Thursday, May 07, 2009

The Brutal Burden of Student Loans

(In bankruptcy jargon, student loans are non-secured, non-dischargeable debt. Listen to this great podcast with Todd Zywicki for more on this.)

Will student loans be the next bubble to burst? Whether or not it is, they certainly seem to be saddling a large number of college graduates with debt that will continue to trail them for many years. On an individual level, something that makes student loans more pernicious than credit cards or mortgage debt is that they are loans you can never walk away from.

I think they’re the worst debt you can get — huge, at unattractive interest rates, and non-bankruptable.

“Perhaps seduced by the idea of graduating from a well-respected university, many students tend to overlook the consequences of graduating with debts that are likely to far exceed their starting salaries. And as many borrowers have learned, student loans are among the most ironclad debts, on par with child support, alimony and overdue taxes. They stick with you no matter what.”
I discourage students from borrowing, but as more people look at the results, we may see a lot of pressure on higher education, where overly-high tuitions have been propped up by easy credit taken out by people who don’t really know what they’re getting into, and who universities aren’t eager to educate on that subject. This quotation suggests that people are catching on:

“You often hear the quote that you can’t put a price on ignorance,” said Ezra Kazee, who has $29,000 in student debt and has been unable to find a job since graduating from Winona State University in Minnesota last May. “But with the way higher education is going, ignorance is looking more and more affordable every day.”

It’s also worth noting that when it comes to consumer exploitation, higher education has no room to strike moral poses vis-a-vis the for-profit sector.

Here is more from the NYT article linked to in this post:

The most recent default rate on federal loans was 6.9 percent, the highest rate since 1998, according to preliminary data from the Education Department. But this statistic illustrates only a piece of the picture. It tracks only the students who started to repay their loans between October 2006 and Sept. 30, 2007, but who had defaulted by September 2008. And it doesn’t include loans in deferment or forbearance even though those borrowers are unable to make payments. Nor does it include loans not backed by the government...

Bankruptcy usually doesn’t provide relief, except in the most dire of circumstances. Even death isn’t a good enough excuse for discharging some private loan debts. And the government can wield a heavy hand to collect what it is due: If you fail to repay your federal loans, it can garnish up to 15 percent of your wages or take your tax refund or part of your Social Security benefits.

I have written frequently on the dangers of too much debt and about balancing expected salaries against debt loads when considering student loans. What makes student loans particularly bad is that they are given to young people who typically have had no previous experience managing large (or small) levels of debt, have shorter time preferences than they may have later in life, and who have a large degree of uncertainty (whether they realize it or not) about what their future financial situation will be.

To get a feel for how prevalent this issue is, here are some statistics from

The following table shows the percentage of students borrowing and average cumulative debt per borrower (excluding PLUS Loans) according to type of educational institution.

Undergraduate Education Debt
Institution Level & Control Percent Borrowing Cumulative Debt
Overall Total (4, 2 and <> 55.5% $15,766
4-year Total 65.6% $19,202
4-year Public 61.7% $17,277
4-year Private Non-Profit 72.8% $21,957
4-year Private For-Profit 87.3% $28,138
2-year Total 37.4% $9,897
2-year Public 33.2% $9,387
2-year Private Non-Profit 69.1% $12,326
2-year Private For-Profit 90.0% $12,107

Graduate and professional students borrow even more, with the additional debt for a graduate degree ranging from $27,000 to $114,000. The following table shows the percentage borrowing and average amount of cumulative debt per borrower among graduating students according to degree program. It provides the amounts borrowed for just the graduate education and also the combined totals for undergraduate and graduate education.

Graduate Education Debt All Education Debt
(Grad & Undergrad)
Graduate & Professional Degree Programs Percent Borrowing Cumulative Debt Percent Borrowing Cumulative Debt
Total 60.1% $37,067 70.1% $42,406
Master's Degree 58.4% $26,895 69.3% $32,858
Doctoral Degree 51.0% $49,007 58.3% $53,405
Professional Degree 86.5% $82,688 88.4% $93,134
MBA 53.0% $35,525 63.6% $41,687
MSW 76.5% $27,136 81.0% $37,029
PhD 40.0% $36,917 46.8% $41,540
EdD 53.4% $49,050 65.7% $47,725
Law (LLB or JD) 87.7% $70,933 89.7% $80,754
Medicine 95.0% $113,661 95.0% $125,819

Student debt is not always a bad thing -- if it is held within a reasonable level (say below 50% of your expected income after graduation) and as long as it is helping either increase your income or has a reasonable expectation of helping to get a job that helps give greater life satisfaction. What is so troubling about these statistics is the level of debt so many students (particularly doctors and lawyers) get into. I don't know too much about the expected salaries in the medical field, but am familiar with those in the legal field. With the exception of those making a career in a big law firm, these levels of debt are potentially disastrous.

It is also troubling to see that the cumulative debt levels for those pursuing MSW degrees are nearly the same as those pursuing MBAs. (With a much higher percentage of MSW students borrowing.) From a financial perspective, not all degrees are created equal and the expected payoff for an MBA is likely much higher than that of an MSW.

The housing market is now a mess because the value of home ownership was oversold and easy credit was made available to far too many people who would not normally qualify for these types of loans. I am afraid the same thing is occurring in higher-education. Unfortunately, rather than learning lessons from the housing market and encouraging restraint when considering college and its expenses, too many people advocate for all people to go to college (often overselling its value at the margin) and politicians seek to make student loans more accessible to those who would normally not qualify. My fear is that we will soon have a generation stuck with paying off not only the debts of all the government spending that is currently going on, but also stuck paying-off non-dischargeable student loans for a good portion of their adult lives.

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