Imagine you're 18 years old and expected to buy a home. You are told to go pick something out that you like, something that "feels" right, and then buy it. Don't worry about how you'll qualify for the mortgage, there is no income verification necessary. In fact, you don't even have to have a job. The money is yours with very few hoops to jump through.
If you want to fix the place up a bit, buy furniture, or put a car in the garage, just roll that amount into the loan. You won't know what the total amount of the house is going to be just yet, and furthermore will have little to no idea of the monthly payment. But don't worry, you have anywhere from 10-25 years to pay this loan off and we won't start collecting payments for a good 4-5 years.
The fine print on this contract is the house is yours no matter what. Once you've taken on the loan, you can never trade it for another. The house, essentially, is yours until you pay it off. It has no equity and some might even say it's decreased in value since you bought it.
If you bought in a bad area, too bad.
If you need to suddenly move to another city, too bad.
If you bought a 4 bedroom home in a gated community when what you really needed was a one-bedroom condo, too bad.
It seems like a ridiculous thing to expect of an 18 year old, doesn't it?
You would think there is not a parent in the world that would allow their 18 year old to sign up for this kind of deal. Yet, what was just described is eerily similar to the way we fund college today.
The result? An absolute explosion of student loan debt -- from $200B in 2004 to over $1.3T in 2015 (and growing at about $3500 per second). The debt is held by over 47 million Americans ranging in age from 18-65+, with the majority of the debt held by young adults barely out of childhood.
The chickens, in all reality, have not yet come home to roost. Of the $1.3T in outstanding loans, only about $600B of it is in repayment. The other $700B is either in deferment, forbearance, or the debtor is still in school and repayment hasn't yet kicked in. And if you're wondering how the $600B is performing, according to the Congressional Budget Office, not well. In 2016, 25% of these loans are predicted to default (go beyond 180 days delinquent). Currently 1 in 3 borrowers have payments listed as delinquent (beyond 30 days late).
In the words of Jim Lovell (and Tom Hanks), "Houston, we have a problem."
How Did We Get Here?
Since the early 1970's, our society has impressed upon students from the time they're in kindergarten through high school that you must "go to school, get a degree, and" (say it together) "get a good job."
That advice was actually pretty sound all the way through the 1990's, but something changed around the new millennium -- we started graduating more people every year than there were jobs created. The sage advice of getting a degree so that you could get a job just didn't hold up. Instead we saw newly minted graduates struggling to find a decently paying job in their field, so many decided to either stay in school and pursue graduate degrees, or take jobs out of their majors, just for the money.
Ask any teacher in virtually any grade what they're doing in their classrooms and they'll tell you -- we're preparing these kids for college. We're preparing them for going to college, just not paying for college. Quite simply, we've already decided societally that going to college is the obvious next step, no matter the cost.
A large portion of the $1T+ explosion in debt over 11 years was a result of student loans being one of the easiest categories of loans to obtain. From 2006 until around 2011, the sub-prime mortgage market implosion had all but shutdown easy access to credit. Home equity lines of credit had dried up, there was additional scrutiny on underwriting mortgages, and credit cards pulling back on offers made student loans the path of least resistance for someone needing cash. No credit check, no income verification, no proof of employment needed -- the only thing you needed was to sign up for a few classes.
Educational institutions everywhere saw students signing up for classes, obtaining their financial aid checks (i.e. student loans), and dropping out right after. The defaults on these loans skyrocketed.
Those students that were in school for the right reasons were tempted by easy access to quick cash. If you needed an "emergency student loan", a few clicks of a mouse was all it took to get money in your account. For the uninitiated and uneducated about money, there was little to no thought given of the future repercussions of borrowing.
Tuitions Rising At Massive Levels
Over this period of time, colleges and universities were raising tuitions at levels 2-3x the rate of inflation. State and Federal funding had been cut year over year, and the most natural way to cover the decreased funding was to pass along the expense to students in the way of increased tuition.
At the campus level, expenses continued to rise with the growth of administrative staff (called administrative bloat) and the remodeling and improving of campus facilities and amenities to attract more students. New dormitories, dining centers, and lavish recreational facilities became the yardstick used to measure one school versus the other. The more that was spent, the more the tuition became. And at a basic level, students assumed the more they paid, the better the education. So, they borrowed. A lot.
A Lack of Financial Education
At the heart of the student loan debt problem is a lack of financial education. In the newly released documentary Broke, Busted & Disgusted, students are asked how much $60,000 in student loans at the going interest rate would be over a 10 year pay off period. While the actual answer is $660 a month, the answers never got above $200 a month. Most of the students interviewed just shrugged their shoulders as if they'd never considered the question.
And why should they? As illustrated above, they were children when they made the decision about where they would enroll, dutifully following the societal trend of going to college after high school, most having NEVER had a personal finance class.
And yet they're signing up for decades of debt repayment. Debt that many reports today suggest won't be paid back until their children are in college.
Setting Up Your Kids For Success
There are multiple ways to prepare your kids for the financial future that awaits them if they decide to pursue higher education in the traditional sense. The following five suggestions will protect your children from the debt that millions of Americans are dealing with currently:
- Know before they owe. In looking at the cost of attendance for various schools, add up what 4-5 years of that education equates to. Then run that number through a student loan debt calculator to determine the actual monthly expense. Give your child a sense of how much that really is (i.e. that's a car payment, that's 3 weeks of groceries, or that's the same amount as my first mortgage payment). If they have some sense of how much it really costs in the long run, their decision may be impacted.
- Apply for other sources of funding. Scholarships and grants are a wonderful way of getting college paid for because it's essentially free money. There is obviously work involved in applying for these awards, but it is one of the highest paying part-time jobs a student can have while in high school. Consider paying your child5-10 for every application they complete starting in middle school or junior high (yes, there are awards for kids as young as 3rd grade!). By the time they are in high school, they'll have mastered the process. Check out resources like www.ScholarshipMastery.com or www.TheScholarshipSystem.com for more information.
- Choose colleges wisely. Institutions of higher learning are all competing for your business. While some compete on academic rigor, the majority are competing based on your emotional feeling while on campus. In fact, we've grown accustomed to telling teenagers "just pick a school that feels right to you". What 'feels' right may be a brand new dorm with the highest speed internet possible, unlimited cable, and a Starbucks in the basement. (The debt from that school won't 'feel' so good in 10 years.) Instead, choose a school based on placement rate after graduation, on the quality of the internships they assist with, and how active the alumni department is. Employers today want experience, education is expected.
- Get community college credits early. If you're lucky enough to have a community college nearby, take full advantage of it. Many high schools are partnering with community colleges so that their students can obtain college credits before officially graduating from high school. For a family that plans well, it's entirely possible to graduate high school with enough credits to start college as a sophomore. If your child were to attend a 4 year state school, that's like saving over20,000. Make sure the credits transfer to the schools you're considering. OR, if the community college has a 2 year program, knock out the next year living at home and saving money. Many community colleges today have employers calling to recruit from their various programs.
- Decide if college is for them, right now. The societal pressure to attend a 4 year program is immense. High schools tout their percentages of college bound students as a wonderful thing. And it is... if they're prepared for it. However, studies show 1 in 3 students dropout within their first year. For some young adults, getting life experience before they attend school might be beneficial. Don't be afraid to encourage exploration and experimentation before running headlong into a major that may not fit your child long-term. A lifelong career is a thing of the past as most people today will change careers (not jobs, careers) at least 3 or 4 times in their life.
If you're looking for a way to have these conversations, consider downloading and watching the documentary Broke, Busted & Disgusted. The film was created as an awareness and education tool for students and parents to have open, informed dialogue about the real costs of attending college.
The financial future of the next generation is dependent on them altering the course that we're currently on as a country. By sharing the above information with those you love, you'll play a part in making the financial lives of the next generation much easier.
Adam Carroll is a financial literacy educator, author and speaker. His programs and books have been used on over 600 college and University campuses across the country. He is the author and co-creator of the documentary Broke, Busted & Disgusted and is a 2-time TEDx presenter on the topic of personal finance. You can find more of him at http://AdamSpeaks.com.