About 25 years ago, federal government policies were implemented to encourage students to get a higher education—including borrowing the funds for that education if necessary. It was assumed that college graduates could afford the debt because they would be earning more from better paying jobs. However, the law of unintended consequences reared its ugly head. College expenses have been increasing much faster than the general rate of inflation. In addition, especially since the 2008 recession, jobs created have not been ones that paid exceptionally well.
An Associated Press article, written by Josh Boah in early October of 2015, gave some statistics about the student debt incurred for a higher education—and how it can have a multi-generational affect. Student debt in America now totals approximately $1.2 trillion. An Associated Press analysis of that data provided the following statistics:
- Americans over age 40 account for approximately 35% of the education debt. Extended loan repayment schedules, mid-career changes, and signing for children’s educational borrowing have driven the increase from its 25% proportion in 2004.
- Adults in the age 35-50 year old bracket owe about the same amount (an average of $20,000) as those students in the age 34 and younger bracket.
- Parents who still have college debt and teenage children have more difficulties in providing education assistance for their children. Such parents have an average of $4,000 for children’s education savings vs. the $20,000 average for children whose parents have no student debt.
- Student debt repayments are surpassing the cost of food for the average college educated head of household under age 40 (who has student debt outstanding)--$404 for debt repayment vs. what the family spends per month at the grocery store.
Student debt levels are causing potential problems in an already weak economy. Older graduates are delaying or foregoing some spending which would benefit the economy (such as housing and related purchases). Some graduates are accepting employment (usually at lower paying jobs) which would qualify them for student loan forgiveness. Second generation student debtors will be looking at greater debt levels to continue their education.
There are some planning opportunities for pre-college students on how to handle the costs of continuing education. We, at Paragon Financial Advisors, can assist parents (and grandparents) in the best way to proceed on college funding. However, stay tuned—we haven’t heard the last of the student debt “bubble." Paragon Financial Advisors is a fee-only registered investment advisory company located in College Station, Texas. We offer financial planning and investment management.