US Student Loans

We have heard about the middle-class squeeze in the United States that has been going on since the 1970’s. What is it? It involves the following: fast rising oil prices, loss of manufacturing jobs, runaway health care inflation, fast rising housing prices, and ballooning student loans. These are really eating into the American Dream which is all about good prospects for the middle class such as a job, a house, a car, higher education, and accessible inexpensive medical care.

Student loan for a college education looks like an unprecedented rip-off. To illustrate, a California resident in 1971 paid about $500 annual tuition to attend the University of California. Today, the tuition is $13,000. If you attend a private college, the tuition can go as high as $40,000 per year. During the same period, the minimum wage rose from $1.65 to $10.

During the good old days when my cousin went to college in California, He only needed to work about 300 hours at the minimum wage as a waiter to earn enough money to pay his tuition. This means 8 weeks of full-time work (40 hours per week) during summer vacation. Or he may work more weeks part-time spread out through the year. In today’s world, the average college student has to work 1300 hours or 33 weeks full-time! Where can he find the time for school?

As a consequence, 60% of American college students have to borrow money from the bank to pay for tuition. According to the Federal Reserve Board of New York, there were about 37 million borrowers of student loans in 2012. The average loan was $24,000. About 160,000 students owed more than $200,000. By 2014, the average student loan has increased to $33,000 (TIME, 2 June 2014, Page 5).

The total amount of student loans has now reached nearly one trillion US dollars. This staggering sum has already exceeded the amount of all consumer loans combined. If a critical mass of students default during an economic downturn, the banks will ask for a government bailout again equivalent to the size of the bailout during the financial meltdown of 2008.

The banks are more than happy to lend to college students because they are at the prime of their age and have better chances of finding a good job. When the banks are glad to lend, the colleges will be glad to raise tuition without thinking about affordability.

What is the excuse for this frenzy? The private colleges say they need to raise tuition much faster than the rate of inflation to maintain quality. The public colleges say they must follow the private ones because they need to compete in view of decreasing funding by the state. The banks say they are dedicated to helping the students achieve their dreams. The government has to reluctantly guarantee the loans to please the students who have voting power starting age 18. What do the students say? Carrying a large loan even before they graduate, the students are too busy thinking about when they can pay off their loans with interests.

June 2014

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