USA Today notes that America’s student debt loan is set to top one trillion, even as the rest of the economy attempts in vain to deleverage. Even more interesting is the fact that the average loan is double what it was just a decade ago. What does this mean exactly?
One decade ago today was October 19, 2001, shortly after the terrorist attacks. We were still reeling from the implosion of the Dot Com bubble. The country was set to embark on a war with no foreseeable victory. Nothing too positive appeared on the horizon. Yet people piled into degree programs, four-year schools and graduate schools at an increased rate. This trend just-so-happened to coincide with the low interest rate policies of the Federal Reserve, making it attractive to banks to lend even more money to young people. And despite the economic doldrums, these university programs continued ratcheting up tuition and fees. This orgy of student debt continued through the crash of 2008, and even accelerated after the evisceration of the banking sector. After all, if the economy is bad, you are better off betting your future on additional credentials, no matter what the cost.
Here we are in 2011, a decade into a national fever for high-priced university education, and the U-6 unemployment hovers somewhere around 20% what with unemployment, under-employment, mal-employment, and people who have just started dropping out of the system entirely. The nation is one trillion in hock to these speculative educations, and the prospect of gainful employment with a “job” is lower than any time in recent memory.
My guess? The speculative debt educational complex will keep rolling strong, since for many young people it will be easier to borrowing living expenses (food, a roof, car payments) and to keep working on the Masters or PhD than it will be to try to actually employ those pricey talents in the actual economy. But naturally, the future will be affected by these microeconomic decisions.
Remember than unlike other forms of debt, student loans in America are now ineligible for discharge in a bankruptcy. This trillion in debt isn’t going anywhere. And the machinery that manages this debt will have no reason to falter. Many private student loans are guaranteed around 4 – 7%, and what bank wouldn’t love a return like that? Barring major legislation freeing people from their student loans, this system of debt will be around for decades, siphoning away $100 – $2000 a month from most every educated American who did not come from the top-tier of the socio-economic ladder.
This should be of major concern to business. Your future customer’s disposable income is already being budgeted away by their university. Let us map out the future impact of student loan debt in terms of the goods and services that people could be buying instead.
Sallie Mae has an online student loan repayment calculator which gives us an idea of what the future obligations will be on both subsidized and unsubsidized loans. Let us use federal unsubsidized loans as our guide, bearing in mind that private loans through a bank (say, Citibank) will have less preferential interest rates and payment restructuring plans. Let us also assume a 6% interest rate. The numbers below are from what Sallie Mae calls “standard repayment,” the plan which does not include any reduced payments due to low income.
|If your total student loan debt is:||…your monthly payment is||…roughly the price of:|
|$25,000||$278||an iPod touch with 8G and some nice headphones|
|$50,000||$555||a Frigidaire 30″ free-standing gas range|
|$75,000||$833||the monthly payment on a 2011 BMW 328i|
|$100,000||$1,100||Chef’s tasting menu (with wine pairings!) for two at Eric Ripert’s Le Bernardin in Manhattan, followed by two tickets to a Broadway show|
|$200,000||$2,200||the mortgage payment on a home in Saint Louis, Missouri with six bedrooms, three bath, two car garage and an excellent public school system – OR – the rent on a two-bedroom in a dodgy neighborhood in Washington DC, your choice|
We rarely see the future in terms of opportunity cost – what we might do instead of the course we are locking in. Where the American educational complex is concerned, we are locking out many of the consumer purchases that this waning manufacturing powerful supposedly counts on for economic vitality. And no, this is not the same level of debt that past generations had to take on prior to their entry into economic life.
Is this the future we want?