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The Student Loan – Our Next Economic Implosion?

It’s getting hard to keep track of our latest and greatest debt crisis. Subprime meltdown, the near collapse of the American banking system, the European debt crisis….. There’s no lack of people, companies, and governments spending more than they make and suddenly we all have to pay the price.

And the newest potential financial collapse we might face, according to this month’s Consumer Reports…. the thousands of American students who borrowed more money to go to college than they can feasibly repay. Between 1996 and 2008 the average debt level of graduating seniors has increased 82%. According to FinAid.org, the average college student has eight to twelve loans to cover their undergraduate education. The average debt for a graduating senior is now $27,650 for a student from a private non-profit college, and $20,200 for a public school graduate, but this is just an average. It is not unusual to see students at the top end of the spectrum, with $50,000, $60,000, or even $100,000 plus in loans.

When you consider that the unemployment rate among college graduates is 9.1% – the highest on record – these debt levels become even more daunting. If you come out of school either unemployed or underemployed, it’s tough to make headway on debt that just keeps growing and will potentially haunt you all your life. I fear a day twenty years from now when kids that graduated from college in 2012 will still be paying off their college loans. And because they are paying off their education into middle age, they won’t have the money to buy homes, cars, and other items that push the economy forward. Debt does not create jobs, except for the few people that become debt collectors, and it is a terrible burden on the economy.

There are a variety of reasons for the problem. Tax dollars going towards higher education have plummeted in most states, requiring student to pick up the difference. Education grows continually more expensive, and as a society we should probably be discussing how to make it more accessible instead of letting the costs continue to spiral. And due to the challenging economy, many students are opting to stay in school as opposed to entering the job market.

I also suspect that our college students suffer from some of the same issues that hampered many of their parents; a basic lack of knowledge about the true cost and impact of debt. I see how it happens. A few years ago people were buying houses they could not possibly afford. A simple look at the numbers should have revealed that fact, but many people don’t really understand those numbers. Banks were willing to lend them the money, and everyone was willing to bet on the upside; that prices would keep increasing and it would all turn out in the end. We all know how that turned out.

Most students have much less financial experience than their parents. To compound this problem, there is no more optimistic time than when you are 18 and heading off to the most exciting phase of your life. Taking on a debt you don’t have to pay for several years seems a no-brainer. Almost every college student assumes they will be wildly successful and make buckets of money.

So the best thing a parent can do is to give their student a realistic snapshot of what life will be like after graduation if they have a huge debt to service. Go online to one of the many debt calculators, and demonstrate what life looks like financially under normal circumstances with a big debt load. Those magical years after you graduate are not so magical if all your income is earmarked towards paying for your education; or worse, you continue to fall deeper and deeper into debt. And if you don’t feel qualified to discuss debt implications with your student, find someone qualified that can give your student good advice.

Just to get you started, I ran a few different loan amortizations to show how much a monthly payment would be.  I am using 6% as an average interest rate –

  • Borrow the average $27,500 for five years, and the payment will be $535 per month, or about the lease price for a small BMW.
  • Going Ivy League?  Borrow $100,000 for five  years, and the payment will be $1933 a month – or go for a ten year amortization and it is $1100 per month, or depending where you live, a reasonable payment on a pretty nice condo.

Or another option…. just bite the bullet and let the kids live with you for the rest of their lives.  There is a big nationwide trend that has kids graduating from college moving back home with Mom and Dad.  Your choice… financial education and proper planning, or a lifelong tenant that pays no rent.

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