Julie Jason: Student-loan debt is a trillion-dollar problem
The size, scope and growth of student-loan debt is a big deal: Student-loan debt is the highest form of household debt after mortgages, according to a recent report issued by the White House, "Taking Action: Higher Education and Student Debt."
More than 42 million people have student loans, a total of more than $1 trillion of outstanding debt. About a decade ago, the total stood at $250 billion (2003).
The cause? An increase in enrollment and in tuition, according to the report. During the past 30 years, costs have tripled at public four-year colleges. From 1999-2000 to 2012-2013, costs increased by 87 percent.
On a state-by-state level, the average outstanding federal student-loan balance ranges from a low of $20,625 (Wyoming) to a high of $29,087 (Georgia). Include Puerto Rico and the District of Columbia, and the range broadens from a low of $18,033 (Puerto Rico) to $39,151 (D.C.). These are averages, of course some balances are significantly lower, some significantly higher, especially for students who borrow to pay for both college and graduate school.
The state with the highest number of federal student-loan borrowers is California (4,036,000, with average debt per student of $25,625), followed by Texas (3,075,000), New York (2,825,000) and Florida (2,334,000). My home state, Connecticut, had 508,000 borrowers, with an average debt of $23,080.
Loan defaults are up. Ten percent of borrowers entering repayment in 2012 defaulted on their loans, compared with only 5 percent in 2003, according to the report. A large number have small balances ($4,000 or less) to repay.
It's probably not surprising that more dropouts default than those who complete college. And this also is not surprising: The student's major has been linked to default rate. Some majors just don't prepare one for work, much less good pay. And if you think about it, if you are going to borrow to go to school, the first thing on your mind should be your "hire-ability" after you graduate.
Choosing a major based on earnings doesn't do the trick either, according to the report: "Choosing a major with high average earnings does not guarantee favorable outcomes for all students."
The seriousness of defaulting may not be fully appreciated by borrowers. Defaults are reported to credit agencies, which means credit ratings will be negatively impacted, which in turn can prevent making purchases on credit.
Having a high student debt burden also can lead to defaulting on other obligations, such as credit-card debt, according to the report. It also can deter college students from pursuing graduate study, which, although this is heresy, I believe is a good thing. From a financial-management perspective, smart sequencing requires delaying grad school until college debt is paid off.
There are flexible repayment options available to borrowers that can help when making payments becomes difficult. Do borrowers know about these options?
The Department of Education is testing "new ways to reach 2.5 million borrowers with the greatest risk of encountering payment difficulty, such as borrowers who have left college without completing their education, missed their first loan payment, or defaulted on low balance loans, and get them back on track with their loan payments. The Department will also evaluate these strategies to identify which can be used on a larger scale and which are the most effective."
The bottom line is this: Student loans are one way to pay for education, not the only way. Eighteen-year-olds need guidance before entering into debt, and in choosing a college based on a value proposition instead of the size of the campus or whether it is in a large city.
Next week, we'll explore some tools that can help determine whether a college is a good value worth borrowing money to attend.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/ comments (firstname.lastname@example.org).