Student Loan Debt in the Pandemic EconomyFinancial Planning Covid-19
As the fall 2020 semester approaches many of us, myself included, are faced with making important decisions regarding our student’s return to college. Outside of mortgages, student loan debt is the largest form of consumer debt - sitting at $1.4 trillion from borrowers across the United States. The average per borrower is $37,172, as of 2017.1 With the trajectory of COVID-19 in America remaining unpredictable, incoming college students are faced with an important question, “Is this year’s student loan worth an online education?”
A Quick History of Student Loan Debt
While the severity of the student loan debt crisis is undeniable, the real issue is - how did we get here in the first place? Decades ago, the student loan market was left fairly unregulated. Tuition was set by the schools and the majority of student loans were offered through private lenders and banks, but guaranteed by the federal government. Individual loans tended to stay on the conservative side, just a few thousand dollars typically, to reflect modest tuition prices of private and public universities. Slowly at first, tuition began to creep up. In return, loan sizes began to grow. Then, between the late 90’s and today, tuition costs hiked up exponentially. In return, so did loan sizes. The loan system, however, has changed very little to accommodate.
Factors Affecting Student Loan Debt Today
When taking a look at student loan debt affecting Americans today, there are three major factors contributing to the crisis.
Factor #1: Rising Tuition Prices
Simply put, universities and colleges are continually hiking up the cost of tuition substantially above the rate of inflation. Tack on room and board, health coverage, mandatory student activity fees and more, and most families face thousands more on top of tuition.
In fact, the cost to attend college has doubled in the past 40 years. According to the National Center for Education Statistics, the average cost to attend university (including tuition, fees and room and board) in 1985 was $12,551 (public $8,798 and private $21,042 adjusted for 2018 dollars). In comparison, tuition in 2018 for a public university was $20,042 and a private university averaged $43,139.2
Factor #2: Pay Inequality
More women are accruing student loan debt than men - two-thirds of America’s student loan debt is held by women, equaling $929 billion.3
The problem is, once women hit the workforce, they’re facing an uphill battle paying down debt. Assuming a woman graduates in her early twenties, she will make approximately 89 cents to every dollar a male counterpart makes. As women age, that number drops. By the time a woman retires in her early 60s, she’s making on average 75 cents to the male dollar. And if a woman decides to have a child, she’s earning even less - approximately 71 cents, or $16,000 less than a father in the same position.3
Factor #3: False Sense of Employment and Loan Forgiveness
The majority of people taking out student loans are young, around 17 or 18. And yet, they’re signing up for a multi-decade commitment. While some federal student loan plans are meant to be paid back in 10 years or less, many borrowers find themselves expecting to still be paying back loans into their 40s.4
Taking on such a commitment at a young age has become the norm, but many take on this debt without thinking realistically or long-term. With unemployment rising among recent graduates and competition for loan forgiveness programs, loan payback is not easily attainable after graduation.
Learning in a Pandemic
Student loan debt has a ripple effect on the economy – underemployed graduates are leery to take on more debt (especially high-interest debt like credit cards), leaving the banks earning less in revenue from interest and fees. Students don’t have the necessary savings to purchase a home, meaning the housing market sees less demand. And with less financial security than generations before, they’re waiting longer to start having families.
Back in March, America began to be faced with COVID-19 and experienced record unemployment numbers. With millions out of work and the start of our next recession, student loan debt is a hurdle that can make financial survival even harder for young people. While a moratorium was placed on federal student loans through the CARES Act, those with private loans have been left at the mercy of each individual institution.
Online vs. In-Person Education
College is a place to network, develop bonds and work closely with world-class faculty. Online learning, while effective to a degree, can deprive students of these in-person interactions typically experienced throughout one’s on-campus college career.
It has been reported that Harvard is among the 8% of colleges across America to announce they are holding classes remotely in the fall. While 60% of colleges are currently planning to continue to hold in-person classes others are transitioning to a hybrid learning model; there’s much uncertainty regarding how this coming fall semester will play out.
A new survey conducted by Simpson Scarborough explored how current college students and high school seniors felt about the transition to online classes. Of the nearly 1,100 participants, 50 percent said it was “worse” and 13 percent said “a lot worse” than in-person instruction.5
If universities don’t open back up for in-person instruction, students and their families must face the reality of deciding if it's worth paying tuition and enrolling for the fall semester. The pandemic has already taken an enormous toll on families worldwide, and if incoming college students don’t get the in-person instruction and experience they are supposed to receive, they might consider a gap year.
In that Scarborough survey, when the high school students were asked how likely it was that they will go to college in the fall as they had planned, a fifth of respondents said it was likely or highly likely that they would not attend because of the pandemic.5 Not only is this worrisome for incoming freshmen, but it's also concerning to the universities as well. Colleges, like so many businesses and individuals, will face financial hardship as a direct result of the current pandemic.
Students across America are hoping to return to campus in the fall, but the reality of this decision is still unknown. Whether you’re an incoming freshman or a returning student or the parent of one, it’s important to sit down with your family and decide what’s right for your situation. If the colleges you applied to have offered an extension on committing or an alternative schedule, take that extra time to see if the coming weeks or months will provide a clearer vision of what this fall may look like.
The student loan crisis is very real, and it’s going to take a major systems overhaul to resolve. In the meantime, you can help your child or grandchild tackle future education expenses by starting a 529 savings plan. Or, speak with your financial advisor about other options available to you.