For graduate students, the debt load is far greater. For example, The Wall Street Journal recently reported that the average law school borrower owes $128,125 at graduation.
Is this debt load crushing young Americans and their families? About $124 billion of federal student loans are more than 90 days delinquent. Most of these loans can never be discharged in bankruptcy, and virtually all defaulted student loans are reported to credit rating agencies, damaging for years the borrower's chances for mortgages, car loans, credit cards and even jobs. (A federal direct loan is delinquent when any payment is past due; a default occurs on the 270th day of delinquency.)
The great college bubble was created by supply and demand growth over 40 years, a period when there were few pressures on colleges or parents to control costs. Now, the bubble is starting to deflate.
For the 2012-13 year, the U.S. Census reported a 3 percent year-over-year decline in U.S. undergraduate college enrollments, the first drop of this size in modern times. Federal student loan issuance also is on the wane, dropping by 2.0 percent in 2011-12 and another 7.6 percent in 2012-13. College has simply grown too expensive for either families or U.S. taxpayers to afford.
Aside from rising costs and shrinking loan availability, other trends factor into the new calculus:
- Household income – The college dream has always been based on the promise of achieving greater earnings power. Although graduates still have a significant edge over non-graduates in career earnings, all U.S. wages have been stagnant for almost two decades. After declining in 10 of the last 14 years, median U.S. household income is now back to about the same level as 1995.
- Rising loan costs – As a result of changes made by Congress, federal education loans are less attractive. The interest rate on federal direct (Stafford) loans is still fairly low at 3.86 percent. But as of July 1 of this year, federal direct loans will no longer be available to graduate students, and the interest rate on the alternative (unsubsidized federal loans) is higher – 5.41 percent. During the six-month grace period after a student leaves school, interest on direct loans will now accrue. A 1.072 percent loan origination fee now applies on all federal loans, subsidized and unsubsidized.
- Restrictions on pay as you earn and loan forgiveness – Through a series of reforms advocated by the Obama Administration and passed by Congress, students who took out loans since 2011 were allowed to take public service jobs and make minimal Pay as You Earn (PAYE) payments. After 20 years of such payments, the remaining loan principal is forgiven. However, the program has been so popular that it has exceeded the government's cost estimates by 90 percent. In its most recent budget proposal, the Administration has proposed changes that would require high-income borrowers to make larger PAYE payments and extend the start of loan forgiveness to 25 years.
- The job scene for graduates – Are recent college graduates finding good jobs? The question was answered in a 2014 report by New York Federal Reserve economists. Although they found that unemployment rates for today's graduates are only about 2 percent higher than in the past, a significantly greater portion of recent college graduates are underemployed – i.e., working in an occupation that does not typically require a bachelor's degree. The researchers documented that 56 percent of 22-year olds and 40 percent of 27-year-olds are underemployed.
See: www.newyorkfed.org/research/current_issues/ci20-1.pdf
- The quality of education – Are U.S. colleges delivering education worthy of the soaring price tag? Although the question is too broad and subjective to answer without debate, the fact that it is now being asked – especially by parents – represents change. In a 2013 survey conducted by Gallup, only 29 percent of respondents strongly agreed with the statement: "Traditional colleges and universities offer high-quality education."
Almost every parent who has taken a "college tour" with a child has noticed the lavish sums of money spent on athletic facilities, student unions, high-tech interconnectivity and other non-academic amenities designed to appeal to an 18-year-old mind. In the past, most parents have accepted that they must pay for these "lifestyle expansions" of the college experience. Now, they are starting to question whether such costly amenities contribute to the child's acquisition of knowledge or useful employment skills.
In 2012, two researchers asked 671 U.S. college students to revisit a battery of questions that had originally been asked of their counterparts in 1980. For 12 of the questions, not one of the 671 students knew the right answer. You can try these questions yourself here.
Discussing the new calculus with parents
Within the cost-benefit calculus, what are the key ideas to discuss with clients planning ahead for a child's college?
- You have many college choices, including new ideas in education. Online higher education is rapidly gaining advocates and enrollments, led by one of the largest universities in the U.S., the University of Phoenix (enrollment 380,232). U.S. News now publishes rankings of the best online programs in the U.S.
Attending community college for the first two years is becoming a more attractive options for managing college costs. In addition, community college graduates often are given preferential admission to in-state four-year public universities, which can save time and money in "the college search process."
- Look for cost-conscious colleges. A few schools are starting to buck the trend of automatic double-the-CPI increases in tuition and fees. Last year, Ashland University (Ashland, Ohio) announced that it will cut its tuition and fees from $30,604 in 2013-14 to $18,908 in 2014-15. Acknowledging that rising numbers of students and parents are being deterred by "sticker shock," the University's President said: "We have decided now is the time to act." Most cost-conscious colleges are facing declining enrollments and, like their counterparts in other sectors of the U.S. economy, have decided to compete on price. Even if colleges don't show price-consciousness in their published fees, some parents have been successful negotiating tuition discounts and scholarships.
- Don't totally trust an 18-year-old's judgment – While there is some merit in letting a student choose his/her college, most 18-year-olds have never been deeply in-debt. They don't understand what it will mean to exit college in four years with $30,000 or more of personal debt. Today's smart parents start the college dialogue with an agreement that all who are financially affected will participate in the choice. It's also not a bad idea for parents to expose children to some debt counseling and financial planning education.
- Consider waiting – A year or two of "real-world" experience in between high school and college can have benefits – e.g., it can help young people appreciate the world of work and the value of money. By earning and saving for college, they also gain perspective on the job market, which can help in choosing college majors and career paths.
- Emphasize skills – In recent decades, U.S. higher education has gradually shifted away from teaching practical skills that can help young people differentiate themselves in a competitive job market. For example, only a small proportion of U.S. students who do not live in bi-lingual homes graduate from college with fluency in a second language. Yet, in today's globalizing economy, many employers give preference to applicants with second-language skills. Medical, technical, environmental and public-safety skills also are in demand – and they don't always take four years to acquire.
- Don't feel guilty – Many of today's parents went to college and believe the experience has contributed to their success and happiness. Wanting the same for their children, they also believe they should be financially able to provide it. But these times are different. The cost-benefit calculus has changed, and new ways of thinking and planning are required. Feeling guilty doesn't help.
Summary
Rising college costs are a battleship. Although the rate of increase has begun to slow, it will take many years to turn around. Today's parents should expect average college costs to keep rising at double-the-CPI rates for the next few years. At the same time, there are different ways of looking at the value proposition college offers, as well as the question of how much debt is enough for any family or young person.
One question advisors may want to consider is whether the new calculus affects high income and high net worth clients, along with middle-income clients. To evaluate the answer, ask your clients how they earned their affluence or wealth. In most cases, it wasn't by spending more and more money to buy products with constant or shrinking value.
For all client segments, the new calculus means balancing value received with cost paid.
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