Thursday, January 26, 2006

Huge College Loans Eating up Salaries

I am very sympathetic to the plight of recent college graduates who have to scramble to find a job and start re-paying their college loans. Starting a life, finding a career, and dealing with debt is not easy. Believe me, I know this from experience.

With this mind, I started to read a Seattle-PI (Huge college loans eating up salaries ) article that discussed the crushing amounts of student loan debt that many people have to re-pay; however, for the most part, I was beginning to look at people who at their juncture towards middle age had made brave, but highly questionable, if not risky, education and career choices. Unfortunately, the reporter was taking in the information at face value without asking some hard questions. Questions for the couple who spent $350,000 to become practitioners of acupuncture and naturopathy (well, other than the obvious one about their sanity) : Were they aware that entering a field with low thresholds in certification, standards, and accountability meant intense competition? Did they stop to consider that because a school offers a loan does not validate the school? For example, it is possible to pursue an advanced degree in astrology, but is it a wise career move?

Another question for the non-profit person, did she realize that agreeing to a $100,000 debt for a master's in non-profit administration was not the best possible investment in the world for someone in their early 40s? Is it really a good idea to gain more certification in a traditionally low paying field from an expensive private school? Even Ivy League professors believe that there's little advantage in having a degree from their schools as opposed to one from a public university (See the MSN Money article.)

The cost of a college not only includes interest on the loan, but the difference in what the money would have earned if saved. I have whiled away time using financial calculators ( to estimate what my money would have amounted to had I not chosen college and instead decided to try out one of those new fangled Vanguard S&P index funds. The results usually leaves me close to tears, especially when I think how much it would have been worth by retirement. Even forgetting (with great difficulty) about the index fund, a $3,000 sum spread over small, mid, and large cap mutual funds 15 years ago would be over $20,000 today.

The only 20-something the reporter could find had not completed school and was still hoping to finish school to find work in law enforcement. The question in this case is did the person realize that a high school diploma or GED is all that is necessary for an entry level sworn position in the Seattle Police Department?( )

Finally, the hardest question of all: why has the average cost of going to college exceeded the consumer price index by six times? Administrative costs in other parts of the public sector, let alone private businesses, have gone down thanks to to computers and more efficient management. To put this in perspective, in 1984 an IBM XT Personal Computer, running at 4.77 MHz and with a 10 MB drive had $5,000 price sticker (and if IBM sold it, that would've been without a DOS operating system or even a monitor). In 2005 dollars, that represents over $9,000. A mid-range computer, comfortably equipped and way better than anything available in 1984 can now be had for $1,000. If the computer business was similar to colleges, the exact same PC XT would still be available, only now it would cost $54,000. Think I'm overstating this? In 1978, the yearly fee for attending UC Irvine was $670, which adjusted for inflation amounts to $2,151 in 2005 dollars. (More than one student I knew then put their school loans into high end stereo equipment, which if they had kept their amps, pre-amps, and tuners would have held their value. Mcintosh hi-fi in the long run is always worth more than Mcintosh computers.) So how much does it now cost in class fees to be an undergraduate at Irvine? Nearly $7,500 a year for California residents, or over $25,000 for nonresidents!

There is one telling clue, in addition to the pictures of the new buildings, that explains why costs have gone up so much: UC Irvine's web page for prospective students ( will lead students to financial aid before it leads them to pricing information. In other words, this is similar to the car salesperson who never explains how much the car is going to actually cost, but instead fixates on the financing options and low monthly payments.

One last question: is a degree in film theory worth $21,000 times 4, at 5% interest for 10 years?

Huge college loans eating up salaries Rich in education, poor on student debt
John Donald and Teresa Bujacich, both health care professionals, don't consider themselves poor, and they wouldn't meet anyone's objective measure of being poor.
Yet they share many of the same challenges as other working poor in the Seattle area. They watchdog their budget, juggle bill payments and live month-to-month. There is no money to save for retirement. No emergency fund. They've made a lifestyle choice not to buy cell phones and cable TV, but even if they wanted to, they could barely afford them. Mini-mansions have popped up like mushrooms in the area surrounding their practice, but they are raising their baby in a modest one-bedroom condominium in Bothell, a 30-minute drive from their work.
The reason? Student-loan debt.
Between the two, Donald, an acupuncturist, and Bujacich, who is both a naturopath and acupuncturist, have 16 years of higher education and nearly $350,000 in student loans, a massive liability that costs them $1,700 a month in loan payments.
"I'm grateful for the opportunities," said Bujacich. "But going through life with basically two mortgages is daunting. It does limit where we feel we can go, what our options are."
"It's scary, what we've gotten ourselves into," Donald said. "In order to feel like we're meeting our (expenses) ... we need to make $85,000 (a year) between us. But we're not making it."
Donald, 40, and Bujacich, 39, are part of a growing contingent of college graduates who are embarking on careers under sometimes-overwhelming debt loads. Experts say this generation of college students is the most debt-burdened in history.

About 40 percent of students now graduate with what lenders consider "unmanageable" debt loads, meaning their payments eat up more of their salaries than is considered financially sound, said Luke Swarthout, who works on higher education access issues for Washington Public Interest Research Group in Washington, D.C. "And there's nothing to suggest it's getting better," Swarthout said.
Driven by rising education costs and easier access to funds, total student loan debt has ballooned during the past decade, economists said. About two-thirds of students now rely on loans to graduate, compared with less than half a decade ago, according to a report by the Center for Economic and Policy Research, a Washington, D.C.-based think tank.
This combination of forces has the potential to create a new class of working poor -- those who have fallen behind before they've had a chance to get ahead. These are secret strugglers. They aren't counted anywhere, and no one is sure how large their ranks are, although anecdotal evidence would suggest they are increasing. They don't necessarily look, act or identify themselves as financially challenged. They are rich in education, but they've leveraged their futures for the privilege.
Based on the center's analysis of government data from 2004, the average amount of government loans used to graduate from a four-year public institution was $15,662, compared with $9,798 (adjusted for inflation) in 1990. For private schools, the average amount borrowed was $22,581, about one-third higher than in 1990.
Federal student loan figures don't take into account the growth in private loans, which are the fastest-growing category, and credit-card debt used to offset growing college expenses. A recent Nellie Mae study estimated about 25 percent of students put some of their education on credit cards.
"One of the most provocative things we found was the share of student costs covered by loans has fallen even as the amount of loans has increased," said Heather Boushey, an economist for the research center.
"To put this in perspective, back in 1981, a student could work full time all summer at a minimum wage job and earn about two-thirds of their annual college costs," she wrote in a recent report. "Today, however, a student earning the minimum wage would have to work full time, (for a) full year to afford one year of education at a four-year public college or university."
The money borrowed for a college degree may mean higher earning potential -- by some estimates a college education can add $1 million to a graduate's lifetime earnings -- but it has unexpected costs as well. Student loan burdens affect people's choices: what kind of job they take, where they live, whether they buy a home or start a family, said Swarthout. "It has serious consequences."
There's a social cost as well if graduates start to veer away from lower-paying but socially critical jobs, such as teaching, social work, legal aid or non-profit work.
"The lawyer with $150,000 in law school debt doesn't take a $40,000-a-year public interest law job," said Sandy Baum, professor of economics at Swarthmore College in New York.

Scraping by
Sandra Mears, 42, is living in the headlock of student loans.

Sandra Mears accumulated $110,000 in student loans while earning her master's degree. She earns about $48,000 as executive director of Puget Sound Alliance for Community Technology. She said the financial burden of her loan payments has her thinking about leaving the non-profit world she loves.
Mears got a late start on a professional degree, earning a master's in non-profit leadership from Seattle University and accumulating $110,000 in loans in the process.
A former Jesuit volunteer, she spent her early adulthood in a series of volunteer or low-paying positions, working with homeless populations, advocating for welfare rights and running a food bank for HIV-positive clients.
Last year, she petitioned the U.S. Department of Education to forgive a portion of her loans -- less than 20 percent -- because her prior work was so focused on service. She lost.
Today, she is executive director of Puget Sound Alliance for Community Technology at a salary of about $48,000 a year. Between the government loans and attorneys' fees, she owes nearly $600 a month. She and her partner live in a $910-a-month, one-bedroom apartment on Capitol Hill. There is no dishwasher. No cable. No high-speed Internet hookup.
"I want a dog," she said. "I thought at my age I could get a terrier. But I can't with an apartment."
A retirement fund, too, is a luxury.
She's contemplating moving to the corporate sector, away from the non-profit world she loves, to ease her financial burden.
"I see other people driving new cars, and yeah, I'm human. I'd like to do that, or to be able to take my mother to Alaska," she said. "I'd like to be in a position to help."

Derailed ambitions
While students have taken on increasing levels of debt, they aren't necessarily seeing the payoff in improved economic futures as they had hoped.
"Statistically speaking, the chances of moving up (the) income distribution (curve) is less than it was a decade ago," Boushey said. "Students with debt face real concerns with the shrinking middle marketplace."
Tight job markets and the growth of lower-paying service-sector jobs mean students can no longer assume they will have the cash flow necessary to make steep payments.
Having $24,000 in loans isn't much of a problem if you get a degree in a high-paying profession. But many students with outstanding loans never even finish their studies.
Life intervenes -- divorces, moves, layoffs, false starts.
Clint Cantu, 27, who lives in Kent, went to college in California to play football and earn a degree. An injury sidelined both, and he returned to Washington hoping to work and go to school to pursue a career in law enforcement.
"I got a job with the intention of going to school, but I could not afford to go to school without working, and could not work at a job and survive economically working part time," he said in an e-mail interview. Now he's earning $12.20 an hour working in customer service for a wireless company, living with his parents, and trying to figure out how to repay $12,000 in student loans.
"I never in my worst nightmares thought that, at 27, I would be living (at) my parent's house," he said. "When I begin to repay them (the loans), they will be about $135 a month and I hate to say it, but that will be a major dent in my income based on my current wages."
A Seattle P-I analysis showed that the majority of the more than 147,000 workers living at no more than twice the federal poverty level in King and Snohomish counties had some college education, although fewer had bachelor's degrees.
Boushey is familiar with this situation.
"It's a common story -- (people) go to community college for a couple of years, and one year at a university, then something happens and they never go back," she said.
But the loans stick. Unlike bad consumer loans, which are subject to statutes of limitations that vary by state, student loans are forever.

No escape
That point was dramatized last month when the U.S. Supreme Court ruled the government could garnish Social Security payments to pay for old student loans.
James Lockhart, 67, of Seattle was living on $874 a month in disability and eligible for food stamps three years ago, when the government began seizing 15 percent of his check to pay for student loans he'd incurred during the 1980s.
Lockhart, a diabetic who has had double-bypass heart surgery, lives in public housing and is barely getting by, said his attorney, Brian Wolfman, who works with Public Citizen Litigation Group, non-profit consumer advocacy group based in Washington, D.C.
"For someone on that level of income -- it was devastating," he said. Lockhart declined through his attorney to be interviewed.
"We don't disagree people ought to pay back their loans ... or that those who don't shouldn't be pursued," Wolfman said. "But you can't go after someone forever."
According to the government's brief in the Lockhart case, delinquent debt owed to the Education Department is in excess of $33 billion.
Default rates have fallen in recent years, however. People have many more options available to them for paying loans back, said a department spokeswoman. The default rate is now at less than 5 percent, far lower than a decade ago, a reflection of extended payment plans as well as more rigorous collection efforts.
Still, some fear that could change as costs continue to spiral, private loan amounts soar and interest rates creep up.
"So far, the debt payment ratio (of loan payments to income) hasn't been higher this decade than during the 1990s, but it's been partly held in check by lower interest rates," Boushey said. "In some sense, we haven't seen the whole burden bearing down yet."

Caution urged
The situations faced by Mears, Donald and Lockhart may be more extreme than most, but some economists believe more people will be squeezed by their payments as costs escalate and people borrow more.
Those who analyze student debt are concerned debt levels will reach a critical point that could deter students from pursuing an education.
Debt analysts suggested one solution would be to provide more opportunities to repay loans by devoting time to service. Medical students, for example, can offset loan costs by agreeing to practice in underserved rural areas.
"In a second, we would go to the most bug-infested place -- the hottest, driest part of the world -- to pay off our student loans," said Donald, who practices in Issaquah. But that option isn't available for alternative practitioners.
Still others favor more part-time education opportunities, expansion of grant aid that doesn't need to be repaid, greater access to income-contingent repayment plans and increased opportunities for loan consolidation at lower interest rates. Currently, loan-holders are precluded from consolidating more than once, leaving them stuck, in some cases, with higher-than-market rates.
Those who now find themselves saddled with debt urged parents, counselors and educators to give prospective borrowers accurate information on what their debt load could mean to them down the road.
"The beginning of that process -- the borrowing -- looks a lot different than the end," Donald said. "It would be better to bring that wisdom (to bear) before the start of the process -- give them some kind of reality check."


Eiranai said...

this stuff keeps me up at night as I am considering going back to school. very frightening.

Steve said...

I've also at times thought about going back to school to obtain a master in some field, and I've come up to same problem of cost and time.
Plus, the more serious issue of if at my age (way, way over 40) would it add any to my earning power?
The advance degree seems to be of the most value in the late 20s or early 30s.

Mitch Kief said...

It depends on the situation. Deciding on a massive career change and going in for a new degree does not by itself lead to tangible success. When I worked in IBM, I saw horror stories of people going to school, sometimes going unrewarded. At least IBM for the night schools. One person shelled out the bucks, took two years off to get an MBA, at Duke no less, and came back and to the exact same indifferent environment. This person quit, joined General Foods, and doing high level projections and marketing forecasts. Essentially, no degree or educational accomplishment could ever change management's mind once they decided a person wasn't top notch material. This isn't how it works in the TV commercials about the tech schools, is it?

On the other hand a carefully managed personal program that includes education can result in a better career. But one has to weight the costs and benefits.

Some of the tech writing students I once taught were very upset when I explained that they would not be earning $70 an hour fresh out of community college. One or two would have been totally outraged had I told them that because they had very real problems using computers (naming and finding files on drives, for example) and that their job backgrounds were in hospitality or other non-technical service, they were facing an uphill battle finding employment in their new field. I decided to keep quiet. One thing I remember, is that while these students were happy to tell me what they expected (high wages, interesting work), none actually asked me what to expect.

In looking at the follow up to the news article about student loan, I noticed that one lady wrote back to the Seattle PI about her bitter experience. She had loans to cover a BA in criminal justice so that she could become a paralegal. She is in her 50, makes 48K, and has a hard time paying the loans. It might've been better if she had simply gotten a paralegal certificate and pursued the BA in the evenings, hopefully paid for by her employer. Her real problem is being middle aged and starting new career. That five year entry period is tough.