“Making an investment in higher education can lead to greater opportunities with larger income potential,” notes Steve Pounds, personal finance analyst at Bankrate.com, in a recent article at TheStreet. “However, with the current tuition prices people need to [be] mindful of the return on their investment and making sure they can manage any debt incurred.”
Higher education often comes with a big price tag and lasting repercussions: The average bachelor’s degree debt is $35,051, currently held by 70.9% of graduates.
This is an increase from average debt of $12,759 20 years ago. Then, 54% of students carried such a financial burden.
Federal Reserve Bank of New York data show student loan debt equaled $1.26 trillion in June, a $69 billion increase from the prior year. This debt comprises the second biggest reservoir for debt after mortgages—currently $8.36 trillion, up from $246 billion last year.
Still, families remain convinced a college investment is a sound one. Bankrate found 73% of American workers overall believe the expenditure worthwhile. Of college grads, 90% agree the price of education was worth the cost, even at today’s high expense.
This week, an examination of various college education costs. Do your members know how school debt will influence their future?
‘The roots of education are bitter, but the fruit is sweet.’ --Aristotle
“Student debt is impacting a generation’s ability to make important financial and life decisions,” says the Student Debt Impact Report.
Among report findings:
Sadly, negative impacts are felt in other areas of life as well.
Many will be unable to purchase a vehicle, says an article at Automotive News. This reality is one that could affect the entire economy.
“Student loan debt… could soon have an adverse effect on U.S. new-vehicle sales, according to a Moody’s Investor Service analyst,” the article notes.
Younger generations typically push growth in retail, and they will reduce expenses in favor of covering existing debt.
New-vehicle sales hit 17.5 million in 2015, but will slow with slack in demand.
“The fill-in demand, which would be the younger people moving up through the food chain, is not going to be there,” says financial analyst Charles O’Shea.
Moody’s does not offer an answer to this issue. But O’Shea suggests consumers think about education funding as “more of a retail-oriented decision” to encompass considerations like participation in a less-costly two-year institution initially before transferring to a four-year school.
Meanwhile, the National Association of Realtors, in cooperation with consumer literacy program SALT, report school debt keeps 71% of potential homeowners from buying homes. Of student debt holders, more than 50% indicated education loans deter a home purchase for beyond five years.
Further, four of 10 grads can’t afford to move out of a family member’s residence.
Education debt hampers sellers, too. About one-third of possible sellers delay as a result of debt. That’s because moving is costly; 7% suffer from credit problems as a result of student loans; and 6% were underwater as a consequence of inability to pay a greater share of home loans.
The result? A “very low inventory problem plaguing today’s housing market.”
‘Education is not the filling of a pail, but the lighting of a fire.’ --W. B. Yeats
“Student Loan Delinquencies Climb Despite Economic Recovery,” says ThinkAdvisor. Morningstar Credit Ratings reports “the level of student loan debt grew to $1.261 trillion at of the end of the first quarter, up 5% from a year ago. That’s almost twice the 2.7% increase in household debt.”
Delinquency rate for student debt sits at 11%—more than triple the delinquency rate for car loans.
“Student loans, in fact, are the only consumer-related debt sector where delinquencies are higher now than they were during the financial crisis,” the article says. Such delinquencies beat out all other debt areas, to include auto loans ($1.071 trillion) and credit cards ($712 billion).
Attendance at for-profit institutions may be part of the problem. Older and poorer students tend to go to such schools, and the schools’ claims about job placement “have been vastly overblown.”
Debt impacts state of mind, too. A “New Survey Shows Student Loan Debts are Stressing Out Employees” says metroatlantaceo.com.
Here, “Employers see the need for student loan repayment assistance as part of their employee benefits package,” according to IonTuition.com’s survey.
Most employers think employees with student loans “would take advantage of a student loan repayment benefit and that this benefit would improve employees’ morale, productivity, and general well-being.”
The advantage for companies is to be found in recruitment efforts (a plus for 80%) and retention (beneficial for 70%).
‘The great aim of education is not knowledge but action.’ --Herbert Spencer, English philosopher
What do borrowers need to gain a foothold on the pervasive debt problem?
Some companies seek to capitalize on anxieties of borrowers, says NerdWallet in “Student Loan Relief Companies Cash in on Confusion.”
Debt-relief organizations charge fees to consolidate loans. These charges equate to hundreds or thousands of dollars, “infuriating to borrowers who later realize they can sign up for those programs for free through their loan servicers.”
These companies may be in violation of consumer laws as they misrepresent federal programs and use “aggressive advertising tactics” that fail to alleviate borrower confusion. “By and large, they’re adding to it,” the article notes.
Impacts? Nine percent have paid for such services, paying $613 on average. Most did not benefit from the assistance. Sixty-five percent said these companies “did not improve their student loan situation.”
“Families Want Details on How Much to Save for College,” notes InvestmentNews. Most families are inadequately prepared for college bills—a mere 29% save enough, notes a Fidelity survey.
Seven of 10 of families “would like to receive more precise counsel on how much they should save to get each of their kids through school.”
Parents want to know: Do they aspire to save to cover half or the entire cost? Should kids attend state or private schools?
Forty-seven percent of parents don’t know how to invest dollars, although 72% do set money aside and 42% hold a 529 account.
Specific plans will vary depending on each family’s situation. But “college savings is an area that cries out for planning,” says Matt Golden of Fidelity. “There’s a need for guidance at the individual level that advisers are in the best position to provide.”
What can you do to help younger members build a strong foundation for themselves and the state of the economy?