There is a lot of information out there today, over the student debt burden. News articles regarding the effects of the student loan on its borrowers, paint a very grim picture. Data shows that 44.5 million Americans owe $1.5 trillion in education debt. The average amount owed by a 2017 graduate stands at $37,102. This is a 78% rise from the average owed, a decade earlier.
There is more disheartening data. At least 2 million of these loans beneficiaries owe a staggering $100,000. Likewise, 500,000 more owe $200,000 in student debt. Education has for decades, been touted as the door that leads to the American dream. However, many news articles have decried the effects of the nation’s highest source of debt. This millstone has been placed firmly on the necks of the average American.
Most suggest that it is time to forget that white picket fence. They are asking you to bid goodbye to dreams of house ownership and starting a family. They have instead advised any prospective college students to prepare for a life of debt. To know that after graduation uncertainty awaits you.
You will have to roll up your sleeves and find a job for the money rather than the passion. If you are to retire at all, you have to spend the rest of your life paying off the high costs of your education.
High education costs vs. the American dream?
Katrina vanden Heuvel in her Washington Post article, says that these debts are sabotaging the future of disadvantaged groups. It is a fact that the student from low-income families, often take on more substantial debt. Similarly, at least two-thirds of the education debt owed is in the hands of women.
Why? They earn less than the opposite gender for comparable work and therefore pay off their debts slower. This also implies that their repayments have higher interest charges. Going by the data, 75% of the millennial generation is saddled with some form of debt. They are, therefore, the hardest hit when it comes to the effects of education borrowing.
According to Katrina’s article, a third of the borrowers in this age group say that they have had to put off plans of home purchases. Another 30% are not saving for retirement, while 16% of them say they have decided to stay childless for a while, to make loans with no credit check repayments.
The rising costs of education
Nevertheless, Researchers Lesley J. Turner and Benjamin M. Marx say that there is more to the debt issue than meets the eye. They have done a study on the effects of education borrowing on student outcomes and found a positive angle to it.
According to their research, that much-maligned debt has assisted more financially challenged students to access a college education. It has also positively influenced their educational attainment. Data shows that since the year 2000, the uptake of students into two-year institutions has increased by over 30%.
The student debt level has risen exponentially, with higher levels of college admissions. This increase in debt has been necessitated by the rising costs of the said education. In the past 30 years, the price of a college education has skyrocketed by 400%.
In the 2018-2019 year, the average cost of a state public college education was $9,176. These costs are 73% less those of private colleges, which stand at an average of $35,676 each year. There are however, over 100 private institutions that charge over $50,000 each year.
Why is the cost of education so high?
First, the costs of living are increasing by the day while the median household income is not. This rise in spending has similarly affected the education sector. Unfortunately, state funding towards education has not increased in proportion to these rising costs. The parent or student, therefore, has to cough up more to foot the expenses.
Secondly, the staffing costs and salaries in tertiary institutions have obscenely risen as the very staff also seeks to get out the debt cycle. This, consequently, implies that even students who attend cheaper community colleges, with state grant aid, have considerable living, supplies and books costs.
The Turner and Marx study on the benefits of student loans was performed at a community college. As per the current student loan program, your dependence on parental support or your class standing determines the amount you can borrow. Respective colleges, nonetheless, choose how much aid to give to students on their financial aid award letter.
A college could, for instance, have a zero-loan offer, a maximum dollar amount or an amount in between these two extremes. The two researchers decided to study the effects of the amount offered on the award letter on student attainment and borrowing.
The benefits of borrowing
As per the investigative study, students whose letters indicated a non-zero credit offer were more likely to ask for a loan. The student that borrowed the funds successfully performed better in school. A student with a non-zero grant had a 7% higher chance of applying for educational funding. In addition, when they did ask, they requested for $280 more than students whose award letters indicated $0 in grants.
The benefits of the grants received showed an attainment of 3.7 additional credits by the students. These beneficiaries also raised their GPAs by at least half a grade, a 30% increase in performance. Additionally, a year after the education funding, such students had an 11% higher chance of transiting to a four-year higher institution of learning.
An even more gratifying result was that these students were better suited to see their annual wages rise by $370 each year. The researchers also found out that half of all community colleges offer all their applicants a $0 loan award letter. Most of them also do not offer any funding at all. These institutions avoid giving prospective students a non-zero funding offer to protect them from over-borrowing.
This in effect, also shields the institution from risky lending that brings about low repayment rates. In these colleges, the rate of education borrowing was low, with a paltry 16% of students taking educational funding. In colleges, that outrightly offered the financing from the word go, 29% of the students took out loans. The student loan offer policy of an institution, therefore, seems to affect the likelihood of student borrowing for educational funding.
It also highlighted the fact that a community college student is less likely to apply for funding than one in a four-year institution. Unfortunately, a student in a community college will have a higher need for financing.
Colleges should nudge students to borrow
Data from the study shows that 70% of community college students with student aid had a higher cost of attendance than resources at hand. Amongst students in four-year institutions, 60% had their financial needs unmet.
Consequently, 33% more students attending community college were more likely to result in credit card payments for funding. The students in these institutions were also 7% more likely to take up work-study programs to meet their expenses.
Unfortunately, these conditions often result in lower college completion rates. It could also lead to less desirable work outcomes, which means that they have less income at hand to pay off their education loans. However, when education grant information was communicated clearly, 30% more students took up the funding and more debt.
They also performed better in school and took up more classes. There was, therefore, more progress in education than those who did not. Education funding can assist you to pay for more courses and perform better at them.
The Lesley J. Turner and Benjamin M. Marx study show that student loans, while highly criticized, can positively affect student outcomes. They can facilitate student success, more so than for those without enough support to cover college attendance associated costs. With funding, students have better educational attainment, enabling them to get more credits and better grades.
Eventually, these advantages can bring long-lasting economic benefits in the job marketplace. It is evident, therefore, that while debt might be intimidating to take on, it could help you to succeed in school and the future. Colleges that do not offer educational funding to their students could be standing in the way of their progress, rather than protecting them.
When colleges fail to mention funding in their award letters, students tend to assume that financing is inaccessible. It only costs the institutions the ink on the paper to give their students a better and more productive life at school. Colleges are therefore encouraged to nudge students to borrow for their education. However, it is up to you the student to take proactive steps towards loan obtainment.
It is also critical to keep in mind that debt needs a lot of financial discipline to offset. For many students, the repayment of debt becomes an incentive to work harder after school, in order to obtain financial freedom. This task will be much easier to accomplish with the very best education, which student financing can give you if you need it.
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Guest Author Bio
Annabel James, is a finance graduate from the University of Ottawa. She has helped a lot of students with their financial subject research papers, has published her advice on various well-known finance portals & right now is working as a PA manager for a reputable credit card company in the US.