Prosperity in America rises and falls with the middle class. Making higher education affordable and refinancing crushing student loan debt, will grow the economy for all.
Student loans debt is at a record high of $1.2 trillion dollars, highest debt in America except for mortgages. 71% of student have student loans. Young people are not buying homes, not getting married, not starting a family, not starting businesses and putting their lives on hold because of crushing debt.
The US government made $51 billion dollars in profits last year (double their administrative cost for undergraduate loans and a triple for graduate loans). Clearly the government should cover it’s administrative costs, but why is the government making huge profits from student loans and increasing the crushing debt that weighs people down and slows economic growth?
Important facts about student loan debt:
1. Size of problem – $40 Millions Americans currently hold student debt. That is more people than the entire populations of Poland, Canada, Iraq, Venezuela, Australia and more than 200 other countries.
2. No increase in income – While average student debt increases, wages decrease. Since 1978, average price of college tuition increased more than 900%, 650 points above inflation. In the last 10 years alone, student debt has quadrupled, with student already paying 800% more in interest than big banks. And in spite of all this investment in education, earnings for college graduates, 24-25 years old, has declines $10,000 since 2000.
3. Crushing debt ends in default – 7 million people have defaulted, had their credit rating trashed and can have 25 percent penalties added to their debt. In addition, default on student loans can make you ineligible for government jobs, loose you a high or higher paying job (60 percent of employers run credit checks), prevent you from access to your transcript (The Department of Education encourages schools to withhold transcripts for those behind on payments), loose you your professional license and possibly your drivers license.
4. Death transfers debt to family – Adding insult to injury, families of deceased students inherit their loved ones debt. Although federal government borrowers no longer have to worry, private student loans can be transferred to the family of the deceased (some banks have began to deal with this issue and offer solutions). Most loans are co-signed without appropriate explanation of what happens in the event of death of student. One example is Christopher Bryski, who suffered traumatic brain injury and passed away. His private student loans were transferred to his family, who is working with legislators to make sure student loans terms and co-signer responsibilities are clear and understood up front.
5. Interest rates can only go up – Unlike mortgages corporate debt and other loans, student loans cannot be refinanced (can’t avail yourself on bankruptcy either). As a result, in bad times when interest rates are lowered and incomes fall, student debt becomes even more crushing. Since the interest rate on student loans is variable, as the economy gets better and interest rates go up, the rate could go above 6.8% in 2015.
*(For an expanded analysis of these and other facts, an excellent article by Kyle McCarthy, Co-founder of StudentDebtCrisis, 10 Fun Facts About Student Debt)
This crushing debt slows down the economy, since young people coming out of college or graduate school delay staring families, buying homes (decline in the housing market), buying cars and other large purchases (and burdens their families with added expenses, further depressing spending). Natalia Abrams, executive director and co-founder of StudentDebtCrisis.org said:
“People cannot participate in the American dream because of student debt…everything from saving for a home to saving for retirement is completely off the table.” Even people with decent-paying jobs are delaying that walk down the aisle because of debt, she added. “If you owe $100,000 to $150,000 in student loans, you’re paying a $1,000 to $1,500 a month. It’s cost prohibitive.”
Henry Ford famously paid his workers a good wage (more than doubling wages in 1914 to $5 a day, that he shortened from 9 to 8 hours), because he wanted them more productive and motivated. By also adding the innovative assembly line, he was able to make the manufacturing process more efficient and reduce the cost of the model-T. The resulting less expensive car was affordable to the higher wage workers, and started a revolution that created the middle class. He was proven right and he clearly understood how the consumer based economy works.
Today, with the crushing debt of student loans, college graduates are finding it near impossible to get into the incredible shrinking middle class (forget about surpassing their parents financial success), and are having a hard time affording the cars of Henry Ford. A simple solution to this huge problem involves three elements:
1. Reduce and control the obscenely high costs of a college and graduate school education by making sure there is readily available information on graduation rates, employment opportunities and compensation rates for degrees. This will allow students and their families to evaluate a realistic return on investment of chosen college and career path, as well as provide for much needed competition among higher education institutions.
2. Allow students to refinance student loans as interest rates fluctuate down, like other loans (mortgages). There is no reason why student loans, with variable rates that can go up, cannot be refinanced when rates go down.
3. Take the government profit out of the equation, while making sure costs are covered, and pay for lower interest rates for higher education (investment in our future prosperity) by closing loophole in our tax code that currently subsidize already large profits of corporations and uber wealthy individuals (Buffet rule).
The middle class is the engine of prosperity in our economy. It generate demand and consumes goods and services which fuel the growth and expansion of the economy, generating profits, jobs and new innovations. Elizabeth Warren and Henry Ford agree that for business and society to prosper, we need to grow the middle class. The devastating recession left us with a much smaller middle class as well as huge and growing barriers for entry into it. Restructuring the student loan debt (reducing rates and refinancing) and reducing and managing higher education costs, will go a long way towards facilitating the healthy growth of a strong middle class and a strong economy.