Repaying loans diverts college grads from buying homes, investing money
Nobody becomes a teacher to get rich, but Andrea Cleary never thought her education degree would leave her broke.
“It's just overwhelming,” said Cleary, 24, of Greensburg. “This is not what I expected my life to be like right now.”
More than two years since she graduated from St. Vincent College, Cleary and her husband, Ben, are scraping by. They both work — she recently left her job as a preschool teacher to work in a program for children with developmental delays, and Ben teaches in an alternative school. For extra money, they coach gymnastics on the side. They pay their bills and have a household income of $64,000. Yet, they've twice been turned down for home loans.
The reason they can't buy a house, Cleary said, is that their student loan debt is too high.
The Clearys offer a case study in what a growing number of economists fear: The weight of student debt is dragging down the housing recovery and overall economy.
In recent weeks, economists from Federal Reserve Chair Janet Yellen to former White House adviser Larry Summers have said high student debt may be preventing households from spending money to fuel economic growth.
The earning potential for college graduates over time appears to justify the cost of education, but some experts say the short-term effect on the economy is cause for concern, as recent graduates put off buying homes and making other financial investments.
Cleary owes nearly $73,000 for her undergraduate education; her husband, $129,000.
Their debt load is higher than the norm — average debt for the Class of 2012 was $29,400, with Pennsylvania among the highest states in the nation at $31,675, according to the Institute for College Access & Success.
Seven out of 10 college students graduate with loan debt. Student debt is more than $1 trillion, quad-rupling from $240 billion in 2003, according to the Federal Reserve.
Not for everyone
Even as schools consider financial models to control tuition increases that outpaced inflation, the economic drag of student debt raises questions about whether benefits of a college education justify the heavy burden of paying for it.
For some people, the answer is yes. But perhaps not for everyone.
“To me, there are some people that are not suited to an academic setting in college,” said Jay Sukits, a professor at University of Pittsburgh's Katz Graduate School of Business. “Everybody is entitled to fulfill their human potential, but that may not entail going to college.”
Americans burdened with college loans lag their peers when it comes to accumulating wealth, according to a report from Pew Research Center. Households headed by a young, college-educated adult without student debt obligations have about seven times the net worth of those headed by someone with student loan debt.
Earning a four-year college degree remains a worthwhile investment for the average student, because higher earnings far outweigh the cost of a degree, according to a report this year from the Federal Reserve Bank of San Francisco. The average college graduate paying annual tuition of about $20,000 can recoup the cost of his or her education by age 40, the report said.
Still, some people worry that the weight of student loans is widening the wealth gap in America.
Two people who begin with the same income can end up in vastly different financial situations, depending on how much they borrowed to finance their educations, said William Elliott, founder of the Assets and Education Initiative at the University of Kansas' School of Social Welfare.
Someone without debt can invest money in stocks, retirement or a home and get a jump-start on accumulating wealth that, over a decade, will put him or her at a significant financial advantage over peers who defer those investments to pay down loans.
“Part of it really is how much wealth you're able to start off with,” Elliott said. “Student debt just eats away at that ability to have a reasonable amount of assets in the beginning, particularly low-income people.”
Not everyone needs to go to college, and some people, including President Obama, tout two-year community colleges and apprenticeship programs as alternatives.
Elliott doesn't dismiss the value of community colleges, but he says promoting them as an alternative for people who cannot afford a four-year degree builds inequality back into the system.
“There is this general mindset that there is this choice. But when you say that, who are you talking to? You're essentially talking to low-income children, because you're not telling rich people, rich upper-income kids, ‘Make a choice,' ” he said. “So then you end up with this steering thing that exists, where you're putting high-achieving, low-income children in two-year colleges, which actually invests less in a student.”
Sukits said that students and families need to be smarter. Spending two years at a community college and then transferring to a university can significantly lower the cost of attaining a bachelor's degree, he said.
Too often, students and families do not understand the real implications of borrowing to finance a degree that may not prepare a student to find a job after graduation, he said.
Students make decisions based on emotions, rather than considering the financial return on their investment.
“The word I hate to hear is ‘passion,' ” Sukits said. “If you're going to take on student loans, you should major in something that makes you marketable to get a job.”
There is no doubt that recent graduates are taking on more debt even as they enter a difficult job market, said Richard Fry, senior economist at Pew. But he doesn't believe the benefits of a college degree are being oversold. Over time, most graduates will realize the benefits even if they struggle now.
“I still say the gains that they are going to experience — they may not be immediate, but they are going to work out over the next 30 to 40 years of their working lives,” Fry said.
Cleary acknowledges she was naive when she signed her loan applications. Loan officers told her that she would “have options” to reduce the cost of paying back her obligations, such as loan consolidation. She since learned that those options don't apply to her private loans.
She doesn't regret going to college. It is, after all, where she met her husband. Both have teaching certificates, and she hopes that, one day soon, she will find a job that puts her degree and teaching certificate to use.
“If I'd have known that I was only going to be making $10.50 an hour, going to college and racking up all this debt, I would've rethought a few things,” she said.
Chris Fleisher is a Trib Total Media staff writer. Reach him at 412-320-7854 or firstname.lastname@example.org.