Amidst the many financial and economic discussions happening around the United States, there is a serious issue lurking right around the corner. Although mortgage rates are around their all time low and consumer borrowing appears to be extremely cheap, the interest rate on the popular Stafford federal student loan program is set to double in July since the Senate could not reach an agreement on a reasonable way to keep the rate at 3.4%. If it isn't obvious at this point, our politicians will just point the finger at one another for their own political gains, but it's our future students who we need to really start worrying about.
I used to think that people getting into credit card debt was our biggest problem amongst personal financial issues for individuals and couples. Then, we saw a period of time (and we are still feeling the effects of it) where people over mortgaged themselves not truly understanding all of the costs involved with home ownership. Now, I have great concerns about our future students and their ability to really afford a college education. It's hard to reach for the stars when you finish college feeling like you're already 3 feet deep in a 6 foot grave.
It's true that a very high percentage of students who graduate with debt hold a subsidized Stafford loan: 70 percent come from families who make less than $50,000; 24 percent from families with incomes between $50,000 and $100,000; and 6 percent from six-figure-income families. However, there are far more urgent priorities for families with college students specifically that the Pell Grant program has become far more arduous to qualify for when it comes to paying for higher education. (source: www.nytimes.com)
The big question becomes, how can future children get a great college education like they do in many countries without starting off life behind the 8-ball? Several months ago, I wrote how we were close to 100 schools in the United States with endowments 1 billion dollars or more. It's time we set forth limitations on these endowments or force schools that raise this type of money to set aside scholarships commensurate with the dollars they have in the endowment kiddy. Colleges and universities are supposed to be not for profit organizations, but they have to help in the cause of keeping costs down so school is affordable for the next generation.
Perhaps we will end up in a situation where a G.I.Bill part II comes about from the Federal Government. The Government could create some way where younger people get involved in helping out their country for a number of years in exchange for some assistance to get a college education. This was a strategy used to get a workforce of highly skilled workers in the 1940's, some of them getting a really great Ivy league school education. The Government may also set some sort of cap on how fast tuition can rise or maybe loosen the rules on some of these 'for profit' colleges to make the playing field even more competitive.
One other thought to this debate is to reset expectations within the public school system. The schools largely encourage every child to get a college education. I'm all for children getting this education if it makes sense for their career direction. However, some kids should go to technical schools to learn necessary skills for blue collar jobs, some should get straight into the workforce until they are mature enough to make the college experience valuable, and some (a small portion) should go to school and get advanced degrees.
I wish there was an easy answer to this. As a parent myself (14, 12, and 10 year old), I think about this topic all the time. Since I do this for a living, I've done a really good job of saving for my children's education but it still begs the debate about what might be best for each of my kids. No matter what, it's important to recognize that $50,000, $75,000, or $100,000 or more can be devastating to the future of someone 21 or 22 years old starting out in life. With job salaries starting lower and finding work more difficult in the 'college educated' jobs, this student debt has taken over quite possibly as the number one problem that will stop young people from reaching their financial goals.
Should I contribute to my 401(k)? Or pay off my student loan? Should I build a savings account? Or pay off my student loan? Should I buy a home? Or pay off my student loan? If you are a parent of a teenager, start getting a game plan in place today or begin having the discussion on how you both think the college education is going to get paid for down the road. With the arguments going on in Congress, I don't suspect a great solution will come up soon. The best smart money moves for your kids to keep their backpack light because those saddled with lots of debt have a hard time building wealth on the climb to the top of the mountain.
Visit to www.oxygenfinancial.net to request a free consultation with the leading financial experts for people in their 20's, 30's, and 40's in the country.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
Co-CEO and Founder of oXYGen Financial, Inc - The Leaders in Gen X & Y Financial Advice
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