Sustaining the Unsustainable – Student Loan Debt

Posted on 03 May 2009

When you take some time to think about the mortgage crisis that’s helped turn our markets to mud, it seems to come down to overpaying for things without a well-reasoned calculation of risk.

Until about a month ago, I lived in Greenwich Village in New York, and walked by New York University’s buildings each day. According to the College Board, the costs for a student who lives on campus total $51,982 a year.

Assuming no increase in costs, that’s $207,928 for an undergraduate degree.

Somehow, they report that the average indebtedness at graduation is $33,637. I presume that they’re referring to the debt load that the student carries. What won’t show up in that figure is the amount of home equity borrowed against by parents to pay the expected family contribution.

In any event, someone’s coming up with $200k. There are many reasons why self-selection would dictate that the median household income of students at NYU would be higher than the $50,233 American average, but even if the average is twice that, after taxes and living expenses for the rest of the family, they’re not coming up with $52k out of pocket, unless they’ve been extraordinarily diligent in saving.

While undoubtedly there are a number of students who will work at high-paying jobs coming right out of school, most of their classmates won’t. Parents won’t always make rational decisions, putting something like the pride of having a child at Princeton above economic sense. If they’ve got the money, it’s none of my concern. If they don’t… who bears the consequences?

Imagine graduating college with $100,000 in debt, at 21 years of age. Assume that the graduate may have a child 10 years later. If a parent’s education isn’t paid off by the birth of his child, when will the cycle end? That’s $833 per month, every month, for 10 years, before considering interest. Twice that for a couple.

How do we get some sanity here?

Making more money available isn’t the answer. Maybe we shouldn’t be trying to send everyone to college. Maybe we should treat education loans more like standard unsecured credit, or make education loan decisions based upon likely ability to repay given not just credit history, but school transcripts and historical economic success of similar loan applicants.

Of course, that idea dies an early death at the hands of those who think it unfair to the economically disadvantaged. So… what do we do? And how do we not screw ourselves with subprime education lending?

Are the people losing their houses now paying their student loans? Are they going to be any time soon?

  • Amy

    This is interesting stuff. I can always count on you to give me lots to think about,

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