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Student Loan Debt Inhibits American Dream for Many

Pursuit of the American Dream—and higher education—often carries a big price tag.

May 12, 2014
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“The American Dream is a national ethos of the United States, a set of ideals in which freedom includes the opportunity for prosperity and success, and an upward social mobility achieved through hard work,” says Wikipedia.  

Further, “Most Americans perceive a college education as the ticket to the American Dream,” although some warn that soaring student loan debt and a shortage of good jobs may undermine this ticket.

A friend’s daughter is embarking upon her second year in college.  Mom has helped her find financial assistance—a daunting process.

Daughter, frustrated, asked Mom to simply hand over whatever loan form required her signature.

Mom advised that this hastiness was ill-advised—Daughter needed to know well the amount of debt she’d accepted and to consider how its repayment might affect her future.

Pursuit of the American Dream carries a big price tag—debt acquisition requires awareness.

Research findings indicate many are not sufficiently aware of the impact of the student loan debt they accept. Many fail to understand loan requirements and struggle after college to not only land a dream job but to realize other dreams as well with debt’s burden.

‘Education: A debt due from present to future generations.’—George Peabody, entrepreneur and philanthropist

“Over one fourth of college students are not participants in the financial system, over one third do not know how much credit card or student loan debt they currently owe, and they overestimate their future earnings by more than 20%,” notes an Arkansas State University article, “Financial Literacy and the College Student.”  

This is grim news as student debt is the only debt on constant upswing since 2003, and of all types of debt, the highest in 2013.  Of further alarm: “11.5% of that debt is classified as either 90+ days past due or in default.”

However, students obtaining financial information from college personnel are more participatory and knowledgeable of their personal finances, and tend to not overinflate salary expectations.

“These results lend support for the importance of providing some type of financial literacy training to college students.”

Does America Need a Student Loan Debt Revolution?” asks The University of Texas at Austin.  “Young adults between ages 18 and 33 are the first in the modern era to have higher levels of student loan debt, poverty and unemployment, and lower levels of wealth and personal income.”

Student loan debt also delays saving for retirement. This is especially problematic, as this generation will endure changes in retirement plans, the elimination of pensions, and the likelihood of increased taxation.

Further, many young adults are unable to save for house down payments. First-time home buyers wield significant influence in the housing market—with consequences for our entire economy.

“With student loans hitting the trillion dollar mark and the national debt climbing over $17 trillion, it is time for a financial revolution.”

The unsettling news continues as “Student Loan Interest Rates Rise for 2014-2015 School Year,” says Bloomberg.  Interest rates on Stafford loans will hit 4.66%, up from 3.86% last year.

This increase will result in additional payments of $46 annually for each $10,000 borrowed based on 10-year repayment periods.

“Graduates of the class of 2012 who took out loans owed an average of $29,400,” Bloomberg reports. “Seventy-one percent of college seniors had student loan debt.”

‘There is scarcely anything that drags a person down like debt.’–P.T. Barnum, American showman

Meanwhile, “Student Debt Weighs Down Women More.  Blame the Pay Gap,” says NPR.  The year following college, about half of full-time working women and 39% of men directed more than 8% of their income toward debt.

For women, impact of this debt load is heavier, as “college-educated women made 82% of men’s salaries one year after graduating in 2009.”

But ultimately, families also are affected as “carrying outstanding student loan debt can affect whether borrowers make other financial commitments… like buying a home, starting a family, opening a small business” and making retirement contributions.

Marriage makes student loan debt a joint burden.

Another unfortunate lifestyle consideration of student loan debt is posed by The Wall Street Journal in, “Who Is Responsible for Student Loans After Divorce?”  Here, “student loans could outlast many a marriage” and “one of the common misconceptions about dividing debt in a divorce is the belief that educational debt incurred before a marriage always becomes shared, marital debt.”

Ultimately, “debt division is complicated and can vary depending on whether the state applies equitable-distribution, community-property or marital property rules.”

Two important components in student loan debt management for couples:

1. Obtain a prenuptial agreement allocating loan repayment responsibility for debt incurred during the union; and

2. Have honest discussions about existing student debt prior to marriage.

‘Blessed are the young for they shall inherit the national debt.’–Herbert Hoover

College debts are repaid as graduates enter the workforce.  But “Are Recent College Graduates Finding Good Jobs?” asks the Federal Reserve Bank of New York.

This analysis indicates “unemployment rates for recent college graduates have indeed been quite high since the onset of the Great Recession.  Moreover, underemployment among recent graduates… is also on the rise.”

However, those without degrees had even greater struggles finding gainful employment.  “The unemployment rate climbed to nearly 16% in 2010 for young workers without degrees, more than double the peak unemployment rate of 7% for new college graduates.”

This interesting analysis provides an in-depth look at the employment situation for young people and may prompt consideration as to their ability to repay their debts.

One final note on the student loan conundrum is posed by a Gallup-Purdue study, which states “level of debt limits individual success and [the] national economy.”

Some evidence of this: “Three times fewer graduates who took out between $20,000 and $40,000 in undergraduate student debt are thriving in their well-being compared with those with no school loan debt.  Twenty-six percent of graduates with no debt have started their own business, compared with 16% for those with $40,000 or more” in debt.

Student loan debt is a reality for many hoping to achieve the American Dream.

How can your credit union help prevent these consumer realities from becoming a financial nightmare?

 

 

 

 

 

Lora Bray is a research librarian at CUNA.

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