ATTN: All Parents and Students
An entire generation is being crushed by student loans they’ll never repay in an effort to get jobs that will never give them the return on investment they want.
Americans owe over $1.5 trillion in debt from student loans, spread out among about 44 million borrowers. This is according to Federal Reserve data. And to put that in context, that’s about $620 billion more than the total U.S. credit card debt and auto loans.
This is due in part to people seeking more education and retraining as well as some students opting to remain in college longer to avoid poor job prospects.
College enrollment has tripled over the past four decades, “demand [for student loans] is driven by the cost of education, which has grown at an extraordinary rate over the past three decades.” Based on Consumer Price Index data, the cost of tuition and fees has more than doubled since 2000, and has outpaced inflation across all goods, health care, housing and energy.
In August of this year, more than 1 million student loan borrowers will go into default. The national student loan default rate is one of the most closely watched metrics in higher education because it is used to determine whether colleges are eligible to receive federal student aid.
Unemployment for those under 24 is around 8%—about 4% higher than the rest of the workforce. This creates a pessimistic outlook for student loans.
What it boils down to is this: Students and parents have been sold on the idea that getting a college degree from a “top” school is the key to getting a good, well-paying job with benefits, thus securing one’s professional and financial future. Full of hope, optimism, and blind faith, students are racking up huge amounts of debt.
The Danger Student Loans Present for the Economy
Unfortunately, the student debt problem is an easy one for many to ignore. After all, if you weren’t silly enough to rack up huge amounts of student debt, it has no bearing on you, right?
Turns out that’s not entirely true.
It’s not a secret that student loans are suffocating graduates. Each of the 44 million Americans that is putting a large part of their already shrinking income toward making monthly payments on the student loan. As a result, less of the young adult’s income is going towards purchasing economy-boosting goods and services.
With the amount of money in outstanding debt, the housing market suffers. Among student loan borrowers, 41% have delayed homeownership and 27% haven’t even made it out of their parent’s house.
Fewer homebuyers, home prices stagnate.
With more money going to pay the loan, students then have less to invest, or even start a business—an important factor in the American economy. Small businesses are the heart of the American economy, making 65 percent of the net new jobs over the last fifteen years according to the SBA Office of Advocacy.
Now imagine what will happen to our economy if the rate of new small business creation drops as dramatically as the rate at which debt on student loan has increased.
This goes to show that when it comes to economies, things are rarely self-contained and that systemic issues can come from anywhere—and they usually start with financial ignorance.
But the Economy Is Good?
Even though job opportunities have improved since the Great Recession, unemployment and underemployment for recent grads is still suffering.
Underemployment for those under 24 was 20% in 2012, and even though there’s improvement it was reported in April that almost 43% of recent college graduates are underemployed—working in jobs that do not require college degrees.
What majors have it worse? Statistics show that 57% of liberal arts majors and 49% of biological science majors are underemployed while only 17% of engineers are underemployed.
Building wealth is proven even more difficult with these numbers. In the 1950’s graduates could expect higher incomes by 57% percent while today, it’s only 43% for those in their 20’s and 30’s.
There is a lot of speculation as to why graduates can’t find employment even though the economy is the best it’s been in years. Among other things, one of my theories is that people are working longer which isn’t freeing up jobs for new recruits.
Sadly, more than half of adults over 60 are delaying retirement because they’ve realized they don’t have enough money to actually retire.
With more people going to college than ever before, this should be a red flashing warning that a college education does not guarantee wealth—let alone a job.
The Two Kinds of Debt
One of the fundamental principles of Rich Dad is understanding the difference between good, asset-producing debt and bad, liabilities-producing debt. In my opinion, college debt is the latter.
A financially sophisticated person understands good debt, good expenses, and good liabilities.
I remember rich dad asking me as a young man, “How many rental houses can you afford to own where you lose $100 per month?”
“Not too many,” I answered.
Then he asked me, “How many rental houses can you afford to own where you earn $100 per month?”
The answer to that question was and is, “As many as I can find!”
This simple example illustrates the difference between the good and the bad forms of debt. In each case, I would have bought the houses with a loan, but in one case that loan, and associated expenses outweighed my cash flow income. In the other, it didn’t.
The simple definition of good debt is that it puts money in my pocket. The simple definition of the bad kind is it takes money out.
So, a simple question for those thinking of taking on more student loans: Is it really putting money in your pocket?
The answer, unfortunately and all too often, is no.
The problem isn’t college. It’s that college is considered a sacred cow, causing many people to blindly hold onto the truism that a good education equals a good job and rush into college with no plan and no concept of the risk they are taking.
As I’ve written many times, what conventional wisdom considers a “good” education is really an incomplete one. You will not learn how to prosper financially in college. You will not learn how money works. You will not learn how to invest. You will not learn even the simple definition of an asset. You must take charge of your own financial education. Only then will you have a complete education.
Editor, Rich Dad Poor Dad Daily
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