The Heartbreak of Student Debt

Wednesday, January 30, 2013 at 1pm
By John Friedman

As a financial planner, I sometimes hear really sad stories. And sometimes I hear stories that are so . . . repugnant, let’s say . . . that I feel them in my gut and it takes my breath away and leaves a big pit in my stomach.

On the brighter side, I’ve never listened to a story and found myself with one of those impossible-for-normal-folks-to-conjure-up-on-demand constricted-throat lumps, tears welling up in my eyes. I am, after all, a professional (though I have gotten the lumpy-throat watery-eye thing going more than once when clients finished a phase of their work with me and told me that the work changed their lives for the better . . . ).

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Earlier today I read these lines:

Delinquency rates on student loans made in the past two years stand at 15 percent in the U.S. as recent graduates struggle to find jobs, Fair Isaac Corp. said.

The rate for 2010 through 2012 compares with 12.4 percent for loans made from 2005 to 2007, Fair Isaac’s FICO Labs said in a statement today, citing data from October. Average student-loan debt last year rose to $27,253 from $17,233 in 2005, and almost 60 percent of bank managers surveyed in December expect delinquencies to worsen in six months, FICO said.

. . .

With college costs climbing faster than the rate of inflation over the past four decades [JF: Ya think? That’s putting it mildly. Try twice as fast], outstanding education debt has swelled to $1 trillion, more than what Americans owe on their credit cards.

 

Think about that: student loan debt is a bigger overhang on people’s lives than credit card debt.

Not impressed? Then consider this: the number of people with student loan debt is far less than the number of people with credit card debt (if for no other reason than we can surmise that just about everyone in the former category is also in the latter category, while the reverse is nowhere near true).

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So what’d’ya think of those numbs?

My favorite scalar when it comes to trillion-dollar amounts is U.S. GDP — the sum total of all U.S. economic activity over the course of a year. That number stands just a bit shy of $16 trillion right now. So you can think of the $1 trillion student-debt-load right now as about 1/16th of annual GDP, which means that it is three-plus weeks’ worth of U.S. economic activity (365 days times 1/16th = 22.8125 days) (not accounting for leap days . . . ).

That is, if every dollar of economic activity during the next 22.8125 days went to student debt lenders rather than to whom it is owed, then the student debt lenders would be paid off in full.

Does that sound large? If not, then try this on for size.

Ya know that truck you just heard drive by and every other truck like it? Take the money the trucking companies get for trucking today and for three weeks after that and pay it to the lenders. Do the same thing for the money to purchase whatever goods the trucks are moving; payment for those goes to the student debt lenders too.

And how’s about all the money from all the coffee and sugary things SBUX sells today and for three weeks after that? Same. It all goes to the lenders. And while we’re at it, you know those wages you are making today and for the next three weeks after that? Fork ’em over fella / slide ’em this way sista.

GDP is all of it. And student debt is on the same begins-with-a-T dollar-playing field as GDP. It’s big.

And how about that average student debt of $27k? What’d’ya think of that?

For me that number is not one of those pit-in-the-stomach-generator sorts of numbers. Nope. Instead, the numbers that leave me aghast and agog are those that take up six figures, as in $100k or even $200k (yes, there are folks with $200k of student debt, and no doubt some that go well past that amount as well).

More fretful by far is the jump in that average number over the last seven years. Going from an average student debt per person of $17k up to $27k in that short a period means that things have really deteriorated.

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But what’s really a kick in the gut and a near-lump-in-the-throat for me is seeing someone with six-figures of student loan debt when that debt represents the flip-side of some privately owned, for-profit education mill that has jacked up its tuition and jacked down the quality of its offering as it profit-gorged, as quickly and as excessively as possible — gettin’ in on it while the gettin’ was good — on the student loan system that existed during the (as we now know) non-halcyon days of the early years of the Millennium.

And what’d the student get for that? I’ve seen cases where what they got was a really unimpressive credential to do something that they will probably never be able to get a job doing. Arrggghhh! And oh the humanity!

The image that comes to mind is this one, of a dementor sucking the Harry out of Harry:

 

Dementor sucking the life out of Harry. Like how student debt sucks the life out of former students?

A dementor sucking the life out of Harry Potter: similar to
how student debt sucks the life out of former students?

 

For Harry it was a moment or two. For student loan debtors it’s usually their 20s and 30s.

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So what’s to be done?

If you have student loan debt, make sure that you are totally smartened up on it. There are lots of programs for people that limit how much must be repaid and how quickly. And more are coming on line. What you don’t know can and most assuredly will hurt you.

Also, draw a graph of what paying the debt off looks like (I built a tool to do this; please contact me if you would like to use it). Having a picture to look at in which the line for “total debt” continuously goes down and then hits zero at a very specific month out there in the future gives you something to aim for — and visuals speak louder than numbers speak louder than a foggy conception of Gee, I just know it’ll be paid off sometime out there in the future, or, worse, a feeling of sinking resignation of, What’s the friggin’ use? I know this dern thing’ll never be paid off (note the dreaded passive voice sneaking it’s nasty linguistic framing in there . . . does the debtor own the debt or does the debt own the debtor?).

And if you are thinking about taking on student debt — either for the first time or in addition to other debt — really do think about it. This is real money; these are real dollars that you will owe. What’s it going to be like having a five- or six-figure loan around your neck? Is that gonna work?

Six-figures of debt only makes sense if you are apt to be making six-figure incomes pretty darn soon after school. And when I say “apt” I mean the odds should be at least, say, 70% — ask the career center how its graduates are fairing.

And do shop around. State schools can be terrific bargains.

And do negotiate with the school and the lender. No askee no gettee.

And do think about what you care about and love in this world, and ask yourself whether doing the student-loan deal is going to help you enjoy more of it. For some people the answer is for-sure and, for others, it’s probably-not.

In any event, a smaller number is better than a bigger number. Fight like the dickens to keep your total student debt number small.

 

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