Home > Uncategorized > Student Debt Non-Crisis

Student Debt Non-Crisis

Student debt is a complex issue by any standard. There is a great body of evidence to suggest that the growth of public subsidies and guaranteed loans, far from making college cheaper, have in fact increased the cost above what would be considered natural levels of increase over the passage of time. Instead of talking about that, which is all too easy to investigate, the question of whether or not the recent average of $25,250 is a burden is more intriguing and far more important to look in to.

I don’t see this debt level to be very crushing, but it seems that every day you can find articles lamenting the fact that students are buried under this “mountain”. Not only are student loans made with long repayment periods and low interest rates, there are a number of options available for their repayment to be made by third parties or “forgiven”. I don’t like the idea of forgiveness because just like guaranteed loans and subsidies, they distance the consumer from the actual cost. There is another option that is common, and it is “third party” repayment. This may seems semantic, but it isn’t.

If one joins the military or becomes a teacher (etc.) there are many options for loans to be repaid. Consider that this is really part of your wage, unlike the government forgiving your loans because you have done something or another. This isn’t without it’s problems, but it’s a far better option than outright forgiving loans, simply because in these cases, if you leave military service or your teaching post, the repayment stops and you have to start paying. If loans are forgiven, usually it’s upon reaching a specific time period of employment and the costs are not born by the entity employing you, but by third parties, usually the tax payer.

Consider the number we are talking about, $25,250. That’s not that much, for an extra $305, you can buy one of these. If you don’t click links (like me) that’s a 2012 Ford F-150 STX, and it retails for $25,555. No one is out there lamenting the crushing weight of new car debt are they? Maybe you are thinking that newly minted college students are not going to take out a $25,000 loan for a new car, you are probably right. Lets go with the more likely scenario of a used car loan, The average size of a used car loan in 2011 was $17,404, assuming our college students are going to be shooting a bit lower, let take an arbitrary $5,000ish dollars off and call it $12,000, roughly half the amount of the average student debt in the US.

Used car loans are usually for a term of 36 months, so over that period, the loan should be paid off, compared to the $25,250 student loan burden, paid off over 10 years (more with a deferment or forbearance and any of that sort of thing) the monthly payments will be higher, and the average lifespan of your used car may only be in the range of 5-7 years after you buy it. That means that unlike your “crushing” student loan debt, which you only need borrow once, you are going to be looking for another car not so far into the future, and likely taking out a new loan for it. Education won’t wear out that easily.

So yes, college is needlessly expensive, so it follows that student debt is needlessly high, but doesn’t automatically follow that the average size of student debt is too burdensome. Especially when you remember it’s not a recurring cost, unlike car loans possibly every 7-10 years.

I’m all in favor of reducing the cost of college, but the answer isn’t to take tax dollars and shower college students with them. We need to do something to return colleges to a place where market forces can act and force prices down. Education is a commodity, like anything else, and subsidizing any commodity, will not make it cheaper, it will only hide the real cost. It would also be nice to have honesty make an appearance in the discussion about the cost and value of higher education, but I’m not going to hold my breath, after-all, there is no honesty what-so-ever in the discussion over the cost of birth control. ($9/mo. at Wal-Mart and Target with no health insurance)

Categories: Uncategorized
  1. 2012/03/20 at 15:43

    Um, $25,000 is the average for college graduates, not the upper limit of what many students owe, nor the total limit (including graduate school). Most of my friends from law school are six figures in student loan debt.

    Moreover, please understand the ramifications of the income-based repayment plans. Functionally, they add unpaid interest and principal into the principal, then either have you pay it off later, or, when your 20-year-sentence is up, consider it to be taxable income. You can easily end up with a tax bill in the tens of thousands of dollars, perhaps one over six figures, which will essentially wipe out your savings, retirement savings, and college savings for your own kids, right as you hit middle age. Additionally, young people think income-based repayment is great, but those who are looking to get married, buy a house, and have children understand that you can’t live on the edge for your entire life, and when your spouse’s income counts towards your income threshold, you can’t get married and stay solvent.

  2. 2012/03/20 at 17:56

    Wonderful, but you are ignoring a few major points.

    1. The interest rates on subsidized loans is paid during deferments and so forth, and even on unsubsidized loans, given that the annual interest rate is almost always lower than most other types of loans, you are not making a good case for student loans being real burdens on many people.

    2. The more guaranteed money students can borrow or be granted, the higher tuition goes. That results in higher loan limits, which increases tuition, which leads to loans limit increases, which leads to higher tuition… Stop me if you’ve heard this one.

    3. Your friends should have thought about that before they went to law school. I’m certain the world didn’t really need any more lawyers.

    4. Lastly, I have no idea what you are talking about in your first sentence, I was only talking about undergrads, while I may have neglected to include that, a cursory examination of the numbers and their sources should have cleared up what my intent was. Which you appear to have understood just fine.

  3. 2012/03/21 at 18:09

    1. The interest rates are still high enough to be a problem (6.8% on many), even if they are lower than, say, credit-card loans. They are higher than many mortgage loans. Also, you missed my point about what happens to unpaid interest on income-based repayment plans; please look them up.

    2. I am aware of this. Not sure why you are bringing it up, unless it is to set alight a field of straw men.

    3. That matters how? If it used to cost $50,000 to become a lawyer, and it now costs $150,000 to $200,000, doesn’t that shoot to hell your theory about student loan debt being overhyped?

    4. A lot of the talk about the student loan debt includes graduate school. Not sure why you wouldn’t include it in your discussion. MBAs and JDs now cost about $150,000 each; medical school reaches $300,000 before residency, in which the debt compounds, usually to about a half-million.

    Whether or not you think people should take out such sums is irrelevant to the fact that they have. You can’t wish the debt bubble away by saying, “They should have thought of that earlier.” I fully believe that a lot of people who got mortgages in 2006 probably should not have done so, but they did, and crises respond to what did happen, not to what you want to have happened.

  4. 2012/03/21 at 18:18

    Sigh. Let’s get some numbers. In 1997, the average student loan debt was $11,400. Adjusted for inflation, that is $15,415. Students are taking out, therefore, an average of $10,000 more than they used to, adjusted for inflation. At a 6.5% interest rate and a 10-year repayment period, that’s another $113 per month out of a graduate’s paycheck. That is a significant reduction in disposable income. Multiply by ten years, and you’re looking at a down payment on a condo or a new car.

    The math only gets grittier when you add in graduate school or think about students who took on $50k of debt for undergrad. As many economists have pointed out, there will be long-term repercussions to soaking up so much money and diverting it to higher ed.

  5. 2012/03/21 at 21:27

    Roxeanne de Luca: Staunch conservative!…except when it interferes with her personal experience.

  6. 2012/03/23 at 14:25

    Guppy Michael: attention-whoring the day away.

  7. 2012/04/03 at 17:53

    “Whore”? You must hate women.

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