September 2022 E-Newsletter: How Did the Student Debt Crisis Happen?
Melissa A. Seamon, CFP®
Senior Financial Advisor
This E-newsletter will discuss the Student Debt Crisis, how it happened, and options for avoiding the crisis. When Baby Boomers and Gen Xers tell their kids and grandkids that they were able to afford college with grants, scholarships, and paying off loans within a year or two, the reactions are likely much different than amazement or amusement, but instead more like shock, disbelief, and anger.
How did the student debt crisis happen?
College costs have changed drastically over the past 10 years inflating approximately 8% per year. Over time, colleges have expanded their degree offerings and many graduates now leave college deep in debt, with no jobs available in their chosen field, and some no more prepared to enter the workforce than when they were high school graduates. Many are calling the status of student loan debt –more than $1.7 trillion as of May 30, 2022, according to the Education Data Initiative - a crisis. That $1.7 trillion is held by 45 million borrowers, which is about 1 in 8 Americans. Of that amount, approximately 40% is held by students pursuing Master’s degrees.
So how did we get here? Let’s take a look at what contributed to the student debt crisis and how you can help your students avoid joining the fray.
Rising Tuition Costs
Data from the not-for-profit organization College Board, which is well-known for its SAT and AP tests, show that during the 30-year span from 1991-92 to 2021-22, the average published tuition and fees increase looked like this after adjusting for inflation:
- Public two-year institution: $2,310 to $3,800
- Public four-year institution: $4,160 to $10,740
- Private four-year institution: $19,360 to $38,070
To help cover the rising costs, federal student loans have more than doubled in the past decade. Additionally, between the years 2010-11 and 2020-21, College Board data showed that total federal grant aid received decreased by 32%, in inflation-adjusted dollars.
College students are facing higher tuition costs, receiving less grants and scholarships, and being offered more loans. And they take them without fully understanding what they are committing to.
The Federal Government Took Over Student Loans
The Higher Education Act of 1965 established the Federal Family Education Loan Program (FFELP) which allowed banks and private lending institutions to provide government guaranteed loans. In 2010, a bill signed into law by President Barack Obama directed all new student loans to be issued by the Federal Direct Loan Program. Unlike private lenders, a student’s credit score, income, and chosen major are not taken into account. This easy flow of money has significantly contributed to the current student loan debt crisis. When government guaranteed checks keep rolling in, there’s no incentive for colleges and universities to lower their prices; in fact, they do the opposite.
Wages and Salaries
Many students likely assumed they would someday earn enough money to repay those student loans. However, according to a report from Georgetown University, from 1980 to 2019 the costs of attending college grew a massive 160% while the income of young adults, ages 22-27, increased about 20% during those same years.
That’s a huge gap to make up!
Economy and Recessions
And what if you don’t have a job?
Data from that same Georgetown University report also shows that the recessions caused by the post-9/11 and dotcom bubble crash in the very early 2000s, followed by the Great Recession, caused a lot of young adults to lose their jobs, forcing them to start over in their careers and even possibly put their loans into deferment, where they then fell into the black hole of compound interest.
Even borrowers who don’t have loans in deferment often are just paying outstanding interest for years before they even get to start paying down the principal.
Current Steps to Combat the Crisis
Recently, federal student loan borrowers have had some relief. The CARES Act passed at the end of March 2020 paused all federal student loan payments and set the interest rate to 0% until September 2020. Former President Trump extended that deadline to Jan. 31, 2021. President Joe Biden has pushed it back several times with the current restart date set for January 1, 2023.
Meanwhile, on August 24, 2022, President Biden announced he will forgive $10,000 to $20,000 of student loan debt for workers earning less than $125,000 per year or $250,000 for married couples. This announcement has come under heavy fire for its unfairness to citizens who never went to college or who have already paid their debt. It’s being claimed as unconstitutional by some and has drawn criticism from economists on both sides of the political aisle. At this point it is not clear how this loan forgiveness program will be paid for.
How to Avoid the Crisis
1. Keeping your child out of student loan debt in the first place is the best route. Encourage your kids to work and pay for classes as they go as much as possible. This will take longer to finish school, but isn’t that better than paying off loans for 10 years or longer?
2. Encourage your child to work hard in high school to give them a better chance for academic or athletic scholarships. While athletic scholarships aren’t feasible for most, academic scholarships are available to many who have good GPA’s. Other criteria that boost a student’s chances are working at a job during school and taking part in local clubs in the school and community. Also, if your student has chosen a field of study, look for scholarships that target those specific areas.
3. Check for work-study programs. Some employers will reimburse college costs if your student commits to work for them for an agreed upon number of years.
4. Encourage your student to check into trade schools. They are currently under-represented, the schooling tends to be cheaper, shorter, and the student graduates with a useful skill and great earning potential.
5. Teach your students to research their chosen profession before taking on loads of student debt. They should specifically think that when they graduate, will their earning potential allow them to pay off that debt?
6. Start saving as soon as possible, including starting as soon as they are born.
When it comes to savings, there are several options:
1. 529 Savings Plans: These plans are exempt from federal taxes, but they must be used for a qualifying education expense and will also count toward your expected family contribution for financial aid calculations.
2. Coverdell Education Savings Accounts: ESAs are very similar to a 529 but contributions are limited to $2,000 per year and only to those with an adjusted gross income of less than $110,000 (or $220,000 on a joint filed tax return). ESAs have more investment flexibility than a 529.
3. Roth IRAs: Paying for college expenses for your children is a qualifying reason to withdraw from a Roth IRA without penalty. However, Roth IRAs have annual contribution limits, and they should be first used for your own retirement.
4. Traditional Savings Accounts: You will get the most flexibility from a traditional savings account, but you also typically won’t benefit from as much interest.
5. Brokerage Accounts: This kind of account allows the same flexibility as a savings account but with the added perk of investing in the stock market. But you will have to keep in mind that the savings will be subject to market volatility and capital gains taxes.
One of the Most Important Financial Decisions You’ll Ever Make
Deciding where your student attends college and how you will pay for it will be two of the most important decisions you will make, both for your own finances and that of your student. At Gardey Financial Advisors, we work with our clients to consider a range of possible scenarios not just for saving ahead of time, but for choosing and paying for the college that makes the most sense for you and your family. This is not a decision that should be taken lightly, but we can help. For more information about the comprehensive planning services we provide, we encourage you to visit our website and see if we could be a good match. We best serve clients looking for exceptional client service, who value a long-term partnership, and have a minimum of $500,000 in investable assets.
Publication Disclosure:
Important Disclosure Information
To better understand the nature and scope of the advisory services and business practices of Gardey Financial Advisors Inc., please review our SEC Form ADV Part 2A and ADV Part 3 (Form CRS) available via the SEC's website, www.adviserinfo.sec.gov. (Click on the link, select “Investment Advisor Firm,” and type in the firm name. Results will provide you both Part 1, 2 and 3 of the Gardey Financial Advisors Form ADV.) Statistics from third-party sources are deemed to be accurate but have not been confirmed by Gardey Financial Advisors.
This communication is for informational purposes only and does not purport to be a complete statement of all material facts related to any company, industry, or security mentioned. The information provided, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or is a substitute for, personalized investment advice from Gardey Financial Advisors. The opinions expressed reflect our judgment now and are subject to change without notice and may or may not be updated. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, expressed or implied, is made regarding future performance. Readers who are not market professionals or institutional clients of Gardey Financial Advisors should seek the advice of their financial advisor, tax or legal advisor before making any investment decisions based on this communication. Gardey Financial Advisors does not render legal, accounting or tax advice. Gardey Financial Advisors works closely with our client’s other professional advisors. The solutions discussed may not be suitable for you, even if your situation is like the example presented. Investors must make their own decisions based on their specific investment objectives and financial circumstances. It should not be assumed that the recommendations made in this situation will result in the mentioned outcome. The commentary does not represent any specific clients, investments, or strategies. 7
HYPERLINK DISCLOSURE
By selecting the links identified in this publication, you may be redirected to third-party websites, over which Gardey Financial Advisors has no control. Gardey Financial Advisors makes no warranties as to the content or accessibility of the third-party website and assumes no liability for errors or reporting inaccuracies. Gardey Financial Advisors neither approves nor endorses the statements made by the third-party on their website. Third-party website content is subject to change without notice and may or may not be updated. It is the responsibility of the viewer/reader to ensure third-party sites accessed are virus-free and Gardey Financial Advisors accepts no responsibility for any loss or damage arising in any way from the hyperlink or third-party website.