Student Debt and the Rising Cost of College

Transcription

1 Student Debt and the Rising Cost of College GRANT BLACK SHARON LAUX CENTER FOR ENTREPRENEURSHIP AND ECONOMIC EDUCATION UNIVERSITY OF MISSOURI-ST. LOUIS Special thanks to Anne Winkler, Economics & Public Policy Administration, University of Missouri-St. Louis

2 Why is Student Loan Debt Receiving So Much Attention Now? Tuition and fees are rising, which places attention on borrowing costs. Student loan debt is becoming an increasingly larger form of debt Student loan debt delinquency is on the rise However, important to keep in mind the rising economic benefits to college (which accrue over the 40+ year work life) First we discuss the economic decision to go to college and then we look at the issue of student loans and debt.

3 Overview Economic decision to go to college Student loan debt Student loan debt delinquency Borrowing for college

4 Should I Go to College? An Investment Decision (Example is for Full-Time Student) Benefits: Future Earnings (above what a high school grad earns) Enhanced Consumption ( the more you know, the more you know ) Costs: Tuition and Fees Borrowing Costs (to be discussed) Opportunity cost of time (foregone earnings while in college) Psychic costs (real but hard to measure)

5 Other Considerations Role of age/expected work life, college major, relative earnings of college vs. high school, and individual factors like personal motivation, failure risk, etc. Recent St. Louis Fed study examined impact of tuition cost, failure risk, earnings risk, and recent recession College completion rates have decreased as dropout rates have increased Maria Cannon and Charles Gascon, College Degrees: Why Aren t More People Making the Investment?, The Regional Economist, April 2012

6 How Much is Higher Education Worth?

7 Table 8-3 Change in Real Mean Earnings of Men and Women by Education for Year-Round, Full-time Workers, Men Women Education (%) (%) High school 1-3 years years College 1-3 years or more years Source: Blau, Ferber, and Winkler, The Economics of Women, Men, and Work, 7 th Edition, Pearson (forthcoming)

8 Ratio of Earnings of College Graduate Relative to High School Graduate Men Women Source: Blau, Ferber, and Winkler, Economics of Women, Men, & Work, 7 th edition, forthcoming

9 Comparison of Tuition and Required Fees % change UMSL Fees (current $) $4,796 $9,304 94% UMSL Fees ($2011) $6,265 $9,304 49% Public 4-Year ($2011) $4,923 $8,751 78% Private 4-Year ($2011) $25,220 $34,805 38% Source: UMSL figures from UMSL website. All from NCES website.

10 Education Investment Decision Source: Blau, Ferber, and Winkler, The Economics of Women, Men, and Work, 6 th edition

11 Benefits and Costs of 4-Year UMSL College Degree Present Discounted Cost of 4-Years of College Present Discounted Benefit of 4 Years of College Net Present Value (5% discount rate) Men $134,494 $420,714 $286,219 Women $111, ,079 $235,821 Assumptions: Full-time college student, completes UMSL degree in 4 years; Earnings are mean earnings for full-time, full-year worker, calculated for ages (47 year potential work life), at a discount rate of 5%. Note: At a discount rate of up to 13%, the NPV of this investment is positive.

12 Student Loan Debt: The Big Picture Outstanding student loan debt is increasing $966 billion in 2012:Q4 Credit card debt $679 billion Auto loan debt $783 billion More students are borrowing 43% of 25 year olds had student loans in 2012 vs. 27% in % of borrowers are delinquent 90+ days Estimated figure is even higher ~25% given that some of the future debt is deferred (while in school/6 month grace period) and not accounted for in 11.7% figure. Younger groups bear most of the student loan debt: Under age 30, 40% have student loan debt Ages 30-39, 25% have student loan debt Under 40, owe two-thirds of all student loan balances Source: Federal Reserve Bank of New York, Grading Student Loans, March 5, 2012

13 Source: Emily Dai, Student Loan Delinquencies Surge, Inside the Vault, Federal Reserve Bank of St. Louis, Vol. 18, Issue 1, Spring 2013

14 Increasing Prevalence of Student Borrowing

15 Average loan balance: $25,000 Median loan balance: $14,100 Source: Emily Dai, Student Loan Delinquencies Surge, Inside the Vault, Federal Reserve Bank of St. Louis, Vol. 18, Issue 1, Spring 2013

16 Source: Emily Dai, Student Loan Delinquencies Surge, Inside the Vault, Federal Reserve Bank of St. Louis, Vol. 18, Issue 1, Spring 2013

17 Source: Emily Dai, Student Loan Delinquencies Surge, Inside the Vault, Federal Reserve Bank of St. Louis, Vol. 18, Issue 1, Spring 2013

18 UMSL Student Costs and Average Debt Average debt of graduates 2012 $ 27,334 Proportion of graduates w/debt % Nonfederal debt, % of total debt of graduates % In-state tuition and fees $ 9, Total cost of attendance $ 24, % Pell Grant recipients 20%

19 How Much Help is There to Pay?

20 Net Price To Attend UMSL With Grants & Loans

21 How Much Student Loan Debt Can You Afford? STUDENT LOAN DEBT SHOULD BE NO MORE THAN 8-10% OF YOUR AFTER TAX INCOME

22 How Much Will I Earn? Salary information by location: Use in salary negotiations Calculate after-tax income:

23 The More You Make the More You Can Borrow Loan amount $25,50 Monthly payment $ Repayment 10 years Interest Rate 6.8 % Annual Wage Monthly Gross Take-Home Pay Debt/ Income Ratio Accountant I Communications Editor Elementary School Teacher Engineer I $43,831 $45,720 $51,483 $55,769 $3,653 $3,810 $4,290 $4,647 $2,853 $2,952 $3,257 $3, % 9.9% 9.9% 8.4% Monthly payment amount determined from calculator on the following website:

24 Student Debt Impacts Future Spending Use of credit reduces income available for future purchases Lenders consider current debt when making loan decisions Will not extend consumer credit to those with debt loads of 25% or more of their gross income (does not include mortgage)

25 What does this mean for me? $43,831 annual income $3,653 gross monthly income x 25% = $513 $913 total debt allowed -$293 student debt pmt $620 available for all other consumer debt (car payment, credit cards, etc.) $55,769 annual income $4,647 gross monthly income x 25% = $1,161 $1,161 total debt allowed -$293 student debt pmt $868 available for all other consumer debt

26 Estimated Cumulative Earnings Net of Loan Repayment for Tuition and Fees, by Education Level Sources: The College Board, Education Pays 2010, Figure 1.3; U.S. Census Bureau, 2009; The College Board, 2009; calculations by the authors.

27 Average Student Loans Per FTE Graduate and Undergraduate Student in 2011 Dollars SOURCES: Trends in Student Aid website (trends.collegeboard.org), Table 4; NCES, unpublished data provided by IPEDS staff SOURCES: Trends in Student Aid website (trends.collegeboard.org), Table 4; NCES, unpublished data provided by IPEDS staff

28 Cumulative Debt: Attainment by Debt Level SOURCES: Beginning Postsecondary Students Longitudinal Study (BPS), 2009; calculations by the authors.

29 Interest Rates after July 1, 2013 Loan Type Direct Subsidized Loans (Undergraduate Students) Direct Unsubsidized Loans (Undergraduate and Graduate or Professional Students Direct PLUS Loans (Parents and Graduate or Professional Students Perkins Loans (Undergraduate and Graduate or Professional Students) Rate 6.8% 6.8% 7.9% 5.0%

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