How College Debt Creates Indentured Servants
It’s no secret that college debt is a major factor preventing millions of grads from making a down payment on a house. It’s also no secret that college debt is at its highest levels than any other time in U.S. history.
The surprise is that high housing debts impact a student borrower’s ability to build a retirement account, distorts the housing market and crates a permanent underclass of renters in certain American cities.
According to a new study by Credible, the average student loan debt load among those who borrow is $37,173, and the average borrower monthly student loan payment is $655. This is money that could be used to fund an average borrower monthly housing payment of $1,231, according to the study.
And which cities are the most affordable for college grads?
Dallas, Jacksonville, and Houston rank at the top, while San Jose, Fort Worth, and Boston are the least affordable, where more than 30% of borrowers’ average monthly income is dedicated to loan and housing payments.
The percentage of monthly income that should be dedicated to housing expenses is about 25% and the study shows cities that have a range of 31% (San Jose) to a low of 26% (Dallas.) The tradeoffs in choosing a city to live pivot on cultural accessibility, climate, locations, living amenities, location of friends and family and job market opportunities, so making a decision where to live is not only based on the percentage of monthly income devoted to housing.
What is important is that college expenses have far exceeded the rate of inflation for the last decade. According to The College Board, the average 2014-2015 tuition increase was 3.7% at private colleges, and 2.9% at public universities. However, looking back at the last decade, the 10-year historical rate of increase is approximately 5%. That tuition inflation has often happened as colleges have become big business, accompanied by a rise in for-profit schools that often fail to deliver on their job-boasting promises.
Compared to the Consumer Price Index (CPI), college costs tend to increase, on average, by about twice the consumer inflation rate. This chart show tuition inflation is about 3.5% to 4.0% higher than CPI-U. A 2012 Forbes article found that college costs have been rising roughly at a rate of 7% annually for decades. Since 1985, the overall consumer price index has risen 115% while the college education inflation rate has increase nearly 500%.
Why has college become so expensive?
It’s a complicated answer, but the answers hinges on increase and decreases in federal and state subsidies, accompanied by an increase in bloated college administrative positions that don’t actually directly benefit students.
Then, there is the issue of socialized vs. for-profit nations. In countries with free or near-free medical care, colleges are also free or charge minimal tuition. This applies to France, the Czech Republic, Germany, Sweden, Norway, Finland, Iceland and Estonia. New York also became the nation’s first state to offer undergraduates who attend a two- or four-year public college free tuition if their families make less than $100,000 a year.
Ironically, in the face of the need for more advanced education in advanced democracies, a recent study found that an astounding 58% of Republicans said a college education was not necessary or bad for the country. Amazing, but true, and a great commentary on why the Republican Congress and president are pushing America back many decades on all fronts.
So what’s wrong with college grads becoming indentured servants? To the Republicans, it’s good practice for being indebted the rest of your life. It also dovetails with the Republican mantra: “If you’re not rich, blame yourself.”
But home ownership is one of the very few ways to build wealth. Without it, many people will lose out on a major opportunity to make money for retirement. Despite what the Republicans say, America did not become rich as a nation of renters. College debt is preventing millions from home ownership and it is changing the way we view the country.
Don’t Forget Credit Card Debt
Students also use their credit cards and unpaid balances are a major drain on resources. As this graphic shows, American Express, for instance, charges almost 30% APR, but they can borrow at 3%. That interest rate gap comes at the expense of average consumers and is another reason for financial servitude.