The Next Big Credit Crunch

Contrary to what the mass media would have you believe, Generation Y has more on its agenda than obsessing over Britney Spears, Heath Ledger, Amy Winehouse, Paris Hilton, and Facebook. As a matter of fact, most members of Generation Y in the U.S. will attend college, and many will graduate. Many may even continue on to pursue degrees in medicine, law, or other advanced degrees. Along the way, they will develop their understanding of the world around them, make new friends, and possibly even have a good time while doing it. If they are like most other modern college students, they will also rack up a massive amount of debt.

The Expense

College has become somewhat of a necessity for the modern American youth. There was a time in the not-so-distant past when only the most wealthy, driven, or inquisitive people continued their education following high school, but now almost every child from the ‘middle class’ feels compelled to go to college or risk having no real chance at wealth and the ever foggier definition of ‘success’.

But what is the real value of a college education? Does it guarantee a lucrative job offer? Does it truly improve your earning potential over the duration of your career? If so, how much debt does it justify accruing?

Here are the facts:

The average bachelor’s degree recipient will graduate with between $19,000 and $40,000 in debt. The average graduate student will graduate with an additional $31,700 in debt beyond what they accrued during their undergraduate studies. Law and medical students will graduate with $91,700 in debt on average.

At a local State University, the current tuition rate for a full time undergrad student is $4200 a semester. Add to this the expense of a dorm room and meal plan, and you can add an additional $8000 per year. This totals $16400 per year over an average of 5 years for a total cost of $82000. Ouch. You better hope that the lucrative job offer comes through… but will it?

Law students are an excellent case in point. Many, if not most, will graduate with about $100,000 worth of student loans. Payed back over the course of 25 years at an interest rate of 8%, this amounts to a monthly payment of $771.82 a month… no problem for a newly minted lawyer, right?

Wrong.

The average starting salary for a first year law associate is roughly $46,000 a year. Take out taxes and a 401k contribution and a new lawyer is taking home about $2500 a month. If they plan on starting a family, this could be a real problem. For students who rack up this kind of debt and graduate with a degree in a field like education or the liberal arts, they are screwed.

The Next Credit Meltdown

This all sounds real scary, but most college students aren’t in this position, right?

Wrong again. Look at the facts.

This could be the foundation for an economic crisis larger than the housing crisis that we have been feeling the effects of lately. With so much debt, many of these students will have two options: pay off their student loans and live in an apartment until they are 50, or try to buy a house and start a family. If they go with the latter option, it seems obvious that either the house or the student loans will go into default, and you can bet that both the student loan provider and the bank who owns the mortgage will want their money. Will the government step in with another plan to help Generation Y save their homes? I imagine we will find out in another 10 to 15 years.

‘Ethics’ and ‘Student Loan Provider‘ – Two phrases that don’t belong in the same sentence.

Why hasn’t this issue already been addressed? Because both the schools and the student loan providers stand to benefit from taking advantage of the students.

In mid-2007, a huge scandal involving numerous student loan providers and school officials was exposed. The situation basically involved the student loan providers offering incentives to school financial aid officers for ‘selling’ their loans to students. JPMorgan Chase spent $74,000 wining and dining more than 200 school officials on a cruise ship. They also employed five college student loan officers at the bank while they were still employed at the university. At Columbia University in New York, the head of financial aid was suspended (yes, suspended, not fired) when it was discovered that he had earned $100,000 on stock in a loan company that he regularly recommended to students. The government took measures to ensure that this would be discouraged in the future and to prohibit student loan officers from accepting ‘gifts’ from banks for selling student loans, but the damage had already been done to the countless number of students who had already been sold into loans that they may not have understood or needed. Who are the schools really looking out for, anyway? Shouldn’t they be looking out for what is in the best interest of their students?

In any case, what is done is done. It seems that the legislation that was passed in 2007 was enough to ‘smooth things over’ and get everyone to turn their heads while the future generations of the U.S. are duped into an over-priced education by banks and corrupt university officials looking to make a quick buck. Our politicians will continue to argue about the merits of universal health care and ‘the war against terror’ while Generation Y digs itself into a hole of debt from which there is no escape. Eventually, the misfortune of America’s youth will be the misfortune of America’s economy. Our leaders had better take notice.

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4 Responses to The Next Big Credit Crunch

  1. I found your site on google blog search and read a few of your other posts. Keep up the good work. Just added your RSS feed to my feed reader. Look forward to reading more from you.

    – Randy Nichols.

  2. whenispark says:

    91000 from medschool? good one. i go to a cheap school, and 91000 is less than my tuition alone. that number grossly underestimates medschool. that avg is more like 150,000.

  3. Nice post. Something’s gotta give in this country. What’s gonna happen in 50-75 years when the children of today are heading into retirement with massive debt and no savings.

    Predatory lending can take many forms, and it seems to be one of the least regarded threats facing the US economy. Why? I’d guess it has something to do with lobbyists and those same Chase executives who are out wining and dining school officials.

    Americans cannot afford 25% APR’s and $49 late fees. Americans can’t afford $2,300 monthly payments on a 30-year $250,000 ARM. Consumers need to fight back and stop giving their money to these lenders!

    ** (I’m not saying stop paying your loans. I’m saying stop TAKING OUT loans.)

  4. Lynn Arditi says:

    I’m a reporter at The Providence Journal and I’m researching a story on the middle-class squeeze. I’m looking to interview Rhode Island residents who are saddled with student loans and forced to scrimp and work extra hours etc. If you are willing to be interviewed please contact me at larditi@projo.com and include a daytime phone number.
    thanks,
    Lynn

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