Billionaire Robert F. Smith recently pledged to pay off all of Morehouse College class of 2019’s student loans. To do so, he announced his family is establishing a near $40 million endowment fund for the college. While this is a magnificent and inspiring gesture, it’s daunting to realize that 396 graduates could rack up that much student debt. It makes you wonder: How did we find ourselves in this position?
Broader access to higher education through student loans comes with many stressful side effects. It has now become a question of whether student loans are a cure or a disease in today’s world of higher education. The debt crisis has emerged as a result of the imbalance between student loan balances and graduates' earning power.
Understanding the history of loans and tuition inflation explains just how we got to our current $1.56 trillion student debt crisis.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Today
As of 2019, there were 44.7 million U.S. borrowers with student debt. Eleven percent were delinquent 90 or more days in their payments. Roughly 9% had entered income-based repayment plans, and 6% resorted to forbearance, meaning they were temporarily halting payments or paying reduced amounts through federal debt-relief programs.
Those eligible for federal debt-relief programs may be the lucky ones. Borrowers who are ineligible must pay their student loans every month even as they face the high cost of living in American cities. More than half of Americans live paycheck to paycheck, and crushing student debt plays its part. Living paycheck to paycheck robs people of the ability to practice effective financial planning, the primary path to financial security.
Those with high student loan balances must confront the situation and create a plan to take control of their financial future.
A word to the wise: For those contemplating taking out student loans, understanding the history of student loans and how they morphed into a $1.56 trillion debt crisis may help them avoid the vicious cycle of excessive debt.
The Good Old Days
Before World War II, college was mainly for the wealthy and elite, and the vast majority of jobs required no degree. As technology advanced, jobs were created that required more training.
Since 1944, many changes have been made to the higher education system, starting with the Servicemen’s Readjustment Act of 1944, better known as the GI Bill of Rights. This bill made college more affordable for veterans by paying up to $500 per year in tuition as well as a cost of living stipend. After the GI Bill's passage, 8 million veterans enrolled, even though the government expected only 800,000.
In 1958, President Eisenhower signed the National Defense Education Act (NDEA), which provided tuition grants and loans to non-veterans. The bill was in response to the need for more technology education as the United States tried to keep pace with the Soviet Union's space and weapons advancements.
In 1965 the Higher Education Act was passed to give greater college access to women and minorities. In 1940, only about 500,000 Americans attended college, but by 1970 that number was near 7.5 million and now in 2018 that number is estimated to be around 14 million.
Since 1970, family incomes for 80% of Americans have failed to make inflation-adjusted gains. With college costs skyrocketing, the lack of wage increases forced most students to rely on student aid and student loans.
Tuition Inflation
Now more than ever, students must weigh the cost of their degree against a realistic estimate of future earning power.
In 1950, the student bill (tuition and expenses) at Yale was about $1,000 per year. By 2015, it had surged to more than $60,000. Since 1987 the cost of college has increased by nearly 500%, according to InflationData.com.
Some blame the federal government for the dramatic tuition inflation. Loan programs increased demand for education while allowing students to borrow too much. That, in turn, allowed educational institutions to raise prices and, according to InflationData.com, create the current student debt crisis.
The Current Reality of Loans
A recent study by 360 Degrees of Financial Literacy found that 81% of student debtors had to make significant sacrifices to afford their student loans:
- 50% have delayed retirement savings contributions.
- 46% worked another job.
- 37% moved in with a family member.
It has now become too easy for college students to casually take out loans with, sometimes, little sense of the burden they represent. In the old days, a degree could be assumed to pay for itself. Now, the cost of student loans frequently outweighs increases in earning power.
What Today’s Students Should Do to Stay Solvent
As a rule of thumb, the student loan debt to salary ratio should be no more than equal to your expected salary. A debt that is double the annual salary may be doable with careful budgeting and planning. However, triple the annual salary places a very heavy burden on the student and increases the chances of default or the need to enter an income-based repayment plan.
So, for example, if you plan on making $60,000 out of college, you should not take on more than $60,000 in loans. If you plan to make $60,000, but your education will cost $180,000, don’t do it!
To keep debt below their expected salary, students should consider cost-saving alternatives, including:
- Attending a community college for the first two years.
- Pursuing scholarships.
- Saving on room-and-board costs by commuting and living with your parents or having roommates.
The more future university students who opt out of vicious cycle of student loans the better — for all of us. It’s important to remember that obtaining a college degree should provide you the opportunity to live your best life. Don’t allow that degree to ruin you.
This information is for general purposes only. This information is not intended to be a substitute for specific professional financial advice. Please consult a financial professional in regards to your own individual situation. Advisory Services and Financial Planning offered through Vicus Capital, Inc., a Federally Registered Investment Advisor. Registered Representative offering securities through Cetera Advisor Networks LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity.
-
UBS Global's Solita Marcelli: It's a Green Light for U.S. Stocks in 2025A strong economy, rate cuts and continued AI spending should support stocks in the new year, says UBS Global's chief investment officer, Americas.
-
General Mills Stock Is Sinking After An Earnings Beat. Here's WhyGeneral Mills stock is one of the worst S&P 500 stocks Wednesday as weak full-year guidance offsets better-than-expected earnings. Here's what you need to know.
-
Your Loved One Fell for a Romance Scam: What Not to DoConfronting them probably won't work, but asking them some key questions and urging them to take certain actions could.
-
Do You Feel Like Somebody’s Watching You? It's Your CarWhat's worse, you gave your vehicle manufacturer permission to watch you — no matter what you're doing. What are the car companies doing with that information?
-
The Best Ways to Use Your Year-End Bonus (and the Worst)'National Lampoon's Christmas Vacation' shouldn't be anyone's go-to for financial advice, but it does remind us how not to spend a holiday bonus.
-
Never Talk About Money? For Women, That Can Spell DisasterHow can you plan for retirement when your husband holds the purse strings and talking about money is taboo? Help is at hand for this common problem for women.
-
One Cure for Legal Headaches: The Advice of Outside CounselSometimes your lawyer is too involved in whatever deal you're trying to swing, but outside counsel has no skin in the game and can tell you like it is.
-
Year-End Retirement Tax Planning Actions if You Have $1 Million or MoreConsider implementing these four strategies before December 31 to potentially improve your tax situation for this year and the future.
-
25 Financial Moves to Consider Before December 31Tidying up your financial house before the New Year kicks off will put you in a great position to have a financially satisfying and successful 2025.
-
Five Side Hustles You Could Turn Into a Full-Time BusinessYou might be able to capitalize on your expertise in ways you haven't thought of, possibly even leading to quitting your 9-to-5 job to do what you love.
