A Tough Decision to Make in a Child's Life

Your daughter comes to you and tells you that she wants to be a teacher.  She understands that a teacher's base salary could be around $30k a year or less but she has a passion for helping kids and so chooses her career destiny.  After telling you this she also hands you an acceptance letter from Harvard congratulating her on becoming the newest member of the incoming freshman class.  So what does a parent do?  do they send their daughter to Harvard where tuition, room, & board can run past $60k annually in order to make a base salary of $30k annually as a teacher or say no go to a public state school?


This was the very conversation that occurred on ESPN's radio show "The Herd" hosted by Collin Cowherd.  You would likely be surprised to hear this type of conversation on a sports talk radio show but as I put in an earlier post [February 12, 2012 The Colin Cowherd You Don’t Know] these types of conversations occur often.  I actually laid on this same scenario to my wife last night and to my surprise she said the daughter would go to Michigan State vs. Harvard.  


I have written extensively regarding the dangers of student loan debt and if a college degree is still worth it. See [“Student Loan ‘Debt Bomb"], [Is college still the path to success?], [Is an Ivy League Diploma Worth It?].  This week Barrons' featured piece was What a Drag At $1 trillion and climbing, the growing student-loan debt could be a burden on economic growth for decades to come.

The astronomical climb in student load debt has massive consequences not only upon individuals who bear the debt of those loans but the economy as a whole.  Naturally people with higher debt levels tend to prove to be less creditworthy which affects the ability to purchase a house, car, and other big ticket items.  But as Barrons points out student loan debt can also have an affect on family formation which has been in decline for several years now.

From Barrons

• You don't need a Ph.D. in math to know that student-loan debt is compounding at an alarming rate. In the last six weeks alone, two new government reports have detailed the growing student debt burden, which has no doubt contributed to the weak economic recovery and could remain a drag on growth for decades to come. First came a report early last month from the Federal Reserve Bank of New York stating that the $870 billion in loans carried by some 37 million present and former students exceeded the money owed by all Americans for auto loans, as of the Sept. 30 end of the government's 2011 fiscal year. It's also greater than credit-card debt. The report went on to note that delinquencies, officially reported at about 10% of outstanding loans, were actually more than twice that number when things like loan-payment deferrals for current full-time students were properly accounted for.
• The cause of the binge is the unfortunate concatenation of steeply rising tuitions in the face of stagnating family incomes, a precipitous decline in states' funding of public universities and two-year colleges, and the burgeoning of avaricious for-profit colleges and universities—which rely on federally guaranteed student loans for practically all of their revenue, in exchange for dubious course offerings.
• Ever-rising tuitions are the biggest part of the problem. As the chart nearby shows, tuition and fees at four-year schools rocketed up by 300% from 1990 through 2011. Over the same period, broad inflation was just 75% and health-care costs rose 150%.

• Two-thirds of the college seniors who graduated in 2010 had student loans averaging $25,250, according to estimates in a survey by the Institute for College Access & Success, an independent watchdog group. For students at for-profit schools, average per-student debt is even greater for training in such fields as cosmetology, massage therapy, and criminal justice, as well as more traditional academic subjects.
• Graduates lugging huge debt loads with few job opportunities to pay them off are reluctant to buy cars, purchase homes,or start families. Family formations, a key bulwark to home prices, have been in a seemingly inexplicable funk over the past five years or so.
• Prospects are even more harrowing for defaulters on student debt. They are virtually excluded from the credit economy, unable to get mortgages, take out auto loans, or even obtain credit cards. "We are creating a zombie generation of young people, larded with debt, and, in many cases dropouts without any diploma," says Mark Zandi, the chief economist at Moody's Analytics.
• Kenneth Lin, of the credit-rating Website Credit Karma, found something astounding when he examined credit reports on literally millions of households nationwide. Student debt borrowing by the 34-to-49 age cohort has soared by more than 40% over the past three years, faster than for any other age group. He attributes this in large part to bad economic times that prompted many to seek more training to enhance their career prospects. This is also the age group that the for-profit schools mercilessly mine with late-night television ads, online advertising, and aggressive cold-calling to entice with their wares.
• Also, some folks in their 30s are obviously having trouble paying off student loans taken out earlier in their lives because of high unemployment rates and disappointing career outcomes. According to the aforementioned Fed report, the 30-to-39 age group owes more than any other age decile, with a per-borrower debt load of $28,500. They're followed by borrowers between the ages of 40 and 49, who had outstanding balances of $26,000. This is what happens to folks when loans go delinquent or fall into default (nine missed payments in a row), as back interest is added to principal and collection costs mount.
• Also, some folks in their 30s are obviously having trouble paying off student loans taken out earlier in their lives because of high unemployment rates and disappointing career outcomes. According to the aforementioned Fed report, the 30-to-39 age group owes more than any other age decile, with a per-borrower debt load of $28,500. They're followed by borrowers between the ages of 40 and 49, who had outstanding balances of $26,000. This is what happens to folks when loans go delinquent or fall into default (nine missed payments in a row), as back interest is added to principal and collection costs mount.
• Finally, and most important, the bulk of the student debt outstanding, some $870 billion of the total, is guaranteed by the federal government—and ultimately taxpayers. "Thus, the damage can be contained, at least until the next recession," Zandi asserts. "We should worry more about more subtle things like how indebtedness is causing the U.S. to fall behind some…emerging nations in the proportion of our population with college degrees than about any direct financial system fallout."
• THE STUDENT-DEBT CRISIS is emblematic of issues bedeviling the U.S. as a whole, such as income inequality and declining social mobility. For as scholarship money is increasingly diverted from the needy to achievers with high grade-point averages and test scores, boosting institutional rankings, the perhaps less-privileged applicant is thrust into the position of having to take on gobs of debt, indirectly subsidizing the education of more affluent classmates. The race to the career top is likely over long before graduation.
• The debt game will continue until students and their families revolt or run out of additional borrowing capacity. Don't expect the educational establishment to rein in its spending. Things have been too cushy for too long.