The Reason Our Student Loan Debt Tops $1 Trillion
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UPDATED: Jan 31, 2013
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As our economy slowly improves and we find ourselves brushing the remaining weight of the Great Recession off our shoulders, analysts are looking at the nation’s outstanding student loan debt with worry.
That feeling of unease comes from the prediction that student loans may be the next economic bubble—one that’s growing ever larger, with thinning walls and too much internal pressure. They’re scared that, should this bubble pop, we might not be able to handle the fallout given our economy’s current fragile state.
But how did we get to this point? The answer to that inevitable question is two-fold: First, student loans are essentially no-doc loans. They require no collateral, no documentation, and no guarantee. That’s the exact same type of product that caused the housing market to collapse in on itself. Second, college tuition is rising at a rate far and above the dollar’s value. More simply, with each passing year (recession or not) the cost of education is getting more and more expensive.
Insight from the Mavericks’ Owner
Interestingly enough, entrepreneur and sports enthusiast Mark Cuban captured both of these observations in a recent blog post:
“It’s far too easy to borrow money for college. Did you know that there is more outstanding debt for student loans than there is for Auto Loans or Credit Card loans? That’s right. The 37 [million] holders of student loans have more debt than the 175 [million] or so credit card owners in this country and more than the all of the debt on cars in this country. While the average student loan debt is about 23k. The median is close to $12,500. And growing. Past 1 TRILLION DOLLARS.”
Don’t just write this opinion off as unsubstantial or with lack of merit. Cuban’s a self-made billionaire and has a very keen understanding of money and economic systems.
What’s more is he’s absolutely right. These fresh-out-of-high-school 18-year-olds are signing the dotted lines for loans in the tens, twenties, fifties, and hundreds of thousands of dollars. But lenders don’t require any collateral, they don’t need a guarantee, and they don’t even care what a student is studying (sorry to say, but taking out 75 to 100 thousand dollars for a liberal arts degree is not a good investment)—all they care about is capturing a signature and condemning a young, bright-eyed child to decades of monthly payment obligations.
But Cuban doesn’t just blame lenders. No, he also points a finger at colleges themselves.
“You know who knows that the money is easy better than anyone? The schools that are taking that student loan money in tuition. Which is exactly why they have no problems raising costs for tuition each and every year.”
Even more frightening than his previous statement, this one’s more true (and more scary) than even Cuban might know.
A Look at the Facts
According to a recent study by loans.org, the average annual cost to attend California State Colleges rose by 1,913 percent over the last 30 years. The UC system in California, which is one of the most renowned public college systems in the world, has spiked 1,226 percent over the last 30 years. And finally, costs to attend California’s community colleges have risen 980 percent.
If we average all three of those public institution types together, their costs have risen 1,373 percent. It’s not too far of a stretch to imagine student loan balances rising at a relatively proportionate rate.
That percentage is certainly high, but it’s meaningless without some form of scale. The most appropriate measure of scale is the value of the dollar. During that same 30-year period, the dollar only rose 147 percent, according to the same study.
That means one 1981 dollar is worth about $2.47 in 2011 money. But if you were to put that one dollar towards an education in California in 1981, you would have to put more than $13 to match that investment in 2011.
To offer another example of how extraordinary this price hike is, if gasoline rose at the same rate that college prices have over the last 30 years, we’d be paying more than $17 dollars a gallon today. Imagine throwing $170 away each time you wanted to fill up your small 10-gallon gas-efficient vehicle.
And here we find $4 per gallon is hardly manageable.
Today, students and recent grads are feeling what it’s like to pay that $17 per gallon. They’re not paying that much for gasoline, but they’re paying a proportionately high price for their college education. If that price were slashed by three-quarters ($4 per gallon), it would still be difficult to pay—but it’d be more manageable than it currently is.
Some like to point fingers at students themselves, saying they willingly got themselves into this mess. After all, they’re adults, they can read contracts, and they agreed to finance an education with student loans.
While one can’t deny the lack of foresight many students have who agree to borrow upwards of $100,000 for a liberal arts degree that will (hopefully) lead to a modest-paying salary of $40,000 to $60,000, it’s certainly not only their fault.
From the time our kids step foot on an elementary school campus, they’re indoctrinated with the advice that college is essential to a good job and a happy life. Naturally, everybody who someday wants to have a good job and a happy life tries to go to college.
Ergo, since, as Cuban said, colleges “have no problems raising costs for tuition each and every year,” they’re the root of why analysts are saying the student loan bubble is growing.