Most of us were more worried about getting into our college of choice than we were about paying for that education. But the cost of college has risen dramatically in recent years. According to the National Center of Education Statistics, between 2000-01 and 2010-11, prices at public institutions rose 42 percent. As a result, of the 20 million Americans that attend college, 60 percent borrow money to pay for it. But without a college degree, people earn much less, leading to greater income inequality. So, what’s the answer?
For many, student loans have become the go-to solution. As the cost of college has risen, so has the amount of student loan debt. According to the American Student Assistance (ASA) organization, in Student Loan Debt Statistics, “There is roughly somewhere between $902 billion and $1 trillion in total outstanding student loan debt in the United States today.” The average balance owed is just over $24,000.
But not all student loans are created equal, as Shannon Heffernan wrote in “Parents put off retirement to pay for kids’ college” on March 13, 2013, for WBEZ.org. One example is the federally distributed PLUS loans that parents can take out, which have a higher interest rate than many other types of loans — currently about 7.9 percent. Heffernan cites an AARP study, which recently found that one in 10 adults age 50 to 65 had some form of education debt. “That education debt is nearly impossible to erase through bankruptcy, and can be garnished from social security payments,” she writes. “PLUS loans can’t be turned over to the student, making a parent responsible until it’s paid off.” For parents, this kind of debt can force them to put off their own retirement.
More debt, more default
Ryan McCarthy blogged at Reuters.com on March 5, 2013, in “Counterparties: Misspent Youth,” that during the economic downturn the only kind of debt that increased was student loan debt. The other thing that increased was delinquency rates on those loans.
The ASA finds that 37 million borrowers have outstanding balances on their student loan debt and of that figure, 14 percent (or 5.4 million) are past due on at least one payment. McCarthy writes, “the approximately $1 trillion outstanding student debt looks less like a quick-bursting bubble and more like a slow, constant drag on the economy.”
So is college still a good investment, particularly when it comes to future income inequality? McCarthy shares that “Fed research has shown the cost college education can usually be recouped in 10 years or less.” The National Center for Education Statistics highlight some other positive figures:
- In 2010, people ages 25 to 34 with bachelor’s degrees earned 114 percent more than did those without high-school diplomas.
- College graduates earned 50 percent more than did young adults who completed only high school, and 22 percent more than did those with associate degrees.
- The median income for young adults with a bachelor’s degree was $45,000, and with an associate degree, $37,000.
The problem with student loan repayment often comes for those who do not complete their degree. Twenty-six percent of college students who left without graduating between 2004 and 2009 defaulted on their student loan debt. Completing your college degree can make a big difference in your future and your income potential down the road. For many, student loans are the answer to make the dream of college a reality. The key is to be smart about the amount of debt you take on, pay attention to where you borrow that money from and, oh yeah, do what mom and dad say — stay in school!