Background
The first of these two posts looked at the huge increase in college attendance, at a rapidly increasing price. While the combination of these two factors has immediate budget implications for Americans, it gets worse. As students and families spend on education, there is also a long-term impact from the trend in student loan debt. The presidential candidate debates have brought this issue forward as an impediment to households’ financial stability. How big is the issue, and what does it mean for the average American?
Findings
- Federally funded/guaranteed student loan debt has skyrocketed to $1.5 trillion, up 6x since 2003. During this period these loans grew from 3% to 11% of household debt. There’s over another $100B in private student lending on top of that. This analysis keys on the federally funded or guaranteed loans as they are most of the market and detailed analytics on them are readily available.
- Double the cost, double the people: We saw in the previous post that college doubled in cost (inflation adjusted). At the same time the number of outstanding student loan borrowers has more than doubled from 19MM to 44MM since 2003. 69% of graduating college seniors in 2018 had some form of student loan debt, and among the total population about one in six Americans have student loan debt.
- The average amount owed is $33K: This is also the average amount for 25-34 year olds, those Millennials who are trying to buy houses and start families. The median is $18K.
- Grandpa in debt too?: Almost $300B of the student loans are held by people over the age of 50; $73B is held by people over 62. There are almost 8 million borrowers age 50+. This is more likely paying for children/grandchildren’s education than the debtor going back to school.
What does this mean for an “average” household? The monthly payment for those who are making payments averages $393, or close to $5,000 a year. This number doesn’t include the 10% of accounts currently in default – not paying.
Implications
The trend in student loan debt is changing the landscape for saving and retiring. While death and taxes are supposed to be inevitable, apparently education debt is rapidly joining that category. This is not only affecting students who exit college with loans, it’s affecting parents who are helping fund those educations with cash or by also taking out loans. Whereas in decades past children struck out on their own after high school and got a job, now they go to school and spend their money and their parents’.
How can the financial services industry better help parents and students? It should start with rational counsel. 1/3 of parents with children who are in college or who recently graduated college say they’ve postponed retirement because of education expenses. A sound financial plan probably requires an emotional discussion contrasting parents’ retirement goals with their desire to help their children. If the parents’ goal is to try to keep working longer (which may not be possible) to help their children, they should get a firm reality check from their advisor. If they insist, then a careful examination of their financial reality is a must. As we will discuss in other posts, our short-term approach to spending and finances has found outlets for irrational behavior – and now there is a new one: mortgaging our futures for our children’s.
The small print
The New York Fed quarterly report 2019 Q3 is an excellent source of information on student loans. The US department of education releases statistics on debt by age, and the private student loan market is sized by MeasureOne. A more detailed analysis would look at a more granular reality than is possible in this summary, e.g. by type of university, job prospects, etc.