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Student loan debt: a case for early financial education

Pam Bailey | 9/29/2014 4:29:51 PM

There’s been a lot of debate about the impact of the escalating burden of student debt on the economy, including the housing market. National Mortgage News says it could be “one of the more dangerous threats to the mortgage business of the near future,” whereas researchers at the Brookings Institution counter that “increases in the average lifetime incomes of college-educated Americans have more than kept pace with increases in debt loads.”

However, no matter where you land in this discussion, it is a fact that the number of young adults carrying the burden of student loans is growing. Between 2001 and 2010, the share of young adults in the 25-34 age bracket with such debt shot up from 26 percent to 39 percent. Within that demographic, the share with at least $50,000 in debt tripled from 5 percent to 16 percent. The common thread that connects them all: the need for early intervention with financial education and counseling – of parents and students, beginning well before decisions about colleges and loans are made, and at each step along the long road that follows. (More later on the opportunities this represents for organizations that offer financial education and coaching!)

Shannon Rasmussen (the author's daughter) with her debt-burdened husband Jeff
Shannon Rasmussen, my daughter, married into student debt.

There are many individual stories behind the statistics. My own 25-year-old daughter is one of them. She was lucky enough to have parents who at the time could afford to help her through college without incurring any debt. But she married a young man a year and a half ago who didn’t have that good fortune. He earned his bachelor’s degree in environmental studies, along the way racking up $50,000 in debt from three different loans – one federal and two private.

That might not have been a problem if they had progressed quickly to jobs that commanded comfortable salaries, or found employment in an inexpensive area. But although they are fortunate to both be employed in their professions, they didn’t and they don’t. And they are not alone.

“In 1970, only one in 10 Americans had a bachelor’s degree, and nearly all could expect a comfortable career. Today, about a third of young adults will earn a four-year-degree, and many of them — more than a third, by many estimates — are unlikely to find lifelong secure employment sufficient to pay down their debt and place them on track to earn more than their parents,” Adam Davison wrote recently in The New York Times magazine.

Who has the hardest time coping?

There are several sub-groups who face particular challenges:

  • Young people who fail to complete their degree after taking on debt. The Brookings Institute found that among individuals with some college but no bachelor’s degree, the incidence of debt increased from 11 to 41 percent. Compounding the problem, a report from the think tank Education Sector concluded that students who drop out experience unemployment rates that are 10 percent higher and earn an average of $5,000 less a year than peers who graduate.
  • Students at for-profit universities, which are the most rapidly growing sector of higher education. They consume one in four of federal student aid dollars and account for nearly half of all student loan defaults.
  • Graduate students, especially those who earn degrees that do not strongly correlate with increased income. According to the New America Foundation, students who attended university for a graduate degree borrowed an average of $57,600 in 2012, a 43 percent increase from 2004.  

Ashley Bolin* is a case in point. The San Diego resident graduated from the University of Southern California with a bachelor’s degree in health promotion and disease prevention, then earned her master’s in public health from Emory in 2007. She financed most of her education with four different loans, totaling $125,000. She got the job she had always wanted, for the Centers for Disease Control and Prevention, but the pay for public-sector jobs often is far lower than in private industry.

Student debt is increasing but so are earnings“The monthly payments were much higher than I realized they would be,” admitted Bolin, who has turned for help to Virgilio Felix, a financial coach at NeighborWorks member Community Housing Works in San Diego. These days, Bolin is hard at work starting her own business, a nutrition and education program for children from kindergarten through eighth grade. She met Felix when she participated in a CHW class on entrepreneurship. “The other problem is that I deferred starting payments for three years as part of a fellowship. I didn’t have the foresight to realize that the interest was accumulating even though I didn’t have to pay. I have friends who started paying their loans off early and today, they are buying houses. But me? Some mornings I just want to pull the covers over my head and stay in bed because of the stress of dealing with it. I feel like am drowning.”

As for marriage..well, as Bolin says, “$125,000 is a big thing to hold over a groom’s head.” My daughter is living the experience of taking on a partner’s debt, and yes, it can be a drag on the relationship at times.

Felix says he coaches a lot of millennials through CHW’s financial fitness program, and student loan debt is a big piece of their worries. For Bolin, he is both helping her consolidate her loans with a lower interest rate through Fannie Mae and improving her budgeting practices..

“Ashley was horrible at planning ahead and budgeting,” Felix says. “Her parents did not model and share that behavior when she was growing up, so we have to teach her new habits. I talk to her every two weeks, sort of like a life coach.”

An ounce of prevention: lessons learned

From Bolin’s perspective, her key learnings, and advice to other young adults and the coaches who help them, include:

  • Calculate and think about the amount that might have to be borrowed when choosing a school – not after the fact. In fact, one recent study from a researcher at Carnegie Mellon found that borrowers are 50 percent more likely to enroll in a higher-ranked program or private school. An analyst at Motley Fool speculates that borrowers are overestimating the importance of school quality for their employment prospects. The Consumer Finance Protection Bureau offers an excellent section of its website focused on shopping for financial aid, choosing a student loan and understanding the options for repayment.
  • Seek professional education and advice early and regularly. Bolin says loans are promoted in a rather flippant way on campuses by purveyors who give the impression that they are “no big deal.” She and her friends did not understand the details or the ramifications, and Bolin recommends mandatory financial seminars before choosing schools or taking out loans, and again before going out into the work world. Indeed, many colleges are beginning to expand their offerings in this arena.
  • Create a budget that will highlight the choices that must be made to accommodate repayment. Although legislators are debating a bill that would allow borrowers to refinance their loans at lower interest rates, it is caught up in debate. And regardless, informed budgeting is a life skill that pays off for everyone.

* Ashley asked that her last name be modified slightly to protect her identity. Being burdened with debt is not an asset in today's society!

Next post: How are NeighborWorks organizations reaching younger audiences with financial education?

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