The Insanity of Student Loans

OK, this is a thought experiment and I am feeling too lazy to dig up precise figures and references.

The average person who has attended a half decent university since the early 2000s has probably close to $ 50,000 (50 k) in debt- total. Whether this amount was accumulated over a degree, a degree and half or two is inconsequential.

So we have a person graduating in their mid 20s with close to 50 k in debt. Now let us assume that the person gets a job immediately. Unless you are doing something in demand, your salary range is about 20-30$/hr full-time.

20$/hr x 40 X 4 X 12 = 38,400/yr to 30/hr x 40 x 4 x 12 = 57, 600/yr.

Sounds good, doesn’t it? Not really!

3,200 – 4,800/ month (pre-taxes) might seem like a good income, but is it?

Let’s say your median person lives in a reasonably priced apartment, pays for common utilities, drives an average new car and is quite healthy. Even then close to half of the pre-tax amount (1600-2400/month) is used up by the basic costs of living in a typical north-american city. Now let us assume that this median person buys clothes, average things, eats well, goes out a bit, has a few unexpected expenses and takes a short vacation or two per year (1-2k package deals). How much money is left over?

My quick guess is- less than 500$/month. As many of you know- jobs are not as stable as they used to be, and there may be short periods of unemployment and/or moving to a new place. Let me cut to the point- given the current economic conditions and paradigms, it would take close to 10 years for the median university educated person to pay back the debts accumulated during education (assuming highly unrealistic best case scenarios).

We can safely assume this debt will delay family formation, buying a house, having kids etc. It might even make people unwilling to step in and fill demand in many life-cycle dependent industries (housing, child-care, schools etc).

Do you see where I am going? Student debt and lifestyle changes are going to kill aggregate demand, resulting in a deflationary spiral (even if the deflation is not monetary). This scenario will play out under the best of conditions, under our current economic assumptions and paradigms.

Now add in the demographic profile of western countries.

Comments?

  1. Guardial
    November 13, 2010 at 6:53 pm

    Makes a lot of sense. Unlike the other bubbles of the early 3rd millenium, the Education Bubble stabs at the heart of the economy.

  2. Black Grad
    November 13, 2010 at 8:55 pm

    This post is spot on.

    I was fortunate to go through school, with a academic scholarship in tow, that paid for damn near everything. School cost was around $7500 a semester or $15000 a year. I only had around 4k to pay in student loans when I graduated in 2009 with a comp sci degree; and my first job paid me 58k/year.

    I was fortunate to say the least as many of many colleagues are doing the 2-3 roommate thing even after they graduate.

    Your posts are top tier dude. Keep up the good work!!

  3. the dude
    November 14, 2010 at 3:55 am

    The deflationary scenario is the mirror image of the inflationary one couple years back, profiting close to government entities and labour. with that comes allocation of resources to non-productive factors, lawyers, MBAs, etc, accelerating the process of ‘the West’s’ relative stagnation versus so called emerging markets. But still, in line with your argument of solely government spilling money into the economy, such as with cheap student loans, can you distribute ‘knowledge’ to a wider population. The calculation misses the steeper rise in salary opposed to lower education on average, though most knowledge you can get in your next library. But in this government controlled system, you need a stamped piece of paper from some accepted institution, speak promoting government control and thinking inside the box. Question is how to better organise it. Access to education for the wider public, but allow for outside the box thinking.

  4. November 14, 2010 at 4:54 am

    Your post identifies something that many university grads and their parents wish they understood before starting college. Using high school AP credits and CLEP exams to earn college credit reduces total costs. Living at home and attending a local community college for two years before transferring to a four year pubic college reduces costs too. Community college tuition is about 1/3rd the cost of public university tuition. People who go to private colleges out of state and study majors that are not relevant to growth sectors of our economy probably will not get good value for the education dollars spent.

    Student loans are not eliminated in bankruptcy. But credit cards are.

  5. Rebel with a clue
    November 14, 2010 at 7:38 am

    The other negative effect of student loans is that it allows universities to increase tuition without limit, since most students are no immediately affected anyway. Thus the education bubble.

  6. Richard
    November 14, 2010 at 10:22 am

    Another thing to consider is that student loans are NOT dischargable in a bankruptcy. So is child support.
    Can’t pay the loan back in full? Then you just keep paying, getting you wages garnished. Kind of like a modern debters prison.
    Then when you die, the creditors get first in line to grab any assets you may have left behind.
    If you are going into hock to get a student loan, you had better get a degree that has the potential for some serious coin. Or get paid in cash, as it is off the books.
    Or die as a homeless person with no assets.

  7. November 14, 2010 at 1:27 pm

    Speaking of child support, men with health insurance and who are sure they do not want children would be wise to let insurance pay for their vasectomy. Those without insurance should fork out the $1000 for the operation. An old man told me this could be the best financial decision a man could make.

  8. Jeff
    December 7, 2010 at 9:48 pm

    Student debt is not dischargeable in bankruptcy giving the banks all the reason to lend absorbent amounts of money to 18 year olds. Because the students can get the money, the schools continue to jack up tuition rates at a cool 7% each year. And because tuition continues to go up, the government perpetuates the same mistakes of “affordable housing” in continuing to throw hundreds of billions of dollars in Federal backed student loans and grants at students, giving schools all the more reason to continue to hike up tuition.

    As long as the money by the government continues to be put on the table in an effort to “make education affordable”, the schools will simply continue to raise prices and the bubble gets larger and larger. What happened to the housing industry needs to happen to school loans. We need to cut off the credit to send prices down. What a disgrace to the country and the upcoming Millenial generation. Most people in this country have no idea how great an impact this will have on home values, car sales, consumer prices in the next 5-30 years.

  1. November 16, 2010 at 3:11 am
  2. November 17, 2010 at 3:02 am
  3. November 21, 2010 at 7:47 am
  4. January 24, 2011 at 1:55 pm
  5. March 5, 2011 at 2:31 pm
  6. May 21, 2011 at 2:01 pm
  7. July 12, 2011 at 4:45 am

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