One of the key ingredients to a growing economy is an educated and well-trained workforce. To this end, our society has invested heavily in higher education to continuously develop the knowledge and skills of the next generation. Students and their families, as the direct beneficiaries of an earned degree, are expected to pay for the skyrocketing expenses of higher education.
The National Center for Education Statistics reports that in the 10 years from 2002 to 2012, prices for public and private institutions have risen 40 percent and 28 percent, respectively, after adjusting for inflation. Student loans, which are the method for financing these expenses, have driven educational debt to over $1 trillion. This amount is second only to mortgages and exceeds credit cards, auto loans and home-equity debt.
Unfortunately, the burden is borne by those who have little credit history and who are trying to enter a somewhat unpredictable and still-recovering job market, many for the first time. Allowing unproven borrowers to amass such debt along with strict repayment conditions is a formula for financial instability.
The Deseret News recently published an editorial suggesting restructuring student debt as equity. We need innovative solutions such as this to help reverse the potentially devastating influences of student debt.
Studies have shown that debt takes a severe toll on the mental health of borrowers, causing stress. Side effects of financial stress include reduced productivity in the workplace and poor judgment. Additionally, debt obligations may steer potential entrepreneurs away from the risk inherent in starting successful ventures. Such startups are integral to creating jobs and wealth across the economy.
Debt at a young age can also significantly interfere with savings and investment progress. The years immediately following college graduation, usually the mid-20s, are valuable saving years. The opportunity to let invested money compound for the next 40-plus years before retirement is important.
The typical student loan term is 10 years. If a recent graduate delays beginning contributions to a retirement account until he or she is finished paying off student loans, the compounding potential is severely diminished, leading to households that are less financially stable.
Graduation from college with massive amounts of debt may also delay other large purchases, such as homes and cars. One study pointed out how the total cumulative amount of student loans continued to grow throughout the recession while most other forms of debt decreased. This added household debt could be part of the reason the housing industry has been somewhat slow to recover. Many recent graduates are reluctant to add to their existing debt.
While the price of education has recently soared, the financing problem is certainly not unique to 2014. In 1947, while looking at higher education, the Truman Commission released a report titled “Higher Education for American Democracy.” The report explained, in the language of the time, difficulties inherent to relying on student loans and described the typical student’s situation. The plight of a male student with student debt is described as follows:
“He often anticipates that during the period in which the loan must be repaid, he will incur the added responsibilities of marriage and family. Furthermore, a prior mortgage on his earnings may be a handicap in procuring a further loan to meet post-graduation needs for starting a business or profession. A program of student loans, wisely administered, can be of assistance to students, but this Commission concludes that even a more generous loan program cannot represent an effective measure for equalizing educational opportunity to the extent which the total need makes mandatory.”
And just as the Truman Commission prophetically predicted, we are witnessing the inadequacy of a “more generous loan program.”
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the School of Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Adam Turville, Hoffmire’s colleague at Progress Through Business, did the research for this article.