Friday Focus: Weighing the Impact of Student Loan Debt

April 19, 2013

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Even years after graduation, many American college graduates are left with heavy financial burden from cumulative student loans. A new report by the New York Federal Reserve underscores how college debt has taken an economic toll, causing young student loan borrowers refrain from auto and home purchases.

Credit: cooldesign at FreeDigitalPhotos.net

Credit: cooldesign at FreeDigitalPhotos.net

New research published on the Liberty Street Economics blog reveals that for the first time in at least a decade, 30-year-olds with a history of student loans are less likely to have debt related to home-ownership than those without a student loan history. The researchers explain that such findings are significant because student debt holders typically have higher education, and therefore, higher incomes than people without school debt.

The financial toll from student debt has grown extensively over the past several years. The percentage of 25-year olds with student debt has grown from 25 percent in 2003 to 43 percent in 2012, while the average amount has grown by 91 percent, from $10,649 to $20,326.

The report highlights how lower expectations regarding future earnings and limited access to credit puts restrictions on young grads’ economic spending. While student loans now account for the second largest debt in American households after mortgages, fewer graduates are actually able to afford their own property, something once associated with the American dream.

“While highly skilled young workers have traditionally provided a vital influx of new, affluent consumers to U.S. housing and auto markets, unprecedented student debt may damper their influence in today’s marketplace,” according to the researchers.

With rising tuition rates and fewer low-income students applying to competitive schools simply because they are unaware of the resources available to them, college students today are faced with very different challenges compared with their parents.

What Leads to Debt?

At a recent event on student loans and debt held by the Society of American Business Editors and Writers, several education professionals joined a panel to talk about the financial crisis that students face in college and beyond.

“We have a dramatically different world now. [In my generation], people could put themselves through college,” said Pauline Abernathy, vice president of the Institute of College Access and Success (TICAS), an independent nonprofit organization that focuses on higher education.

Abernathy noted that colleges should take greater responsibility in explaining their financial aid packages and better communicate the net price of college tuition, including the interest rates, rather than just the tuition “sticker price.”

Other panelists agreed, and Jane Clark, senior editor at Kiplinger, noted that acceptance letters can be very misleading, blurring the lines between loan offers and grants. Stephen Burd, a senior policy analyst at New America’s Education Policy Program, said that students and families are often left alone to navigate a complex loan system and that college entrance counseling may actually come too late for new students who are often too preoccupied with class work to consider the impact of their newfound loans.

The consensus was clear: colleges need to make a better effort in explaining offers while students and parents need to pay closer attention to the costs of college down the line.

In a recent IMT Career Journal editorial on education, Greg Jones, of the Association for Manufacturing Technology (AMT), advocated expanding community college and tech program enrollment to help lower the student debt burden and fill the skilled worker gap.

What do you think is the best way to help reverse the student debt crisis? Let us know in the comments section below.

 

 

 

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