Obama vs Romney: What Romney and Obama Will Not Tell You About Student Debt Loans

In a recent PolicyMic article, the question was posed “If you could ask one question of Barack Obama and Mitt Romney, what would it be?”  The following question submitted by Anna Therese Day received an overwhelming response:

“Every election, students play a vital role energizing campaigns. In 2008, both of you supported bailing out struggling financial institutions, which are now making record profits. Meanwhile, the students they lend money to are struggling with increasing debt loads as the price of higher education continues to rise. The amount of student loan debt now exceeds the amount of credit card debt in this country, and neither party seems to have a plan to provide any relief. With millennials graduating tens or even hundreds of thousands of dollars in debt, why should students lift a finger to help either of your campaigns?”

Student loan debt is becoming a national crisis. In June 2012, student loan debt surpassed the national level of credit card debt for the first time in history. The graduating class of 2011 is the most indebted to date, with an average per student debt of $22,900. This is 8% higher than the previous year. This was quite a significant, and obviously unsustainable, increase.

Well, I’m not the president. Nor am I running for president. But as a Certified Financial Planner and co-owner of a wealth management firm, I do help families plan for their goal of paying for college with as little debt as possible. It would be difficult for either candidate to honestly answer this question because, well ... they are running for president and the answers aren’t always popular. Romney’s response was basically “a good defense is a good offense.” The best way to address any debt is to have a good paying job that will allow you to cover your liabilities. Hence, a strong economy will take care of the underlying foundational issue. Obama details specific government programs he has expanded to deal with the problem. In direct response to the president’s answer, I submit a different perspective:

“The President believes higher education shouldn’t be a luxury – it’s an economic necessity for every American . . .. ”

I disagree with the president that every American should have a college degree. Going to college is an economic decision that requires a cost/benefit analysis that is different for every individual. You need to weigh the benefits of a potential job against how much it would cost you to be trained for that job. How many years, at that profession’s average salary, will it take for you to repay your debt? How much are you willing to pay? Is it just an open ended, blank check? Not every degree is worth what it would cost you to pay for it. When totaling your cost, don’t forget to include the lost wages you would have earned during the 4+ years while attending college.

There are numerous jobs that do not require a four-year college education. Trade schools and community colleges provide excellent training for specific career choices. You have to determine what your strengths and interests are first before assuming you need to go to college. Some of the most successful individuals in our country never attended college.  It is presumptuous to assume it is an absolute requirement for success.

And remember, if everybody has a college degree then the value of that degree diminishes for everybody.  If there is an oversupply of graduates, the expected salaries for all degrees will decline.

“That’s why Obama cut big banks out of the student loan system and cracked down on the Wall Street recklessness that led to the economic crisis, putting an end to taxpayer-funded bank bailouts . . .. "

As the president stated, the financial institutions that were bailed out were not lending money to students. In 2012, the government went from primarily guaranteeing private student loans to lending 100% of its student-loan money directly through the Department of Education, turning the agency into one of the largest lending banks in the country. 

But there is a serious problem with this. The government took over another part of the economy, an entire segment of the private market-lending portfolio. Legislative overstep such as this is partly to blame for the U.S. decline in economic freedom. No one asked me if I (as a taxpayer) wanted to go into the business of directly lending money to college students. Based on the number of defaults  ($23.6 billion in the Federal Family Education Loan program and $23.8 billion in the Direct loan program, for a total of $47.4 billion), I’m not sure I want to be in this business. But now I own part of a bank and a couple of car companies, but I only get stuck with the debt and don’t receive any dividends as I would from a traditional investment.

Banks set loan rates based on the current federal funds rate plus a premium to cover risk of default.  Based on that formula, current rates would have been much lower than the 7.9% currently charged at the DOE. That’s because Congress has no idea how the markets work. And a government agency has no business trying to do business in the “free” market.

So from the moment you get a job and until you earn your last paycheck, a portion of your earnings will be taxed and go towards the payment of the student loan program. With average life expectancy for men and women age 75 and 80 respectively, that’s 50 plus years of paying for this program. Maybe you would have been better off just paying your own loans.

“His (Obama’s) student loan reform lowers the cost of federal student loans and lets students repay their loans as a fixed percentage of their income. As long as people make their monthly payments on time, any remaining debt will be forgiven after 20 years – 10 years if they become a teacher, a nurse or serve in the military . . ..”

Offering to forgive debt to individuals who pursue a lower paying career is a negative, reverse incentive program. People are encouraged to borrow from the government and not repay the full amount by going into certain professions. Not a great business model. And “government” always means “taxpayers” are going to be stuck picking up the tab. Why should a family that has saved and paid to send their own children to college be required to pay for someone else’s education?  The motivation moves from individual responsibility to government dependency - a certain deterrent to economic growth.

“He (Obama) created a college tax credit worth up to $10,000 over four years of college and doubled funding for Pell Grant scholarships to help nearly 4 million more students pay for college.”

I do support the college tax credit because it is basically letting people keep their own money to pay for their own expenses. But in other areas where the more government has inserted itself into the economics of college education, the problem seems to have gotten worse (or at best stayed the same). Testifying before the House Committee on Education and the Workforce, economist, Dr. Richard Vader, had the following perspective:

“As many of you have heard me say before, it seems that the more we spend in higher education, the further we continue to fall behind. In fact, some believe government spending may be a hidden culprit in the ongoing inflation of college costs. They point to what seems to be a vicious cycle: Colleges increase tuition. Government responds by increasing spending, and colleges respond by increasing tuition again.”

Other studies have shown that it is difficult to isolate the effect that financial aid has on tuition prices. No exact causation has been determined, but the two do trend together. Private colleges were found to have more of a link between federal aid programs and increased tuition. State universities tended to have a stronger link with state aid programs and in-state tuition increases. 

The University of Oregon’s study demonstrated that increases in Pell Grants appear to be matched nearly one for one by increases in tuition at private universities. The behavior they identified to be most significant was that wealthy and needy students received equal support – certainly not what the program was intended for. So is the government funding of education just adding fuel to the fire of college expenses? It is difficult to determine, but there is certainly at least some element of linkage. We have to acknowledge the possibility that trying to squeeze more money out of the government may never solve the issues related to college expenses.

Keeping Costs at a Minimum

Part of making the right college decision involves asking, “If I even need a degree, do I want a college degree or do I want the college experience?” The cost differential between the two choices is significant. Taking courses through a community college or online colleges for your basics can drastically reduce the amount of required expense if you desire a degree over an experience.

There is no rule that you have to finish in 4 years. If by working part-time, you can’t take as many classes and you graduate in 6 or 7 years – debt free – is it worth it? This is a very personal decision because statistics show that working part-time does lower the graduation rate among students. If you are unable to juggle the stress of working alongside taking courses, consider working a year or two before going to college and save as much as you can to have a “down payment” towards your college expenses.

The truth is, we spend other people’s money different than we spend our own. If your parents are paying all of your education or you have borrowed the majority, it is easier to waste some of those dollars on frivolous, unnecessary courses. Be sure and avoid wasting money on non-essential random classes (classics like “Lady Gaga and the Sociology of Fame” at the University of South Carolina, Columbia, “Harry Potter: Finding Your Patronus” at Oregon State University, and “DJ History, Culture and Technique” at New York University). Don’t take more classes than is required for your degree. The typical bachelor’s degree requires 120 hours, but the average student graduates with 136.5 credits. 

Closing Thoughts

Deciding whether or not to go to college is a huge, economic decision. It is one of the most expensive purchases/investments you will possibly make in your lifetime. Thinking through the ramifications and total cost is crucial to making a good decision. Selecting a career choice that fits your personality is more important than basing the decision solely by what you will earn. Bonnie Hughes, a CFP on the Financial Planning Association’s Board of Directors and a member of the Georgia Eldercare Network, has shared that one of the biggest regrets by her elderly clients is that they didn’t work at a more fulfilling occupation. Make the right choice now to avoid regret later.

If you are already in significant debt, my advice is not to count on the government to assume your debts or provide additional assistance. The reality is that you may be spending the next several years repaying this debt. But it can be done! I’ve seen clients pay off substantial amounts of debt once they set it as a priority to do so. It requires prioritizing debt elimination ahead of other goals, but persistence will pay off and is well worth it.

• A college education is a privilege, not a right.

• The opportunity to attend college will fall more on you and/or your family than any other entity.

• Don’t assume you need an expensive, 4 year degree to be successful

• Don’t assume the government will step in to cover your liabilities

• Start taking control of your own future

Additional Resources:

Debt-Free U : How I paid for an Outstanding College Education without loans, scholarship, or mooching off my parents

Strengths Finder

The Power of Focus for College Students

Example of Cost/Benefit Analysis:

Research what salary you can anticipate with the degree vs. without the degree

Costs:

            Time                                                    4 yrs

            College Costs              4 x $12K         $ 48,000

            Lost Wages                 4 x $24,000     $ 96,000

            Total Costs                   4 years and    $144,000

            Anticipated Debt                                $ 40,000

Benefits:

            Job Availability                                   ?

            Salary with degree                              $ 45,000

Salary without degree                         -$ 24,000

Wage differential                                $ 21,000

# of yrs til breakeven                          $144,000 / $21,000 = 6.85 (10.85 if you include the

          4 of school)

# of yrs til Debt is retired                    Approx. 12 yrs