Ballooning college debt is troubling
Rising costs, stagnant wages can mean a lifetime of catching up
The roots of the retirement crisis can be traced to the 1980s, when employers began to abandon defined-benefit plans (like pensions) in lieu of defined-contribution plans like 401(k) plans.
You can certainly argue the crisis was caused by the transition itself, which I’d struggle to disprove. But I believe the real issue was the lack of reaction to the changes by the people affected.
Yes, I’m suggesting that when the rules changed – the onus shifting from employers to employees – the employees didn’t react appropriately. Whether they could or couldn’t, employees didn’t regularly contribute an amount of money to the newfangled defined-contribution plans, which would ensure retirement success.
Prior to the 1980s, a person could successfully retire without having saved a dime because most people had a pension and Social Security. When that changed, people’s habits didn’t. Our current collective reality is the result.
Basically, economic trends shifted, and we didn’t. And it’s happening again. Right now.
This time, it’s not our retirement income streams that have shifted. Now, the problem is we’re paying for increasingly expensive college degrees, and the wages we hope to attain with those degrees are disturbingly stagnant. In other words, the cost of college is growing faster than first-year wages for degreeholders. The result is larger-than-ever loan balances, which continue to swell with interest as borrowers seek adequate income for repayment.
Americans hold roughly $1.5 trillion worth of student loan debt.
In a perfect world, first-year wage growth outpaces the college inflation rate. Perfect world. Ha.
The cost of college is a basic calculation. Tuition and fees are X and the amount in student loans needed to pay for that education is Y. Upon graduating, your starting salary is Z. Ideally, you use a portion of Z to get rid of Y as soon as possible. This basic calculation generally worked up until X started getting too large, too fast, thus increasing Y, all while Z stayed relatively flat.
Now for some real-world numbers. According to the National Association of College and Employers, the average first-year salary for new college graduates in 1998 was $34,471, which adjusted for inflation through 2017 is $51,048 in today’s dollars. But the class of 2017’s average starting salary is $50,516. So average wages have decreased about 1 percent over 20 years. That’s not good.
As for college costs, in 1998, the College Board pegged one year of tuition at a public university at $4,740 (inflation adjusted). In 2017, the cost of one year of public university was $9,970. That’s a 110 percent increase.
The takeaway? In the last 20 years, first-year wages went down 1 percent and the cost of the education to earn those first-year salaries went up 110 percent. Even if wage growth is flat or growing at a slow pace, it can’t chase down college cost inflation.
The trend has been accelerating for a generation with little sign of improvement. So, what can you do about it?
Buying the average-priced education seems like a horrible idea, based on the data I just shared, especially if you’re fi- nancing your education with student loans. It’s an especially bad idea if you blindly borrow amounts and your chosen profession could never conceivably guarantee high enough average wages to ever pay back what you borrowed.
Every student and parent should be talking about these numbers. They need to stop crossing their fingers, hoping they are the exception to the rule. Choosing an affordable education and a career field with proper job prospects must become a primary strategy. Each student has to purposefully choose to get off this unsustainable debt path and find viable alternatives. Don’t let this troubling economic trend sweep you away into financial irrelevance.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: “Million Dollar Plan.” Email him at AskPete@petetheplanner.com. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.
Every student and parent should be talking about these numbers. They need to stop crossing their fingers, hoping they are the exception to the rule.