Student debt: America's 1.3 trillion issue

By Jacob Hoag, Editor in Chief
On April 16, 2017

The Class of 2016 graduate had over $37,000 in debt upon leaving college. SPECIAL TO THE ORACLE

Graduated, on his own and $120,000 in the red.

That was Tim Pease’s first taste of post-graduation reality.

The financial burden of college, as with most students, fell entirely on Pease, 29, who studied business marketing at St. Leo University before obtaining his masters in Entrepreneurship from USF in 2012.

With no help from his parents, Pease turned to student loans to front the bill for his schooling.

When it came time to collect, Pease felt the full weight of his debt, which in turn, directly altered many of his ensuing life decisions.

“With my first job, I wasn’t making a ton of money,” Pease said. “With rent, car, personal expenses and student loans, I was barely getting by. 

“Originally I had to defer my loans to give me some cushion financially, but once I started paying them back … I had maybe a couple hundred dollars at the end of the month.”

After five years of payments, deferring them multiple times, that number has only slightly dropped.

Pease is one of 44.2 million Americans carrying student debt, with that number growing each year. As of February, the national student debt total had risen to $1.3 trillion compared to $300 billion a decade ago, according to research from the Federal Reserve Bank of New York.

That increase can, in part, be attributed to the increase in enrollment, which rose 31 percent from 2000 to 2014.

But the topic of student debt still remains an issue of concern among students and universities.

In today’s market, a college degree goes a long way to securing a high-paying job.

And due to the increasing trend of “credentialism,” which causes professions to screen for higher credentials where they might not be needed, it has become nearly essential to obtain one.

A 2014 study by Burning Glass, a labor analytics firm, concluded that “middle-skill career pathways are becoming closed off to those without a bachelor’s degree.”

The study found that 42 percent of management jobholders had bachelor’s degrees, despite only 68 percent of job postings requiring them.

Receiving a diploma has increasingly become a necessity, but at what cost?

“Like everyone else, students have to make choices,” said Michael Loewy, an associate economics professor at USF. “Among them is whether to attend college and possibly graduate with some student loans, or to enter the labor force without a college degree.”

For Loewy, student debt is not as big of an issue as others might proclaim, rather, it’s simply part of the decision to attend a university. In the long run, he said, the price of tuition is “more than offset by the higher lifetime earnings.”

While that may be true of a STEM student, detractors might say an education major, which makes $40,000 a year on average, according to a survey done by the Department of Education, may face a stiffer financial burden than the $65,000 a year of a STEM graduate.

“You wind up disadvantaged just as you begin,” Melinda Lewis, associate professor at the University of Kansas School of Social Welfare told CNBC. “It has reduced the ability of our educational system to be a force for upward mobility, and for an equitable chance at upward mobility. 

“It is still true that you are better positioned if you go to college, but you are not as much better positioned if you have to go to college with debt.”

The perpetual burden of student debt is also having a lasting effect on both the housing market and small businesses.

According to the Fed, fewer 30-year-olds have bought houses since the recession, with a greater decline in those with significant college debt.

With the average student accruing over $30,000 in loans, recent graduates are less likely to buy homes and to invest in small businesses.

According to research done by the Federal Reserve of Philadelphia focusing on the impact of student loan debt on small business, a person’s debt capacity can only hold so much. 

When that capacity is filled up primarily with student loans, it dampens the probability of that person committing to outside endeavors. 

“Given the importance of an entrepreneur’s personal debt capacity in financing a startup business, student loan debt, which is difficult to discharge via bankruptcy, can have lasting effects and may have an impact on the ability of future small business owners to raise capital,” the report states.

But for a select few, like Pease, these investments are the only way they can get by.

After graduating, Pease was scraping by working as a marketing analyst at St. Leo making around $40,000 a year.

With $1,250 in monthly loan payments, his paychecks could barely cover expenses. 

Pease ended up moving back home to New York to open a string of businesses.

He bought a lease-to-own lot with a 2,500 square-foot building where he opened a motel, an ice cream parlor and a clothing store.

With the money made off those investments, he was able to finance a sports bar and a pizza joint.

The income has helped stabilize his finances.

But Pease is in the minority, with few students able to make these commitments.

“I figured I was already six figures in debt with student loans, so, what’s more debt to me?” Pease said. “If I never took the risk to open up my own business, I’d regret it for the rest of my life.”

New York is one of the first states looking to reverse that and innovate its college loan system to enable more financial stability for graduates.

It became the first state to make tuition free for four-year universities after Governor Andrew Cuomo introduced the tuition-free legislation in January, with lawmakers approving the plan last week.

Starting this fall, families that earn no more than $100,000 a year are eligible. The income cap will lift to $110,000 next year and will reach $125,000 in 2019.

In plain sight, this is the solution to student debt. But there’s no such thing as a free lunch.

“The tuition subsidy must be covered somehow, either by raising taxes or by reducing spending elsewhere,” Loewy said. “If the ‘free tuition’ were to lead to an increase in people attending college, then there are consequences to that as well – larger class sizes, a need to hire more faculty who must be paid, etc.  

“It is not clear that students are better off in this case.”

Nonetheless, it could be the origin of a new wave of innovative thinking about how to lower the financial burden of attending college.

“At the end of the day, to obtain a good career nowadays, you almost always need a college degree,” Pease said. “But most 18-year-olds aren’t too worried about the college debt they will have to start paying down the road.”

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