The Rate Of Attending College Continues To Rise Even As Costs And Debt Also Rise

Jordan Lee, CEO and co-founder of CollegeBacker, discussing the student debt crisis, Bernie Sanders‘s proposal to tackle its reform, reducing the burden of college debt, why gen Z is still going to college, and the role of Navient.

burden of college debt

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What are the nationwide trends regarding student debt?

Average student debt continues to climb every year. It has more than tripled over the last 15 years and currently totals more than $1.6 trillion.

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Is there a correlation between student debt and major and future earnings?

There is a correlation, but it doesn’t always go in the same direction. For example, college graduates who go on to medical, law, business, or other professional graduate schools often need to take on additional debt, but it can be justified because of their higher lifetime earning potential. On the other hand, students attending for-profit art or design schools often take on huge debt with limited job opportunities and low earning potential, making it more difficult to justify the debt incurred.

Any recent trends showing student debt slowing or is it continuing to spiral higher?

College costs, the primary driver of student debt, continue to rise at alarming rates. One favorable trend is that millennial parents, saddled with their own debt, have recognized the need to assist their children to pay for college and are starting to save earlier. Use of tax-free college savings plans or 529s also continues to grow year over year. Still polls show 70% of U.S. parents are still unfamiliar with this option.

What is Bernie Sanders's proposal to tackle student debt reform?

Sanders is proposing to wipe out college debt for 45 million borrowers and combine this with low-cost or tuition-free college for families earning less than $25,000. He would fund the programs with new taxes on certain investments.

How do they differ from those of Elizabeth Warren?

Warren’s proposal would not forgive debt for those earning $250,000 or more.

Any other major Democratic candidates proposing student debt overhaul ideas?

Since Warren and Sanders are among the small group of Democratic front-runners, it is likely that all competitive Democratic presidential candidates will need to formulate some proactive policies to address the issue. Some of the candidates’ platforms focus on lowering the cost of college rather than excusing debt.

Has Trump or any major GOP official given their views on the topic?

President Trump and most other key Republican leaders don’t believe it is the government’s responsibility to address this issue, and polls show that most Republican voters agree that college should not be free, let alone existing college debt forgiven.

How would these proposals impact credit scores?

Not sure

What about economic growth and sectors like housing?

Reducing the burden of college debt – however it is achieved – should spur faster economic growth because young graduates will have more disposable income to spend on consumer and capital goods. Many young people today are putting off a first home purchase because of debt, so a reduction in college debt would also spur the housing market.

What would happen would lenders be wiped out?

There aren’t that many private lenders that focus exclusively on the college loan market. Some of the companies that have emerged recently to focus on college debt refinancing, such as Sofi or Earnest, would certainly lose a lot of business if loans were forgiven.

Many in the GOP claim that if lenders lose because rules are changed they will not loan again and it will hurt the entire debt market - however i find that hard to believe when looking at ridiculous market situations like Mexico selling 100 year bonds - what is your take on the matter

There are many areas where financial institutions can make loans without this type of moral hazard. And about half of student loans are through federal programs, which would be shaped by legislation.

On the other hand, many in the GOP believe that you should be allowed to default on student debt and that seems to make sense- why does the law not allow that and how big of a factor is it?

Unlike non-recourse debt secured by collateral like a car or house, education loans do not have physical collateral. If students were allowed to default on college loans in the absence of other reforms that would likely drive up interest rates and potentially make it harder for many to qualify for loans since the lending institutions would now have to manage greater risk. Lower income and minority families would likely suffer disproportionately.

Related, are we going to cure the cause of student debt without looking into issues causing the huge spike in college tuitions? Shouldn't student debt forgiveness be combined with more responsibility on behalf of Universities and colleges?

Yes, that is a great point. As noted above, college costs, which have been increasing much faster than incomes and the general rate of inflation for more than two decades, are driving the debt crisis. There are many reasons for this, not least of which is the significant drop in government funding at the state level for universities. Proposals to provide tuition-free community college might be a better way to solve the problem going forward.

What is Navient and how does it tie into student debt growth?

Navient is a corporation created by the federal government to provide student loans. It is similar to Fannie Mae, which provides home loans. The interest rates charged vary, but can be quite high.

Is Generation Z not going to college because of debt or are they repeating the millennial trend?

The rate of attending college continues to rise even as costs and debt also rise. Most studies show that the job prospects and lifetime earnings of college graduates are much higher. At some point there may be a tipping point at which it no longer makes sense to attend college. But we haven’t reached that yet.

If you could craft one piece of legislation on the matter what would it be?

I think it is going to be hard to come to an equitable agreement on forgiving debt that does not in effect punish people who either worked extra hard or sacrificed a lot to not incur college debt. What CollegeBacker would like to see are improvements to the incentive programs that encourage people to save for college. In particular, we would like to see a single federal savings program, rather than the complicated state-by-state 529 plan system currently in place. And perhaps also tax incentives for employer contributions to employees’ tax-free 529 plans. This should be combined with federal programs to lower interest rates on college loans and provide more funding for higher education.



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver