the collateral damage.

UPDATE: Since this blog was published Business Week released its annual look at the return on investment for college degrees at various institutions. Interestingly, the analysis found that at 191 schools, students who graduated had a negative return on the investment in the college educations. They concluded: For students attending these schools, they would have been better off dropping out without completing their degrees.

And, a theater group in Maryland has produced a stage play — “College Fever Live” — that presents a musical about the student debt crisis. They are performing it April 29, 2012, in Camp Springs, Md.

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  • Did huge student loans ever make financial sense? For the majority of students, I think I’d say no.

  • It’s especially true for liberal arts degrees. Students and parents have to choose their majors and career paths very carefully if they decide to take on the debt. Even then, it’s a gamble. I know people with engineering degrees who can’t find work. Their jobs have been exported to India and China.
    I’ve seen several people talk about lower cost community colleges (which have long been shunned as inferior) as options to reduce the amount of debt. They can take two years at the local CC and then perhaps transfer to an affordable university near home — again to keep travel costs down.

  • Dave

    This is what happens when government gets involved and guarantees student loans. You create a bubble and prices skyrocket. Education would be a lot cheaper if there wasn’t all the access to student loans. People used to be able to afford college by working while they went to school and didn’t need loans. That would happen again if the loans were not so readily available.

  • Guy Gold

    The Declaration of Independence set forth a broad framework of what the United States Constitution was supposed to put into law as the founding
    principles of the United States of America. A major goal set forth by the Declaration of Independence was the right “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their
    Creator with certain unalienable Rights,that among these are Life, Liberty
    and the pursuit of Happiness.”
    The pursuit of happiness if very much tied to the ability to earn a living. Government should exercise the power to limit occupations to citizens with credentialing requirements only in circumstances where there can be a proved
    scientific need in order to protect the public good. Unfortunately-in the area of government red tape-over the last 50 years in no area of government has the red tape grown more than with
    government putting ever more unnecessary degree requirements on occupations. It has gotten so outlandish that government now has degree requirements on many occupations that provide a negative return on higher education
    investment and on occupations where there is no proved beneficial outcome to society for the degree requirement. I think it is easy to prove
    scientifically our doctors need to go to medical school, our attorneys need to go to law school (but much of the undergraduate work is a waste of time and money for them) and engineers need to take engineering courses (but not
    much else that they are required to take in courses to obtain an engineering
    degree). An example of an occupation where a degree can be proved not to be needed is teaching K-12 students.
    The practice of putting unnecessary education requirements began after World War II when teachers were required to obtain a degree to teach with the government promise being that it would improve student outcomes. Average
    ACT and SAT scores were higher before teachers had to obtain a degree to teach-with every raised teacher credentialing standard student performance declines further. I theorize that those who are working to an obtain an education degree to teach who don?t question why government would think it necessary for them to take college level math as a credentialing requirement to teach 4th graders to memorize multiplication tables-are future teachers that lack the
    innate ability to ?think outside the box. Those that are in education majors that fail to realize how bad the investment is tend to be
    students of average IQ (the high IQ quickly abandon that degree plan for one
    that will pay more). Therefore the educational requirement produces a government credentialed demographic of teachers that are of average
    intelligence and lack the ability to think outside the box. The thing which probably made 1950 high school graduate teachers better than
    subsequent college educated teachers was simply that the primary characteristic of a 1950’s teacher wasn’t a government credential but both
    an innate love of children and an understanding of the subject matter being taught. Those type people may get weeded out by unnecessary credentialing requirements. Samuel Peavey, an emeritus professor of education at the
    University of Louisville says that “after
    50 years of research, we’ve found no significant relationship between teacher certification and pupil achievement. It’s just nil.” He continued,
    “We mislead parents to think their certified teachers will provide the education they want. We mislead the public to put its money on a preparation that is simply not paying off.” Donald A. Erickson, professor of education
    at UCLA says, “Some of the worst teachers I’ve ever seen are highly certified. Look at our public schools. They’re full of certified teachers. What kind of magic is that accomplishing? But I can take you to the best teachers I’ve ever seen, and most of
    them are uncertified.” C. Emily Feistritzer, director of the private National Center for Education Information, reveals that it is difficult to even find any link between teacher education and pupil achievement. She says she does not know “of a single study that says because a teacher has gone through this or that program, he or she is a better teacher.”
    Proponents of training programs, she continues, “argue eloquently that teachers need to be grounded in all these things, but there has yet to be a study that shows that in fact is the case.” Professor Erickson agrees. “We don’t have evidence at all that what we do in
    schools of education makes much difference in teaching competence.” He added, “We have this nonsense idea that schools of education have all this esoteric knowledge, which if we impart it to
    people, will work magic. There’s no evidence for that at all.”
    Part of what caused private sector employers to look for a college degree was a miserable ruling by the United States Supreme Court in Griggs vs. Duke Power that made pre employment IQ testing illegal (employers came to realize
    a college degree as the most inefficient and costly method to provide an employer an indication of intelligence). Two college professors wrote about this and concluded that if ever challenged-The Supreme Court would also have to conclude that the unnecessary requiring of a degree is as discriminatory as the IQ tests that
    predated degree requirements:
    As government has worked to saturate the market with college graduates by reducing curriculum standards the college degree has become less reliable as an indicator of intelligence.
    Employers are now starting to ask applicants for their SAT scores because the SAT is a form of IQ test but not one the employer is administering so it is a way for employers to get around Griggs vs.
    Duke Power:,,SB106729501444224900,00.html
    If we want to improve the economic opportunities for next generation Americans the public needs to insist that the government revoke all degree
    requirements put on occupations since 1950 and only reinstate those requirements if scientific evidence shows that the revocation has caused a
    significant decline in capability of the profession.
    Employers rather than asking for a college degree should ask for applicants to provide their ACT, SAT or better yet, their Armed Services Vocational
    Aptitude Batter (ASVAB) scores. In the “do as I say not as I do” category-the military (government) IQ tests all Americans (ignoring the
    ruling in Griggs vs. Duke Power). The ASVAB is the gold standard of IQ testing-the SAT is only 72%-86% as effective at determining IQ as the ASVAB:
    The Department of Defense in written testimony before Congress told the truth when they testified:
    “Research has proved that cognitive ability or general intelligence, is the single greatest predictor of job success — for any position.
    More effective than resumes, education, references or interviews,
    cognitive-ability testing gives objective information to aid hiring
    Employers should also recognize that they can’t say they support higher education but then put degree requirements on job postings that pay so
    little that it would have made attaining a degree a stupid financial investment (because people that do stupid things shouldn’t be hired into
    jobs that are trying to determine intelligence by the degree requirement).
    No job paying under $50K per year should have the words “degree preferred” or “degree required” in the job posting. That includes the teaching


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