College debt has been on my mind a lot lately, which isn’t too surprising since student loan debt is a hot topic in the media. There was $1.2 trillion in student loan debt at the end of last year, or so I’m told by the Federal Reserve Bank of New York. I confess, I haven’t actually counted it myself.
Another reason student loan debt could be top of mind is that its impact on the housing industry is a topic I am asked to speak on by MGIC customers who visit our Mortgage Speakers Bureau. Another popular topic is millennials who owe a fair amount of the student loan debt.
However, neither of those is the reason student loan debt has occupied my mind so much lately. It is much more personal.
My daughter joined the millions of students – 20.5 million according to the National Center for Education Statistics — to be enrolled in a college or university. My wife and I have saved and will contribute toward her education, she has worked and will contribute, her grandparents will contribute, the school contributed … it takes a village; would you like to contribute to her education? Still, there is little doubt that when she graduates, she will carry some student loan debt, too. And that’s okay.
Is There a Student Loan Debt Crisis?
I believe the secret to a happy life is to make sure you understand the difference between a problem and an inconvenience. For most, student loan debt is an inconvenience. A burden, not a crisis.
Start with the fact that student loan debt is not like credit card debt. Debt, regardless of the type, is essentially borrowing from your future self. But student loan debt is also an investment in your future. Simply put, you will be more employable and earn more with a college degree.
The Bureau of Labor Statistics points this out for us in the following chart:
While being employed and making more is one side of the equation, there is still the debt side to consider. Let’s look closer at the $1.2 trillion figure.
Recently Kim Clark, who covers higher education for Money Magazine, joined Brookings Institute’s Beth Akers on the Diane Rehm Show to discuss student loan debt. (Transcript available here. Clark points out the little known fact that 40% of student loan debt is graduate debt – not undergraduate.
According to the Washington Post, nearly 60% of borrowers owe less than $20,000 in undergraduate debt and of that, 42% owe less than $10,000.
To be fair, that number is increasing. Rapidly. Student loan debt is rising faster than any other category of debt according to the Federal Reserve Bank of New York. Economist Joel Elvery of the Federal Reserve Bank of Cleveland states outstanding balances have increased 280% since 2005. Concerning, but not a crisis – at least not for most.
Elvery also states that while balances have risen sharply, the average payment increase during the same period was less severe at just 50%.
The average student loan payment for the 20- to 30-year old range is $351 per month. Again, we have a small fraction of those with large payments pulling that number up. A closer look shows 50% had payments below $203, and another 25% between $203 and $400.
Of course that is a considerable amount to pay each month. However, we also need to go back and factor in how much more a college graduate makes each month. Elvery states that in 2014, labor force participants between the ages 20 to 30 with some college education earned on average $750 more than those in the same age range who had obtained only a high school degree.
Going to college is an investment in you — with a financial rate of return of about 15%.
Again, going to college is an investment in you. One that Akers demonstrates has a financial rate of return of about 15%. (Side note: Akers’ book Game of Loans just came out and is an in-depth look at the student loan debt issue.)
Student Loan Debt Impact on Housing
None of this is to say student loan debt is not a problem for some. For some maybe even a crisis, to use hyperbole.
However, when it comes to its impact on housing, the group for whom it is the most difficult is students who took on debt but did not reap the benefit of obtaining the college degree.
Those who earned their degree and borrowed for college (and in fact may even still have student loan debt) are more likely to have recently obtained a mortgage, than those who did not. The charts below illustrate this further.
25- to 30-year-olds with a mortgage
31- to 35-year-olds with a mortgage
Source: Navient Solutions; Sept 2015
Am I happy my daughter will most likely end college with some student loan debt? Of course not. But to be honest, I’m not happy to have a mortgage either. Nevertheless, I’m willing to take on that debt for the enjoyment of the home I live in, as well as the investment in my future as I pay the mortgage down.
Student loan debt is similar. You are taking on debt in order to invest in your future and enjoy pursuing your passion and development of your future self. Watching my daughter do that makes me very happy.