How Student Debt Reduces Lifetime Wealth

http://www.demos.org/what-cost-how-student-debt-reduces-lifetime-wealth

by SQL2219 • 9 years ago

45 70 9 years ago

demos.org

shmerl2• 9 years ago

Student debt should have no interest. Better even, there should be free education to begin with.

downrightmike3• 9 years ago

All student loan interest really is, is true double taxation.

JimmyAustin• 9 years ago

Only in the same way a processing fee at the DMV is.

That said, an Australian HECS style debt (tied to CPI) with a minimum repayment threshold (roughly 50k AUD) makes a lot more sense.

downrightmike3• 9 years ago

Edit: taxed on income and then also paying the interest. Really, it should be paid with pre tax money, like a 401k. They are both vehicles for future success.

ChrisLomont• 9 years ago

If there were no interest, then the loans would be for more money. Getting someone else to lend you money for your education needs to benefit them also, or else they stop lending unsecured lenders money.

And there is no free education - someone pays for it. The notion of it being free means later in life you will pay for it in taxes to fund such an education. So it may seem free to those that don't understand they're paying for it in taxes, but it is not free.

abalashov11• 9 years ago

Yeah, but as with healthcare, there are both economies of scale and opportunities for systemic cost reduction when it's paid for by taxes.

Paying colleges with loan-leverage represents a massive inefficiency, and one that they have undeniably milked in ways written about extensively elsewhere (the enormous growth of the administration corps and non-academic expenditure at the expense of instruction and tenure-track positions).

shmerl2• 9 years ago

Investing in education benefits everyone. But I doubt the system which uses interest on education loans really cares about it.

hiram112• 9 years ago

Lifetime wealth might be a good way to aggregate the results, but the practical consequences of student debt are far more insidious.

If half the educated population is still paying off loans in their late 20s and even 30s, this delays and reduces family formation and population a.k.a. child free.

This will eventually destroy the housing market, especially in the sprawling suburbs. If suburbia goes, it takes down the auto industry and the conspicuous 'big-box' retail industry, which we are already seeing.

Next comes the bankruptcy of Western social programs - social security, medicare, pensions, general retirement in one's mid 60s - all of which is not actually based on any sort of 'savings' but instead are paid for by the younger generation, which must always be larger the previous, in true pyramid style.

I'm guessing that the collapse of the big school loan bubble, originating in the US, and now cloned in the Anglosphere and beyond, William make the housing bubble look like a cake walk. School loans are further down the chain than mortgages being backed by the government itself.

Y7ZCQtNo397• 9 years ago

The cyclical pattern you mention is concerning. Our government should be mandating cheaper housing and encouraging child rearing. Otherwise, we'll end up like Europe with flat or negative population growth. Our path forward mostly depends on having more people than before (which in itself is not sustainable indefinitely), unless we see radically new policy, like UBI.

carsongross• 9 years ago

We need to re-moralize the language around debt and bring back the concept of usury. There is a reason the European middle ages were so hard on the matter, it came from the experiences of the late roman empire when debt consolidated wealth and then destroyed the social order. (Sound familiar?)

Some ancient usury-based systems had the good sense to have a debt jubilee every fifty years or so to stave off complete societal collapse. Steve Keen has proposed a modern implementation of such a debt jubilee:

http://www.ideaeconomics.org/a-modern-jubilee/

Sticking our kids, especially our intelligent ones, in this much debt before they even have a chance at family formation is deeply dysgenic and is civilizational suicide.

johnnyb9• 9 years ago

I think even better would be to have the federal government get out of the student loan business altogether -- it's been shown that as 60% of federal aid increases end up increasing tuition by that amount.

maxerickson• 9 years ago

Bankruptcy is a personal jubilee.

I think if you are talking about societal policies, we should try to move away from credentialism and better fund people that want to go study.

How you do that I have no idea.

nandemo2• 9 years ago

Student loans are largely subsidized. If you call that usury then you'll have to call any interest-bearing loans "usury".

The main issue is why US tertiary tuition is so high in the first place. In fact, the virtually unlimited supply of student loans is part of the problem (more loans -> more demand for college -> colleges raise the price).

Mz5• 9 years ago

Though a college education remains the surest path to a middle-class life, evidence has begun to mount that student debt may be far more detrimental to financial futures than once thought, particularly for those with the highest levels of debt: students of color and students from low-income families.

•The wealth loss will be greater for households with larger-than-average levels of student debt: students from low-income families, students of color, and for-profit students.

Well, that sucks. The behinder you are, the behinder you get. Ugh.

abalashov11• 9 years ago

The ultimate the-behinder-you-are-the-behinder-you-are debt is IRS debt, of which I have six figures' worth. Paying back-tax debt out of future income that is itself taxable leaves you with the ability to, in the best case, maybe pay some of the interest and penalties on the back principal + future taxes.

Unless you win the lottery or somehow experience a meteoric/extraordinary rise in earnings, of course. And that comes with tax consequences of its own.

cheez4• 9 years ago

How'd you get that?

qwerty2020• 9 years ago

wrote something along these lines a couple weeks ago: http://erikrood.com/Posts/college_roi_.html

The net is to treat your tuition like you would any other investment (while also acknowledging the non-monetary benefits) -- thoughtfully weigh all options before blindly heading into college because it's 'the right thing to do'.

duckingtest• 9 years ago

I think the real difference is much more pronounced than what your analysis suggests. A significant fraction of people without college-level education aren't able to pass the non-financial admission requirements, or drop out. Which almost certainly means that earnings of those who could easily finish but decide not to are going to be much higher, making the decision to not go even better.

Sadly, I don't think any relevant statistics exist.

k__• 9 years ago

This is really sad.

I had bad luck studying computer science in the short time when there was tuition fees of 500€ per semester in Germany.

It "only" cost me 3500€, which I paid back 1 year after. Didn't have to take any loans, because I worked as a developer on the side, while studying.

Some of my friends were less lucky, they couldn't work on the side and had to take a loan. We have some subsidised loans here in Germany, where you only have to pay back half of it and only to a maximum of 10k€, but that's still rather much for many people, especially if their entry jobs don't pay that well.

So they starting their "working life" and already got 10 years of debt.

dkarapetyan4• 9 years ago

So don't go into student debt. Go to your local community college and then transfer somewhere affordable. I've now worked with grads from all over the place. I honestly can't tell the difference.

nunez4• 9 years ago

There are a LOT of factors that you're not considering with that statement. For some (many?), the decision isn't that easy. Here's why:

- Are you going to college to escape a really bad situation at home?

- Are you going to college because your local community college isn't good at preparing you for a four-year college and has a bad/incompatible atmosphere?

- Are you going to college because you'll be ostracized by your family (that you love very much) if you don't, even if you (or they) can't afford it?

- Are you going to college because the study that you feel is your life calling can only properly begin at a reputable four year?

dkarapetyan4• 9 years ago

I don't get what point you are making. How is any of what you said reason to go into huge debt?

wmichelin2• 9 years ago

At the end of the day, you will be the one in debt. It's your own stupid fault for giving into those pressures if they're exerted upon you. You shouldn't buy something you can't afford, no matter what. If you choose to, you are responsible for the consequences. That's all.

Y7ZCQtNo397• 9 years ago

Some curriculum is specialized from the get-go. I don't think I wouldn't been able to get the same quality introductory foundational computer science courses -- into to programming, data structures & algorithms, & object-oriented programming at a community college. Possible observation bias, but a generalized community college education will only take out liberal arts classes. And you weren't spending those semesters building up your hard skills necessary for industry. For a bachelor's, that would leave you with just 2 years to really refine the craft. And I think most people need 4 years of academic programming experience before going into industry. You need to see enough and have established a basic level of experience to make quality judgment calls when working on enterprise software.

austenallred4• 9 years ago

Community college is a great way to get the stuff that won't ever affect your career out of the way. If you want to go to a top engineering college it's pretty insane to keep paying $20k/semester for the mediocre liberal arts portion as well.

omegaham• 9 years ago

Community college alum here, currently going into my senior year at a 4-year university.

CC CS classes were clown-shoes. The math and physics classes were excellent, but the CS classes were not on par with the expectations that most 4-year colleges have for upper-division classes.

That being said, it was still a very good deal for me; I'd been tinkering with programming for ~8 years by the time that I went to school, and self-study easily got me up to speed. Thus, I took my freshman and sophomore classes for less than half of what it would have cost at a 4-year university.

---

Portland State does a proficiency demo for CC transfers with basic data structures questions, (linked lists, binary trees, recursion, etc). If you don't pass, you don't get into the upper-division classes. It's a bloodbath every single year. You don't have much of an excuse to fail, either - they give a description of everything that they will test you on more than a month before the demo[1].

[1] https://www.scribd.com/document/351661090/PSU-Proficiency-Ex...

dkarapetyan4• 9 years ago

I studied math. Now I program for a living. I have missed nothing from a specialized CS education.

I could see maybe EE or robotics being something that a good university would have an edge over your local community college. But even here you could get by without access to a good lab if you were motivated enough. Going into debt is almost never the answer.

cryoshon• 9 years ago

glad to see this getting attention.

there was one thing which i'll take issue with, which is in figure 5.

nobody that i know who has student loans can afford to pay that much per year, meaning that this figure is extremely optimistic and likely not representative of the median case-- which is fine because it still gets the point of the authors across, but it's missing some context.

anecdotally, 7 years out of college has left me and a few people i know with scarcely 2k shaved from our principles, with the rest lost to paying off the 6.5% interest. people don't have incomes which rise quickly enough to make headway against the loans.

thankfully the article comments about the deferred retirements savings caused by student loan burden.

this is a hugely important issue that requires a jubilee or some other radical measure... but will likely not have one barring major societal disruption which the current trajectory is barreling us towards.

delazeur• 9 years ago

nobody that i know who has student loans can afford to pay that much per year

I think that's cumulative cost, not annual cost. Hard to say though; it's not a very good figure.

grecy2• 9 years ago

It is really sad that the wealthiest country in the world shackles it's young people with crippling debt if they attempt to get an education.

My load from Australia is interest free, I only have to pay it back at a very low rate when I earn over $45k per year, and it was $20k (TOTAL!) for a 5 year Bachelor of Software Engineering.

owengriffiths• 9 years ago

College students will have to pay the cost of their college educations one way or another. Either with loan repayments or higher taxes.

The problem is how much people in the US spend on getting a college education, not the funding mechanism. (ie living away from home, rather than living at home like most of us do in Aus).

surfmike• 9 years ago

Having it tied to income definitely makes it less crippling for those who have trouble in the job market after college. Like most grads after 2008 in the US for example, who got unlucky.

boomboomsubban• 9 years ago

College students will have to pay the cost of their college educations one way or another. Either with loan repayments or higher taxes.

If I'm buying a hundred thousand tuitions, presumably I can negotiate a lower price far easier than if I'm buying one. Additionally, even if their total monthly income was the same, not being in a large amount of debt could be a positive. Many would feel more comfortable taking a loan to start a business or build a house, and it would be easier to justify spending without needing to worry about debt interest.

nandemo2• 9 years ago

Perhaps you meant "e.g." ("for example") and not "i.e." ("that is")? Because I'm pretty sure boarding costs aren't the only issue. I don't know about Australia, but tuition in Japan is much more reasonable than in the US.

Y7ZCQtNo397• 9 years ago

I think this statement is a little sensational. If $30k in student debt is 'shakling', then did we ever expect the same person to take on a $300k mortgage, or other larger financial milestones typically associated with middle class life?

I agree that this debt isn't helping achieve other goals, but it's magnitude seems small compared to large financial goals like home purchases. If you weren't going to qualify for the $300k mortgage (less down payment), it wasn't because you had student debt; it was become you didn't have the income.

My point being, this debt isn't crushing. It delays other financial milestones, but it shouldn't end them. However, if the discussion was about borrowers that are taking 6-figure student loans and then becoming baristas, well I would agree that person is definitely shackled for life -- but that situation isn't representative of the typical college graduate. The typical graduate has about $25k in student loans.

abalashov11• 9 years ago

Yeah, but it's not entirely fair to compare a $300k obligation secured by the house with a non-dischargeable student loan.

I've gone through foreclosure on an underwater property, I can speak to that. When I was 21 and had far more money (relative to my age) than sense, I bought a $160K 1 BR condo in downtown Atlanta on underwriting terms that could only be described as housing bubblicious, and which certainly could not be found after the Great Recession. I got an 80/20 loan with 6.625% APR on the primary loan and 8.25% on the secondary. For May 2007, that wasn't terribly bad, considering it was a non-conforming property and I had barely six months of income history at the level necessary to qualify, and hardly any credit history.

A mere three months later, those rates looked absolutely hilarious. Nevertheless, I kept paying for 6-7 more years. These were more or less default payments on 30-year notes, so obviously front-loaded with interest, so in 2015 I still owed $140k. Well, even in 2015, the property was worth $85k. I walked away for various reasons I don't need to get into here, and the primary lender went so far as to sue me for a $29k deficiency, to the great surprise of most people in the know. The other lender forgave the $26k principal outstanding.

But the point is, that's something like a worst-case outcome (-48% underwater) of a real estate transaction. It's not at all like being made to pay back the entire $160k + interest! :)

tmnvix• 9 years ago

If $30k in student debt is 'shakling', then did we ever expect the same person to take on a $300k mortgage...

A student debt is different than a mortgage in that with a mortgage there is collateral. This reduces the risk to both parties considerably because usually the collateral can be used to settle the debt if needed.

I forget which of the ancient philosophers said it but to paraphrase: "it is basically unethical to place a mortgage on yourself (because you are the collateral)". Not too far from what you are effectively doing when taking on a student loan.

grecy2• 9 years ago

If $30k in student debt is 'shakling'

The Average was $37k in 2016, up 6% on the year before. [1]

That makes my $15k(USD) debt look pretty low.

[1] https://studentloanhero.com/student-loan-debt-statistics/

CryoLogic• 9 years ago

Why not make it so instead of loans, the university gives you 4 years of free school and than gets say 10% of your next 4 years of income?

Than the school has incentives to improve the academics in your favor.

madengr• 9 years ago

If that's the case you would only need to work 1 hour a day to pay your way through school, while at school. They would need to take 10% of your income for a lot longer than 4 years.

nunez4• 9 years ago

I'm going to take a contrarian approach and say that I'm actually really glad that I had to pay my way through college with loans. I started with ~$200k in undergrad loans and have ~$45k left.

First, without having taken those loans, I wouldn't have been able to go to the kind of college I did or establish the career that I now have. Full stop. Tuition and lodging was ~$40k for my first year. My parents definitely couldn't afford to send us there with cash, and no job or saving would've paid me enough to pay that note.

I specifically avoided going to my comm college for my first two years despite it being free because I really really REALLY REALLY needed to leave my house. I had a ton of issues with my dad that only got fixed after leaving the house. We're cool now, but I don't think that would have been our outcome had I not left.

My college (and me learning how to code) was the biggest reason why I went from graduation to a $125,000/year salary within two years of graduating. While I might have gotten the same outcome had I gone to a comm college and transferred, the age of the people I interviewed for my job that did that did not suggest this. Perhaps I could've gotten a foot in the door by going to a Hacker school or dogging it on my own; I don't know. My school (stevens tech) and my course of study (Computer Engineering) made it really easy to get interviews at top places for great jobs; that's all that mattered to me and that's all that matters now.

Also, who knows what decisions I would've made in those two years that I didn't make because I left. I love my folks, but they are pretty bad with money and don't know anything about my industry. I was also not very good at socializing with people going into college; moving to NYC and going out and about fixed that and has helped me immeasurably since. I wasn't good at dating and kept bouncing back to a relationship with my first girlfriend to avoid having to look. She was a lovely person, but we had very different families, life goals and personalities. I am incredibly thankful for the years I spent earning how to date and branching out to other women; I would never have met my soon-to-be-wife without that experience. I have college (and the loan that enabled me to stay there) to thank for that.

The money thing leads me to the second reason why I'm grateful for having taken those loans. Between trying to pay these loans back, my salary and reddit.com/r/personalfinance, I learned a SHIT TON about how to manage my finances. I have a spreadsheet that tells me everything about my money: who I owe, what I owe, what services I have, how much they are, when they started and stopped, etc. More importantly, I can copy it, edit some numbers and instantly have a model for what my finances will look like if I buy a house, have n kids, buy an additional car, etc. It's paramount in helping me negotiate salary and helped a lot in predicting what my finances would look like after moving to DFW from NYC.

The ONLY reason why that spreadsheet (and my financial health, which needs work) exists is because of student loans.

Now, it would've been GREAT if I didn't pay for college like my peers did. But I wonder how much money I would've wasted had I been in that situation. I could've done a wa better job of using the money I made from my time in cooperative education paying back my loans. Didn't have the financial discipline. When looked at from that way, I think learning how to manage my money through student loans INCREASED my future worth because I can now make better and more confident decisions about how I spend my money.

austenallred4• 9 years ago

I went from graduation to $125,000/year salary within two years of graduating

So long as that is part of the story it's a great deal. The problem arises when it isn't.

Y7ZCQtNo397• 9 years ago

If you apply yourself, and do your due diligence (e.g., see average salaries for fresh college grads at prominent employers for your college major); then yes, you will command the appropriate market salary. It's not an exact target: industry trends could change, the macroeconomic landscape could change, but overall performing due diligence is 95% of it, since you can't control whether or not the market enters a correction when you graduate. But if you majored in underwater basketweaving and expected to feed yourself, I have little sympathy.

Y7ZCQtNo397• 9 years ago

I agree with you, but mostly for a different reason: the opportunity cost. You can flip burgers for $10/hr indefinitely, or you can forego ~4 years of income, accept ~$30k in debt, to permanently raise your base salary to $100k if you pick, say, Software Engineering. So was the student debt worth it? At age 65, most certainly the college graduate will have accumulated more assets and have a higher net worth. Sure, debt repayment has a drag on a portfolio, but if you don't have a well-paying job, you're not even building that portfolio in the first place.

BJanecke• 9 years ago

Doesn't all debt reduce lifetime wealth?

How Student Debt Reduces Lifetime Wealth

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