As long-time clients and readers know, exploding debt levels in America are one of my greatest concerns and will pose a serious threat to the economy at some point (I know I’ve been saying this for years). Out-of-control student loan debt is already having a negative impact.
Student loans are now the second-largest category of household debt in America, now surpassing $1.5 trillion and trailing only mortgages at $9 trillion. Outstanding student loan debt in the US has tripled over the last decade, posing a greater burden to Americans than auto or credit card debt.
More than 1 million student loan borrowers go into default each year, and nearly 40% of borrowers are expected to default on their student loans by 2023. Within four years after leaving school, nearly a quarter of the borrowers had defaulted according to the Urban Institute which analyzes student debt. But the news gets even worse.
From 2007 through 2017, the Consumer Price Index rose by 21%. Over that same period, college tuition costs jumped 63%, school housing surged 51% and the price of textbooks increased by 88%. These troubling price increases wipe away any mystery behind today’s staggering levels of student loan debt. And it gets worse still.
The national executive recruiting firm Korn Ferry says the average starting salary for a 2018 college graduate is $50,390, up just 2.8% from 2017. Meanwhile, the recently-released July Consumer Price Index report shows the inflation rate rose 2.9% over the last 12 months. Average starting salaries are not even keeping up with our relatively low inflation rate. And there’s more.
Regardless of income bracket, housing is the biggest line item expense in family budgets. On that count, the best news for fresh college grads is that rent growth appears to be slowing as a flood of new apartment units hits the market.
According to RentCafe, the average monthly home or apartment rent in the US was a record $1,409 in July, a 2.8% increase from a year earlier. While rent growth has stopped outpacing gains in salaries for now, the level is nevertheless prohibitively high for many, especially those weighed down by student loans the minute they cross the graduation stage.
The average monthly student loan payment is $351. Tack that on to average rents and you’re pushing $1,800 – before you add groceries ($200 a month or more for most) and gasoline at around $120 a month (1,000 miles at 23 mpg and $2.75/gallon). That puts you up to over $2,100 a month before you add other bills and expenses. That’s well over half of the average monthly take-home pay! And it’s much higher in states like California, New York and others.
As of the end of 2016 (latest data available), 22.4% of all US households carried student debt, with the percentage rising to 44.8% for those aged 18-34, up from 18.6% in 2001. The average household with student debt has an outstanding balance of $33,000.
These increases are taking a toll on the economy. As we’ve all read in recent years, more and more young people are not buying houses. The average household has to save for almost six-and-a-half years to cover a 20% down payment on a home at current prices, according to a recent study by Zillow’s HotPads. And that’s based on the steep assumption that workers can sock away 20% of their monthly take-home pay – and most can’t.
While homeownership has picked up recently, it’s been held back for a decade due to stagnant wage growth and onerous debt burdens. The macroeconomic ramifications are well-documented with a record number of Millennials who can’t afford to leave their parents’ homes.
Clearly, the issue of skyrocketing student debt must be addressed, and institutions of higher learning in this country must take some of the responsibility for the current state of affairs. Yet that doesn’t mean free college for all, as espoused by ultra-liberals like Bernie Sanders and others, is a good solution.
Remember that President Obama federalized the student loan program in 2010. Since then, the program has begun to lose money, reportedly about $36 billion in 2017. Fortunately, President Trump is trying to change that.
The bottom line is that the return on investment for a four-year college degree isn’t as straightforward as it was for high school grads 20 years ago. Americans are figuring this out. It remains to be seen if colleges and universities will get their act together and limit cost increases in the years ahead. If not, the market will do it for them!
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