Rising Student Loan Debt Vs. Falling Salaries

The Wall Street Journal recently published an article about the problem of student loan debt.  The graphic below sums up the issue in a powerful way.  As student loan debt has increased dramatically over the past decade, salaries of young adults have also fallen.  I was recently interviewed about this issue by a local TV News station.  After the camera was turned off, the reported explained that she had $96,000 in student loan debt.  She is 30 years old and her monthly student loan payment is higher than my mortgage payment.  This is clearly a significant and growing problem.   As the cost of college has increased exponentially over the past twenty years – by more than double the rate of inflation – it takes more of a family’s income to pay for college than ever before.  So naturally, parents and students turn to loans.  Since many parents have run out of home equity on which to draw, they pass the loan burden on to their children.

While this may seem like an intractable problem, there is a solution, one which many families won’t enjoy reading.  Stop overpaying for college!  In the same way that debt counselors tell consumers to cut up their credit cards, I advise my clients to stop taking on unecessary debt.  I recently told a client with significant debt issues not to send their son to his number 1 college choice as it was the most expensive option of the 8 schools to which he was admitted.  This family was considering taking out $160,000 in loans to pay for college, when they could have opted for their cheapest option at a total cost of about $68,000 over 4 years.  By the way, lest you think that public universities are always the lowest price option, that was not the case in this instance.  The first school mentioned above was a public university.  The second, lower priced option was a private, liberal arts college!

The key is to strategically and systematically search for colleges at which your child will be an appealing applicant.  This means different things to different colleges.  Some schools want and need world class athletes; others seek strong academicians.  Still others are seeking “geographic diversity,” and the list goes on.  The more colleges value the applicant, the better the aid and scholarship packages will be.

See the graphic below, and then avoid that situation at all costs!

Selective College Admissions And Who We’ve Become

“A 35 on the ACT Math Test is no good.”  So said my student, Jenny, from Shanghai via our effective, but somewhat blurry Skype connection last November.

Trying to boost her confidence, and add some degree of accuracy to her statement, I said, “I’m not sure you understand.  A 35 is at the 99th percentile.  You scored better than all but one percent of U.S. test takers,” to which Jenny replied:  “In China a 36 (a perfect score) is the only good score on the ACT Math and Science tests.”

And then it hit me.  The ACT, SAT and many tests like them are normed largely on American students.  In comparison with U.S. kids, Jenny’s 35 was extremely strong, but give that test to a million Chinese students, and her score may have fallen in the 65th percentile.   Chinese students and others across the world score, literally, off the charts, or at least off our charts.

That same week, my first grader’s class planned, organized, and executed a “Pow Wow” to help them learn about Native Americans, the pilgrims, and early American History.  I couldn’t help but think that while he was dancing and socializing with his friends, a class of first grade students somewhere in the Pacific Rim was getting drilled on Trigonometric functions.  And we wonder why our kids rank 32nd among industrialized nations in math proficieny and 17th in reading.

But the issue goes further than underperforming teachers and schools.  It goes to what we’ve become as an American culture.  The New York Post reported yesterday that officials at several elite Manhattan high schools have banned seniors from wearing the sweatshirts of selective colleges to which they’ve gained acceptance.  Nor were they allowed to post their admissions decisions on Facebook or MySpace.  I wonder what George Orwell would think!  The rationale behind the policy is that doing so will hurt the feelings of others who were not so successful in their college admissions quest.  Yours truly was interviewed for this story, and I expressed my disapproval of such a policy.

So I began to think:  Are we punishing students for their achievement?  Are we so cautious about not hurting the feelings of others that we fail to celebrate our own accomplishments?   Why do we give trophies to every child who took part in a sport?   Webster’s Dictionary defines a trophy as “anything serving as a token or evidence of victory, valor or skill.”  Clearly, every child on every team in my son’s Little League does not finish the season victorious – and many have no skill at all!  But this does not mean they will be scarred for life.  Quite the contrary.  It means that given the opportunity, and the right kind of encouragement, they will feel compelled to find a new activity in which they can excel.  An activity they enjoy.  For true self esteem is the product of hard work and achievement.

In short, I believe we’re coddling our kids into mediocrity.  This must stop or our Asian friends will continue to surpass us, and this could mean even darker days for our education system, our economy and the very Country we value so much.

The Financial Crisis And Paying For College

With family investments and home values battered by the recent financial crisis, colleges and universities around the nation are seeing an increase in students seeking financial aid and are bracing for even more.

A panoramic picture of the Angell Center court...

A panoramic picture of the Angell Center courtyard at the State University of New York at Plattsburgh. (Photo credit: Wikipedia)

At the same time, higher education’s ability to meet that extra need is in question because the value of most college endowments has dropped as well.  Nationwide, applications for financial aid jumped 16% last fall compared to the previous year.  Some colleges may need to cut back on other spending to fund extra scholarships.  Others are increasing grants and boosting staffing to help students find loans if their families’ college savings accounts have been hit by Wall Street losses or if they can no longer borrow against their homes.

Before taking steps to reduce financial aid, schools will probably first postpone new construction and stop hiring new faculty. BostonUniversity, for example, announced a construction and hiring freeze, and other schools may follow suit if the situation does not improve.

In recent years, universities with significant endowments have faced pressure from Congress to spend more of the investment returns on scholarships or risk jeopardizing their tax-exempt status.

Another concern is that some financially stressed families may push current high school seniors to apply only to public institutions, like the SUNY (State University of New York) system.  I have seen this occur with some of our affluent clients.  Despite being able to afford it, they simply cannot justify spending almost three times the money for a selective private college.  This has resulted in the SUNY schools, and many out of state publics, becoming highly selective.  So parents hoping to send their children to what used to be a “safe” SUNY school, in terms of selectivity, may not have that option.  They will still have to pay the going rate for a private college, which can run close to $60,000/year.

The result:  More loans, at a time when concerns persist about loan availability if the banking system remains unstable.  In addition, many experts are now warning that the student loan bubble will be the next debt crisis in the United States.  Average student loan debt has increased to close to $30,000 and many students graduate with more than $50,000 which makes it much harder to start out in their 20s.

At Northeastern University in Boston, about 10% more students than last year have asked for additional midyear aid.  Many parents are asking “what if” questions about whether reduced investment values could make them eligible for more aid.  So far, Northeastern has been able to meet all legitimate needs.

So what’s the best course of action for prudent parents and students?  First, continue to save early, and save often.  Second, make sure you begin the college search in 10th grade, or 11th grade at the latest.  There are many strategies available to reduce a family’s Expected Family Contribution (EFC), but this must be done before the middle of a student’s junior year.  Third, in most cases, saving should be done in the parents’ name.  Fourth, depending on the college that students select, home equity or business assets may be included in the financial aid formula.  Make sure you understand how the equity in your home or business will affect the college’s estimate of your ability to pay.  Finally, consider contacting the College Advisor of New York where we specialize in finding best fit colleges socially, academically, and financially for families of all incomes.

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