The Lifetime Earnings Myth Part II: College Grads only earn $732576 more than High School Grads

Posted by Student on 2009/03/13 @ 1736 Comments (2) (show tags and categories)

If you are fortunate enough to be in college right now, or if you ever went to college, then you are probably aware of the statistic that proclaims, “college graduates earn $1,000,000 more than high school graduates.” On this basis, you may have rationalized student debt as being a necessary liability for achieving this higher lifetime earning potential. It’s easy to see where this mythical million comes from: according to the oft-quoted statistic, by the time college grads retire they will be earning about $25,000 more per year than high school grads. Multiply that figure by 40 years of productive labor, and you get $1,000,000.

Student Loan Bubble recently discussed one major problem with this figure: new college graduates will only earn $7000 more per year than their high school peers, while shouldering significantly more debt than high school-educated workers. Additionally, high school grads will have at least four years worth of income before college grads even enter the workforce. The take home message from the first Student Loan Bubble article is that recent grads are facing a very real risk that they won’t be able to manage their student loan debt with such a meager income increase, at least during the first few years.

The first article provoked some interesting feedback such as the question, “what happens later in life?” In this article, Student Loan Bubble presents two graphs of lifetime earnings, which were calculated based on median income data from the US Census. The census provides data in 10-year aggregates, so Student Loan Bubble assumed a yearly pay raise that would make yearly earnings consistent with the census aggregates. After determining yearly income, Student Loan Bubble determined the cumulative income between the ages of 21 and 64.

The first graph presents yearly median incomes of High School and College graduates. You can click for a higher resolution version. Notice that the gap is not major while workers are young, and that by age 35, everyone has nearly achieved their maximum earning potential. It is difficult to perceive, but high school workers actually notice a slight pay decline between age 55 and 64.

student-loan-bubble-median-yearly

Next, Student Loan Bubble presents cumulative earnings, and these results might surprise you. By the time workers are 64, college grads will have earned $1,991,574 while high school grads will have earned $1,258,998. These are median figures, which means that 50% of workers will earn less than these amounts. The difference in median lifetime earning is $732,576, which is less than 75% of the fabled $1,000,000.

student-loan-bubble-median-cumulative

Consider, too, that it not unusual to pay $120,000 to attend a private university for 4 years, and the earning difference drops to approximately $600,000. Once interest expenses are included in this figure, and accounting for the very real risk of penalties for late payments, the earning difference will be reduced even further. It should be reiterated again that these are all median data, which are a robust measure that is not affected by high-earning outliers.

It is plainly evident from these graphs that college graduates can expect to earn more with their degree, but the exact amount of this earning difference deserves to be scrutinized. The next step is to examine the upper and lower quartiles to see how the relationship looks. Student Loan Bubble predicts that the earnings gap for the 25th percentile will be somewhat lower than the median difference, and that the 75th percentile will show a much larger income difference.

It is the conclusion of Student Loan Bubble that the $1,000,000 lifetime earning difference truly is a myth that is not supported by the median income data. In the case that this myth has been used to justify excessive student debt liabilities, it is possible that some students will be seriously disappointed by their lifetime earning potential.

Supplement: A CSV file is available to download here, for anyone who wishes to give these data a closer look.
student-loan-bubble-lifetime-median-income.csv

Is student loan forgiveness the answer?

Posted by Student on @ 1125 Comments (2) (show tags and categories)

Many sectors of the economy, from banking to insurance to manufacturing, have all received extremely sizable public assistance in order to repair their damaged businesses. To be clear, these “bailouts” are actually offsetting the losses from disastrous decision-making or failed business models. If the economy were not being affected en masse, these same businesses would probably be allowed to fail, because every indication is that they have failed.

What, then, about those who used debt to create real value? What about the companies that leveraged their debt and invested wisely? What about the individuals who used debt to pay for education? This line of reasoning is loaded, because it takes as a presupposition that “Education is Valuable.” With the caveat that some people might argue over the true value of education, Student Loan Bubble will take it as a given that college usually does increase an individual’s capacity to be a productive member of society.

At what point did we collectively decide that our public funds would be used to reward failed businesses? When did we decide we would use public money to send people to school, only to leave them with crippling debt repayments? As Student Loan Bubble has previously speculated, it is entirely possible that the public financing of education has driven tuition prices up at a rate much faster than inflation.

As a nation, are we entirely satisfied to punish the most productive members of our society with debt that is impossible to discharge, when it was probably a public policy error that inflated tuition prices in the first place?

Certainly, this line of reasoning is not without consequence. This is the perfect storm that would trigger the Student Loan Bubble, which would create a new “dark ages” for US colleges and universities who rely on inflated tuition, and would bankrupt even more lending companies. Those securities that are backed by student loan debt would suddenly become “toxic assets” in exactly the same manner as housing mortgages. Government purchase of those newly-toxic assets would, in fact, be a bailout for the student lending industry.

At this point, Student Loan Bubble is not willing to articulate a formal position on the topic, but there are extremely compelling arguments to be made for both sides of the issue. Consider the following article from banks.com…

Excerpt from: http://www.banks.com/blogs/mortgages/2009/03/13/wo…

In a way, it makes sense. How many of us graduated from school with student loan debt? What would we be able to buy if we didn’t have it? How much more would we be able to borrow if we weren’t making student loan payments? The stated goals of our leaders, since the issue of financial crisis reared its head, have all been connected with getting us to spend more money. So why not make it possible?

Student loan forgiveness would be costly, though. The government would have to buy all the loans from the folks it subsidizes to offer low cost student loans, and then forgive the loans. It could work, though, as part of the effort to cut out the “middle man” when it comes to student loans. If the government began making the loans directly to students, rather than paying others to do so, the government could make money on it. And it might go toward reducing the horrendous deficit we’re in.

The housing bubble, explained through fascinating animation

Posted by Student on 2009/03/01 @ 0900 Comments (0) (show tags and categories)

The housing bubble, and the consequent credit crisis, is a very complex system that is elegantly and lucidly explained in the following video, created by Jonathan Jarvis.

There is at least one element missing from the video, which is mentioned but not expanded upon: Credit Default Swaps (CDS), which explain how insurance companies are also included in the flowchart. The Collateralized Debt Obligations (CDOs) are partially insured by CDSes, which is a guarantee that if the CDO stops earning money, the insurance company will pay the difference. Because the CDO market was actually the business of reselling housing mortgages (and we all know how that went) the CDS contracts are now in effect. Now, insurance companies must pay out sums of money that are a large portion of the total mortgage defaults.

Nevertheless, this video is fantastic, and it is a useful tool for learning more about the student loan bubble. In the same way that bankers created CDOs out of mortgages, student loan debt has also been packaged and resold to other bankers and investors. Unlike mortgages, students are not able to default on their loan repayments.

Excerpt from: http://vimeo.com/3261363

The goal of giving form to a complex situation like the credit crisis is to quickly supply the essence of the situation to those unfamiliar and uninitiated. This project was completed as part of my thesis work in the Media Design Program, a graduate studio at the Art Center College of Design in Pasadena, California.

Default: the Student Loan Documentary

Posted by Student on 2009/02/14 @ 0630 Comments (0) (show tags and categories)

After watching the trailer for Default: the Student Loan Documentary, I eagerly anticipate the general release of this film, which focuses on the personal stories of students who have been affected by educational debt. Although there are strong political and financial overtones to the student loan bubble at large, it is important not to lose track of the actual people who will be most strongly impacted.

It is very common to read criticisms of students who have taken on more debt than they can handle, and if this film is able to speak to those criticisms, it will be a significant accomplishment. This challenge involves convincing a wide audience including people who dutifully paid all of their student loan debt, those who required no debt to begin with, those who compromised in order to avoid debt, and those who didn’t go to school at all. With an audience like that, Default might be a very difficult sell.

The following trailer is about 5 minutes long.

Excerpt from: http://www.defaultmovie.com/?page_id=2

Default: The Student Loan Documentary is a feature-length documentary chronicling the stories of borrowers from different backgrounds affected by the private student lending industry and their struggles to change the system.

In 2005 private student loans were exempted of ALL consumer protections. No matter when their loans were taken, many borrowers now find themselves in a paralyzing predicament of repaying two, three or multiple times the original amount borrowed, with no bankruptcy protection, no cap on fees and penalties and no recourse to the law. The consequences are dire, with stories of borrowers in financial and emotional ruin.

Beyond these personal accounts, DEFAULT will explain the differences between federal and private student loans, a subject often overlooked by colleges and high school counselors. It will also give detail on the rise of the private lending industry and of college debt.

While the media has focused on the disaster that sub-prime mortgages have turned out to be, only superficial attention has been given to financial giants which have been profiting by approving loans to low-income students with variable interest rates up to 25%.

As The National Consumer Law Center concluded in their March 2008 report titled “Paying The Price: The High Cost of Private Student Loans and the Dangers for Student Borrowers”, there are ominous signs that “the student loan market is headed for the same fate as the subprime mortgage industry .”

Default is directed by Aurora Meneghello and produced by Serge Bakalian. Keep an eye on the official website, which is www.defaultmovie.com. Student Loan Bubble will keep you posted as this story develops.

Credit cards are a fatally attractive gimmick for managing student loan debt

Posted by Student on 2009/02/12 @ 0630 Comments (0) (show tags and categories)

The student loan bubble is a unique debt situation that spans multiple generations, with the younger doing its best to remain independent, and the older finding itself impotent to help even if it wanted. This requires students to reexamine their consumption patterns, which may have included using a credit card for discretionary items. While this can be seen as a good sign, more troubling is the notion of using short-term debt, including credit cards, in a futile effort to pay for the longer term.

The practice of leveraging credit cards against student debt is a recipe for disaster, because it isn’t the interest rate of credit cards that makes this behavior attractive, it is the debt repayment terms that make the more expensive option attractive. Students are unable to default on their educational loan debt, but they may have more options for dealing with poorly managed credit card debt.

Excerpt from: http://online.wsj.com/article/SB122756709839854439…

Recent graduates traditionally live on a shoestring, but they were often protected by a financial safety net: their parents. Now, as 401(k) balances erode and home values plunge, many families are coping with other financial problems and are less able to help the children.

Mandy Kakavas graduated in 2007 with $25,000 in student loans and $3,000 in credit card debt. Her mother raided her 401(k) to help her daughter pay for a degree in mass communications from the University of California, Berkeley, and can no longer help her financially.

“I look at the headlines about the bad economy, and I feel like I’ve already been there for a while,” she says.

Although Ms. Kakavas has cut corners on dining out and taken a second job to earn extra cash, she says she often uses her credit cards to pay her student-loan bills. In January, a new batch of student loans that were deferred will land.

“It’s going to catch up to me,” she says. “It’s hard to see financially where you’re going to be 20 years from now when you don’t know how you’re going to make payments next month.”

Some are taking out loans to cover the loans. Lindsay Fletcher of Wilmington, N.C., has $50,000 in student loans. To make ends meet for the next couple of months, she has taken out a $2,500 personal loan at a 13.9% interest rate to help pay off her credit cards and student loans, which come out of forbearance — deferment due to financial hardship — in November.

“There’s been a lot of tearful calls to Mom,” Ms. Fletcher says. “And I know that if she could help me, she would. But I don’t want her to have to. That’s why I went to college.” Unlike mortgages and credit cards, student loans are not forgiven in bankruptcy proceedings.