Borrowing The Future

by: Douglas Tengdin, CFA

Are young people being eaten by their student loans?

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Source: St. Louis Fed

The outstanding level of student loans has increased by 10% per year for the past 9 years. The amount of student borrowing has grown from about $540 billion in 2007 to over $1.3 trillion now, surpassing the level of credit card and auto loan debt. With college enrollment increasing and the cost of college rising, this balance is only going to grow.

On one level, this is encouraging: kids are investing in themselves at an increasing rate. In our dynamic knowledge-based economy, people have to have advanced skills to improve their chances of getting and keeping a good job. On another level, however, it is concerning. The heavy debt loads assumed by students and their parents may be crimping the economy - discouraging folks from other kinds of economic activity. Among people under 30, over almost half have student loans to pay off. And much of the increased spending on college is just going to price increases, although lately the rate of tuition hikes has been slowing.

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Year-over-year increase, college tuition and fees. Source: BLS

Not all student debt is productive. With college enrollment rising, graduation rates have been falling. At many schools, less than half the freshman class receives an undergraduate degree. If students don't graduate, they're not much better off in the job market than folks with no college at all. So delinquencies on student loans have been rising. Currently, about 20% of student loans nationwide are delinquent - adjusting for those that are still in their deferral period, where no payments are due. For the past two years, though, the delinquency rate has been stable.

There's no evidence right now that we're in a student loan "crisis" - although, with annual tuition and fees that exceed many families' annual incomes, some folks are in over their heads. People need to take "buying" an education seriously. For the amount of student debt they incur, many young people could own a small house. But there's no resale value for three quarters of a college degree. You can't sell the asset and pay off the loan.

Student debt is a necessary evil. We have the best colleges and universities in the world, in part because they compete with one another for students, grants, and faculty. For low-income students, the most economical choice is to take their first two years at a local community college, then transfer to a state school - hopefully one within commuting distance.

But an undergraduate degree isn't necessary for all occupations, and it shouldn't be used as a marker to screen applicants. For many, college is an unforgettable experience. But as Dear Abby once wrote, if we could sell our experiences for what they cost us, we'd all be millionaires.