How the Rising Cost of College Affects You
May 4, 2015

Graduation season is just around the corner. Many college seniors will be entering the real world to take up vocations that they studied for expressly during their academic years. At the same time, many high school seniors will also be making up their minds about which college they plan to attend. One of the aspects they will be assessing will be the level of financial aid they are receiving.

Student loans have been in the headlines for many reasons of late. The ever-increasing volume of student loans has long become the second largest form of consumer debt in America – second only to mortgages at present. Yet, the rising costs of college might not be one of the things you worry about.

This might be so if you’re among those who don’t need to repay a student loan. It might also be the case if you don’t have a kid who’s about to enter college (or is in college currently). Despite this, it’s worth remembering that nothing exists in a vacuum. As such, the rising cost of college could be affecting you more significantly than it initially appears.

Why College Costs and Student Debt are Harmful to the US Economic Recovery

According to this article on the NASDAQ website, four interrelated factors highlight why exactly rising college expenses are a major headwind to the economic recovery of the nation. Rising college costs:

  • Raise Unemployment Levels: Higher college costs result in a financial burden on many parents. The higher the volume of debt they bear, the lesser the money they have for saving. As such, they often delay their retirement and stay in the workforce for longer. This makes it harder for younger people to secure jobs.
  • Thwart the Tendency to Save Money: Many college students have significant loan balances to repay even into their 30s. Because they’re busy repaying their student loans, these individuals will often have little (or no) savings. As a result, they will need to work for longer to repay their loans and to save enough money for covering the college costs of the future kids they might have.
  • Foil Home-Buying Plans: A report stated that the rising levels of student loan debt diminished home sales in the Us by about eight percent in 2014. Rising volumes of student loan debts, stagnant incomes and diminished employment opportunities don’t leave students with the savings needed for making a down payment toward purchasing a home.
  • Widen the Class Divide: College degrees improve the employment and potential earning capacity of students. Yet, many students find it hard to secure well-paying jobs even after taking student loans. The situation is direr for those who drop out of college. Oftentimes, they end up with damaged credit, a hefty volume of debt to repay and a job that doesn’t pay well. As such, the rifts between the haves and the have-nots continues to widen.

Each of these factors is likely to affect people in various ways. This is regardless of whether these individuals have any direct relation to student loans or the rising cost of college.

Student Loans Likely to Affect a Part of the Bond Market Too

Recently, Jody Shenn and Matt Scully report on the likelihood of America’s mounting student loan debt impacting a part of the $170 billion bond market linked to government-guaranteed loans.

Shenn and Scully refer to a recent presentation from the Federal Reserve Bank of New York that states that only 37 percent of borrowers are current on their student loans. These borrowers are actively working on reducing their balances. The remaining borrowers are missing their payments or are signing up for relief programs because of the sluggish pace of the economic recovery.

Consequently, as the risks of slowing principal payments or receiving no interest continue to mount, the fallout from the nation’s student loan debt, worth a record $1.2 trillion, is affecting the housing market, consumer spending as well as the taxpayers. Because of this, Moody’s Investors Services announced its plans of lowering the rankings on $3 billion of top-rated debt.

It is worth noting that the government currently guarantees 97 percent of loan balances. Therefore, Moody’s and Fitch Ratings hold the view that even if the quantum of missed payments continues to increase, there is little doubt that the investors will not receive their funds back eventually. Despite this, the threat of downgrades and slower principal payments have forced investors to retreat, resulting in heightening the yields on some top-rated securities.

The Sluggish Pace of Recovery Hurting Student Loan Repayments

In addition, the slow recovery in the job market for recent graduates has also fuelled bond investor risks. The presentation from the economists at the Federal Reserve Bank of New York shows that borrowers in low-income communities have made hardly any progress in paying down their loan balances, even five years after leaving school. At present, these individuals have an aggregate balance worth 97 percent of the amount they left college with.

Shenn and Scully report that yields over benchmark rates for some AAA-rated securities widened this month from the level of 0.35 percentage points to 0.5 percentage points. In addition, data from Nomura Holdings Inc. reveal that the amount of balances in deferment or forbearance for federally guaranteed loans that back bonds rose to 35 percent from 20-25 percent before the financial crisis.

If the bonds end up in default because of a failure to pay them off at maturity, higher-ranking investors in the deal would be able to adjust the cash flows by cutting off payments to junior investors. It could also lead to a slower repayment for some of the senior investors.

Given this backdrop, the fact remains that ignoring the student loan crisis is not of much help. Over the past decade, the levels of college tuition and student debt have outpaced employment opportunities significantly. Starting salaries have witnessed a stagnation too. As a result, the rising costs of a college education no longer affects college students and their families only. It has a significant effect on the broader economy too.