It used to be a college degree was the ticket to upper-middle class prosperity, even wealth, a guaranteed investment win. However, most millennials will tell you differently. This month’s topic on Financially Savvy Friday is student loans and student loan debt. Most millennials today will tell you student loan debt has crippled any chance they have at financial freedom and put an entire generation of lives on hold. Where did things go so wrong?
The Ugly Truth About Student Loan Debt
College tuition costs have more than tripled over the last 40 years, significantly outpacing inflation, with public tuition costs rising faster as state’s cut education funding. This rising cost was mostly ignored through the end of the last century as student loan funding made it possible for students to get their educations and the jobs that came with a degree after graduation… until the jobs stopped coming.
Post the 2008 housing market collapse, the job market has never really recovered. A decade’s worth of students, saddled with record-breaking levels of student loan debt, remain un- or underemployed, living at home with their parents or barely making ends meet living on their own, the lives of a near entire generation of Americans on hold. How did this happen?
A Tale of Two Students
Private School, Finance Major, 2004 Graduate
I count myself among the lucky ones. I didn’t have a college fund. I graduated from college in 2004, with an undergraduate degree in Finance and Business Economics from a top-ranked undergraduate Finance program… with $60,000 in student loan debt. The average graduating senior today has about $30,000, up 25% over the last 4 years. I had double that over a decade ago. If I had elected to go to a public state school vs. my private one, ironically, my debt would have been equivalent or higher since my private school is one of the few to provide merit-based scholarships over and above financial aide. I also know had I gone to that state school, my ability to get the job I got upon graduation, while not impossible, would have been highly unlikely.
Fortunately for me, I entered a booming job market in a lucrative industry. My starting salary as a financial analyst at a major Investment Bank was just enough to cover my rent and utilities in a 2 bedroom walk-up I shared with a roommate in Chicago, my dry cleaning, a few groceries (for the handful of meals I didn’t eat in the office)… and 6 months post graduation, my hefty monthly student loan payments which were more than my rent.
Other than engineering majors, finance majors coming out of Notre Dame had the highest average starting salaries of all undergraduates. And my monthly salary was just enough to pay my bills, including my student loans. If I had joined ACE or Teach for America, two popular teaching programs for Notre Dame graduates coming out of school, I would have been drowning in debt on a teaching salary.
I was super lucky in other ways too. Given the market, I was able to consolidate all my loans at the then near-historic low interest rates less than 2%. Today’s rates range from 4.5 – 7% depending on whether they are subsidized, unsubsidized or private. Also, graduating in 2004, I was just ahead of the 2008 recession. While investment banking analysts in classes behind me were cut by major banks for the first time ever, I had enough experience at that point to have already moved on to work for buy side hedge funds, who were profiting from the market turmoil.
Lastly, while at first my monthly salary was just enough to make ends meet every month, at the end of my first year (and every year I worked in the finance industry for nearly 8 years), for my 80-100 hours a week of servitude, I earned a bonus that exceeded my annual salary. And other than buying myself a car to replace my college clunker two years after graduation, I put every after-tax penny of it towards paying down my student loans until they were gone 4 years later.
Private School, Arts Major, 2006 Graduate (almost)
Now let’s tell the story of Student 2. She goes to a different private university just two years behind me. She declares herself as an Arts major. At the end of her four years, she leaves just a few credits shy of graduating. No diploma, but she still leaves with $60,000+ in student loan debt, waiting to be repaid.
She enters a less lucrative (unless you hit the Hollywood lottery and become America’s sweetheart) field overall, and as part of the entertainment industry, gets hit hard by the 2008 recession. While she always has a job in her chosen field, she more than struggles to make ends meet, adds to her student loan debt with credit card debt to fill the gap. Her lack of a finished degree leaves her fearful to ever leave her current company.
She has an amazing entrepreneurial spirit, but can’t put any capital or leave her 9-5 job to pursue her dreams because she has no savings, a growing pile of debt, awful credit and sees no way out of it. No way to save for a home, or start her own business, and forget starting a family. And she’s still better off than many students graduating post-2008 who could never even get a job in their fields.
Irrational Exuberance in Education
Irrational exuberance was a term first used by Alan Greenspan in the late 1990s in describing the tech bubble, just before it crashed. It is a phrase that has become analogous with market bubbles and the inflated prices that come with them just before the crash. Student loan debt is often looked at as the next bubble, that in many ways has already burst, after the housing market collapse of 2008.
Government subsidization of student loan debt has kept the market from entirely collapsing as most market bubbles do… or in my mind, it has just allowed the bubble to continue to grow and delayed the market correction that always occurs after bubbles. Year after year, high school seniors continue to sign up for exorbitant tuition and future student loan balances with no concern for the price or ultimate return on the investment they are making.
I tell the story of the two students above because, yes, there is a great amount of luck involved, but when you are paying sky high private school tuition (especially funded by debt), irrational exuberance tells you your choice of major and future career doesn’t matter. ‘You can study and be anything you want to be!’ Irrational exuberance tells you, I have a great job lined up already, it doesn’t matter if I don’t meet that last small graduation requirement. The market, especially when the economy is tough, will tell you otherwise.
So yes, market timing and the weak economy have been unkind to millennials. They face an uphill battle in the job market, one made fare more treacherous when saddled with historic levels of student loan debt. Large, levered investments in schools and degrees left them little margin for error, margin that has been erased entirely by the state of the economy.
Higher Education as an Investment Decision
This is not meant to pass judgement on degree choices or chosen career paths in anyway. Everyone should pursue the career field of their choice, and degree of their dreams – and while many may disagree with me for saying so, it is not financially savvy to do so at any cost.
At 18, you (or your child) may not be ready to know what you want to do with the rest of your life – and if you don’t, you shouldn’t be investing, especially on borrowed money, in an education you may not be able to ultimately afford. The days of a college degree being a golden ticket no longer exist. Even if you have a college savings plan, education should be a carefully considered economic investment, one where the forecast return, the future earning potential of the degree you are pursuing, is worthy of the cost of the education.
Just like lenders continued to issue mortgages on homes buyers’ couldn’t afford right up until the moment the housing market collapsed, student lenders and the government, continue to make student loans to anyone going to school. Default rates are climbing. Parent co-signers, headed for retirement, and taxpayers are left holding the bag on millenials’ educations. Protect your and your children’s future financial freedom by making informed, investment-evaluated decisions before signing up for student loan debt.
Stay tuned for the rest of this month’s Financially Savvy Friday contributor posts on Student Loans. If you enjoyed this post, you might also enjoy College Savings Plans 101. You can find all our Financially Savvy Friday posts on the series home page, as well as on Financially Savvy board on Pinterest!