Are Student Loans Destroying Consumption?

Over the long Christmas Holiday weekend, The New York Times published 'For Poor, Leap to College Often Ends in a Hard Fall'. The post is a anecdotal essay correlating being poor and the inability of those who are poor to become higher educated. This post shows how easy it was for the starring subjects to get loans, and how easy it was not to graduate and be stuck with the bill anyway.

The majority of money flows into consumer credit are due to student loans.

The red line on the above graph indicates the growth of consumer credit after subtracting student loans. Currently, not considering student loans – consumer credit is growing at $200 per year for every person 18 years or older in the U.S.A.

Student loans, however, are not obtained by the majority of the population – most are targeted to a small group 18 to 26 years old. The average debt burden on this segment per capita is growing at an annual rate exceeding $2,000.

Here are some random statistics from the American Student Assistance (ASA) website:

  • Close to 12 million – or 60% of all students – borrow annually to help cover costs.
  • There are approximately 37 million student loan borrowers with outstanding student loan – and 14%, or about 5.4 million borrowers, have at least one past due student loan account.
  • Among all bachelors degree recipients, median debt was about $7,960 at public four-year institutions, $17,040 at private not-for-profit four-year institutions, and $31,190 at for-profit institutions.
  • The average student loan balance for all age groups is $24,301.

The lead NY Times article, however, was not about those who graduated – but about those who dropped out. Here the ASA website offered the following perspective.

  • Nearly 30%of college students who took out loans dropped out of school, up from fewer than a quarter of students a decade ago.
  • More than half of students who take out loans to enroll in two-year for-profit colleges never finish. At traditional nonprofit and public schools, the percentage of students with loans who started college in 2003 and dropped out within six years is about 20%.

This past week Econintersect has featured an opinion piece The 21st Century Debtors' Prison as well as Infographic of the Day: Graduating Our University Students. These were a mixture of fact and opinion. In this analysis post we will try to provide facts and perspective and refer you to the other sources for opinion.

One significant factor that differentiates the U.S. from other countries: Many countries educate their young at no cost to the students. It remains to be determined by other analysis which approach to funding higher education has any economic advantage. At this juncture it appears that a generation is being saddled with debt they may not be able to repay – and that could well be the deciding factor in the economic analysis.

My weekend posts are geared to identifying specific elements of the U.S.A. economic system which are creating growing headwinds for future economic growth. It is hard to believe student loans are a healthy societal benefit (or investment) in the future. However, I have difficulty espousing solutions:

  • Is higher education's purpose to provide specific skill sets, or just provide a broad general education for employers to finish the training? Are we graduating too many "arts" degrees?
  • With reduced funding levels, high school (secondary school) is graduating students with no specific skills. Should secondary education be teaching specific skill sets such as mechanics, welding, agriculture, etc?
  • Should higher learning institutions be burdened with responsibility for educating in fields where there are jobs? Should the government be involved? Business?
  • Should students be counseled before deciding their course of study (specifically jobs availability) or taking any student loan (showing how this burdens their future options)?

I do not believe there are any good or perfect solutions – but the current path for the U.S.A. is clearly wrong. The U.S.A. is a consumption based economy, and the young entering the workforce are not able to provide economic tailwinds if they enter the economy already burdened with debt.

My normal summary of the analysis of economic releases is in my instablog (and it does not mention the Fiscal Cliff).


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