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Student Loan Debt Devastates Millennials, Impacts Economy

First Posted: Jul 28, 2015 05:00 AM EDT
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President Barack Obama has called higher education "one of the crown jewels of this country." However, U.S. students have garnered more than $1.2 trillion in outstanding student loan debt, and 83 percent of that debt, or $1 trillion, stems from federal student loans. This has had a deep impact on millennials and the economy.

Among the 40 million young borrowers, an average student collects $29,000 to finance a college education, a debt that takes a decade, on average, to repay. The mounting student loan debt is debilitating, and it has sweeping economic impact across the board. Millennials are postponing home purchases, childbearing, marriages and entrepreneurial efforts because debt has weakened social mobility and challenged economic stability, not to mention total financial success.  

The costs of both private and public college degrees have skyrocketed, despite state funding, which has long been an important tool for making college more affordable for students. States have reduced backing for higher education, limiting funding offered via grants and other types of subsidies that don't require repayment. As a result, students have relied more heavily on student loans, but this increased dependence on student loans to finance education has consequences, particularly among minorities and lower income individuals.

"A Demographic Look at Student Loans," a new report from Wells Fargo, takes a look at the evolution of costs and financial options for undergraduate education concerning different ethnic groups in the United States over the past 20 years. It also examines the extra burdens placed on students and how they consequently impact the flailing U.S. economy.

While it's possible that average monthly student loan payments may not be higher for post-Great Recession college graduates than older graduates, the total payment on those loans will be much higher. The higher total payment affects post-Great Recession college graduates' ability to save and engage during those repayment years. The report also argues that the weak performance of the U.S. housing market can be linked to student loan costs.

Senior Economist and report author Eugenio J. Alemán poses a question: "Does spending the time and money in higher education improve the economic wellbeing of individuals who graduate from college?"

There are a few obvious benefits to higher education in today's labor force. For instance, education raises earnings. In 2011, individuals with bachelor's degrees were paid 64 percent more than individuals with high school diplomas. Also, the unemployment rate for college graduates remains low, and college graduates are more likely to have access to health care coverage, vacation time, bonuses and other perks of full-time employment. The study also mentions the psychological benefits of remaining employed, which is more likely with a college degree.

However, the negative side to college education is the cost, which has increased at a rate faster than the rate of inflation over the past decade due to reduced funding for educational institutions. State aid has increased for almost all races/ethnicities, but tuition costs have experienced a more significant surge. Additionally, the percentage of undergrads receiving state aid declined in 2011-2013 for all students with the exception of Asians.

"The total price of attendance for a Hispanic full-time student has increased 133.3 percent during the 2011-2012 school year compared to the 1995-1996 school year with tuition and fees increasing 170 percent during the same period, the largest increase for all races/ethnicities," the report states. "For Whites, that increase was 113.6 percent, for Blacks 115.4 percent and for Asians 102.7 percent. The lower increase for Asians is probably related to the fact that Asian students are possibly attending, in general, more expensive schools, and thus the cost of attendance for the 1995-1996 school year was already higher than for the rest of the races/ethnicities."

Asians were paying $30,000 for tuition during the 2011-2012 school year, compared to $24,500 for Hispanics, $25,200 for Blacks and $26,700 for Whites. Meanwhile, the average net cost increased 111.3 percent for Hispanics and 111.9 percent for Blacks. Between the 2011 and 2012 school year compared to the 1995 and 1996 school year, out-of-pocket costs increased 85 percent for Hispanics, 92.3 percent for Blacks, 97.5 percent for Whites and 89.3 percent for Asians.

On average, costs increased about 97 percent between the 2011 and 2012 school year compared to the 1995 and 1996 school year, according to the report. This has contributed to the worrisome, increasing trend of students accessing loans to fund education, with Blacks seeing the largest increase, followed by Whites, Hispanics and Asians.

According to the study, which employs data from the U.S. Department of Education and Wells Fargo Securities, LLC, there isn't much information on the amounts different student cohorts are scheduled to pay under the traditional 10-year loan repayment plan. Alemán used the average growth rate of federal funds borrowed by students, which is about 15 to 26 percent, to estimate that repayment likely requires an additional $4,249 and $5,567 during the repayment period.

The report concludes that a decline in state funding for higher education has placed a greater burden on the federal government to fund schools. Also, student loans, which must be repaid and must be secured by students, place strain on those who graduated during and after the Great Recession. Education inflation has increased three-fold since the mid-1990s as educational institutions began to rely on increased tuition and other fees, and new "help" from the federal government came in the form of subsidized student loans, rather than grants.

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