Student loan debt is at a record high at about $1.8 trillion. In a January 2023 report, the analysis showed that the average debt per borrower wasover $37,000 for federal student loans and nearly $55,000 for private loans. But is it really a big deal when incomes are at record highs and the unemployment rate is at a record low? Probably not.
Duringmy New York trip, I stopped by Princeton, New Jersey to attend a college friend's wedding. We were Spanish House housemates who used to flip on CNBC before class and dream of one day making it on Wall Street. This was back in 1998 when working in finance was all the rage.
Although he never made it into finance, he did something better. He became a cardiologist andmarried an opthalmologist. In terms of finances, their household is set for life. After all those years of training, I wouldn't expect anything less.
According to the Association of American Medical Colleges,84% of all 2014 medical students graduate with debt, and the median debt level is $180,000. That is a ton of money to be paying back. Or is it? Let's look at why the “student loan crisis” the media harps on and on about is overblown.
Student Loan Debt Is Relative To Income
Let's say my friend the cardiologist graduated with $180,000 in student loans. Is that really so bad if the median salary for a non-invasive cardiologist is $250,000, and $400,000 for an invasive cardiologist? I don't think so, especially given the high certainty for lifetime employment for doctors. There just aren't enough.
After a 30% effective tax rate, $250K and $400K equals roughly $175K and $280K. Breaking the numbers down even further, $175K is about $14,583 a month, while $280K is about $23,333 a month in income. Let's say my friend goes through an aggressive 10 year student loan repayment plan at a conservatively high 5% interest rate, his monthly payments would be $1,909.18 or just 8-13% of his after tax salary.
If he were to refinance his student loan with Credible, I'm sure he could get lower than 5% because he went to William & Mary, Columbia for his Master's in Public Health, Yale for Medical School, and Cornell for his residency!
Fintech firms are addressing the vastly underserved demographic of recent graduates with a tremendous amount of earnings potential, but not a lot of money just yet.
OK, I understand not everybody hasthe intelligence or grit to become medical doctors. I certainly don't. I just usedthe highest student loan debt figures cited by the media and match it with a common example to showhow affordable student loan debt may actually be.
Average Student Loan Debt In America
Now let's talk about people who go to college and don't go on to get a graduate degree. The following chart shows the average student loan debt per borrower. We're at record highs at ~$40,500 for the latest class of college graduates of 2022.
Although graduating with $35,000 in student debt sounds like a lot, to gain some perspective, let's compare this debt to median income.
According to the Labor Department, the median weekly salary for those with at least a bachelor’s degree is around $1,193. Let's say the median person works 49 weeks a year. That's an annual salary of $58,457. To be more conservative, let's round down the figure to $55,000.
If we plug $35,000 of median debt into a student loan repayment calculator using a 10-year payoff term and a 5% interest rate, we get a monthly principal and interest payment of $371.23. Let's continue to stay conservative and use a 30% effective tax rate on a $55,000 income. We get $38,500 a year net, and $3,208 net a month.
A $371.23 monthly student loan payment is only 11.5% of a graduate's monthly net income. With over $2,800 a month to live life andsave for retirement, unless the person is completely fiscally irresponsible, is his/her student debt really so burdensome? I don't think so.
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What About Private School Tuition?
While I was at Princeton, I spoke to some Princeton students and Princeton employees at the admissions office about the cost to attend. Here is the official breakdown of Princeton's tuition and expenses for 2022-2023:
The cost of attendancefor 2022-23is $79,540 and includes:
- Tuition: $57,410.
- Room charge:$10,960.
- Board rate:$7,670.
- Estimated miscellaneous expenses:$3,500.
Damn, Gina! That's a ridiculous amount of money for college. $79,540 means one has to spend 100% of a$100,000 gross income after tax. With the median household income around $75,000, who can afford that?
RICH PEOPLE Are Paying Full Tuition
Private schools have a disproportionate amount of higher income earning households than state schools. That's common sense. I have literally talked to thousands of private school students and now parents during my time working in finance and through this website.
Not everybody can be as rich as Democratic Socialist AOC and attend expensive private universities like Boston University. Most people are not rich enough to pay so much in tuition to encourage socialism.
But let's not assume private schools only consist of kids whose parents make six figures or more. If your child is smart enough to get in, but comes from a middle class-to-lower income household, then attending collegemight be free or at least highly subsidized!
Private University Tuition Subsidies By School
Check out thesubsidies given by the following 10 private schools assembled by Bloomberg. Tuition rates are about 20% higher for 2023-2024.
1. Princeton
Tuition for 2015-16: $43,450
Acceptance rate for the Class of 2019: 6.99 percent
Policy: Families making less than $54,000 a year don't pay tuition, room, or board, andfamilies making less than $120,000 a year don't pay tuition.
2. Brown
Tuition for 2015-16: $48,272
Acceptance rate for the Class of 2019: 8.5 percent
Policy: Families making less than $60,000 don't pay tuition, room, or board.
3. Cornell
Tuition for 2015-16: $48,880
Acceptance rate for the Class of 2019: 14.9 percent
Policy:Families making less than $60,000 don't pay tuition, room, or board.
4. Columbia
Tuition for 2014-15: $51,108
Acceptance rate for the Class of 2019: 6.1 percent
Policy:Families making less than $60,000 don't pay tuition, room, or board.
5. Duke
Tuition for 2015-16: $47,650
Acceptance rate for the Class of 2019: 11.3 percent
Policy:Families making less than $60,000 don't pay tuition, room, or board.
6. Harvard
Tuition for 2015-16: $45,278
Acceptance rate for the Class of 2019: 5.3 percent
Policy:Families making less than $65,000 a year don't pay tuition, room, or board.
7. Yale
Tuition for 2015-16: $47,600
Acceptance rate for the Class of 2019: 6.5 percent
Policy:Families making less than $65,000 a year don't pay tuition, room, or board.
8. Stanford
Tuition for 2015-16: $45,729
Acceptance rate for the Class of 2019: 5.05 percent
Policy:Families making less than $65,000 a year don't pay tuition, room, or board, andfamilies making between $65,000 and $125,000 a year don't paytuition.
9. MIT
Tuition for 2015-16: $46,704 (includes mandatory fees)
Acceptance rate for the Class of 2019: 8 percent
Policy:Families making less than $75,000 a year don't pay tuition.
10. Dartmouth
Tuition for 2015-16: $48,120
Acceptance rate for the Class of 2019: 10.3 percent
Policy:Families making less than $100,000 don't pay tuition.
Middle Class And Lower Households Don't Pay Full Tuition
As you can see from the data, a lot of middle class to lower income students don't pay the rack rate and that's a GOOD thing. Those students who make above the policy cutoffs will get prorated assistance as well.
There's this big uproar against soaring private school tuition costs.People feel it's unfair that only the rich can afford to send their kids to elite private schools.
Here's a post that shares how much certain rich folks would be willing to pay extra to get their kids in. We already know that rich people have advantages over the rest of us. And coming from a , I couldn't help but feelthe same way as most.
But after speaking to people at Princeton and highlighting the subsidies in this post, we should actually want listed tuition prices to rise as high as possible!
With high tuition prices, colleges have more flexibility to smartly charge their richest students the highest prices to help subsidize those students with lower household incomes. Ah-ha! A silver lining.
For those curious, here's the median income earned by Ivy League graduates.
Student Loan Debt Is Manageable
So far I've demonstratedthat student debt can be manageable for those who've taken out the most debt (doctors). I've alsoshown that student debt should be manageable for the median person who graduates from college.
I've evenshown that the rack rate for private school tuition is not necessarily the amount a student actually pays. We haven't even touched upon how many people can save a ton of money going to a public school like I did or attend community college for two years and then transfer to a publicschool for even more savings.
The cost to attend college is directly proportional to a student's ability to pay.That a person is able totake on $100,000 in credit card debt is due tothe fact thatthat person has a high enough income to afford it. No credit card company just gives that much credit to anybody just like how nobody pays $60,000 a year for college if they can't afford it.
Rational peopleresearch the graduation rates, job placement rates, the median salaries of graduates, the school's rankings in the various polls, internship opportunities, the most popular employers, and so forth because college is expensive and takes years to complete.
The same goes forhow plenty ofrational investors who want to maximize returnsdevelop a system to allocate capital.
Only Few Students Get Snowed Under By Student Loans
Although every student hopes the perfect job is waiting upon graduation, few students are so delusional as to think employment is guaranteed. Few people would not run acost/benefit analysis of college or graduate school before spending years of their lives and tens of thousands of dollars. There is no sure thing except for how hard one can work.
Even with the national unemployment rate at ~5%, and the unemployment rate for college graduates at ~2.7%, there will alwaysbe students who graduate with debt, andbecause they haven't found a job or theideal job, some will have difficulty meeting their loan repayment obligations. Many might even have to move back in with mom and dad, the wealthiest generation in the history of the world.
However, if college graduateswant to work, it's not like they'll stay unemployed forever. While searching for an opportunity, there are plenty of lowwage jobs to take.You can also apply to work for thestate, federal, local or tribal governments, nonprofit organizations with a 501(c)(3) tax-exempt status, AmeriCorps or the Peace Corpsto take advantage of the Public Service Loan Forgiveness program as well. Nobody is too proud to work.
So for all those people who think the $1.8 trillion student loan bubble is the next to burst, relax. We've got fintech lending companiesmaking student loan repayment much more manageable since big banks are too inflexible to change.
The rack rate tuition highlighted by colleges is only paid by those families who can afford to pay. And the sharing economy has created a plethora of freelance opportunities to help people make ends meet. Where's the crisis folks?
The problem is, there is a war on meritocracy now. This is leading to a lot more angst and anxiety from parents and students alike. It's hard to get free money through grants and scholarships, even if you are brilliant.
Summary For Student Debt Sufferers
1) Refinance your debt.Check out Credible, a student loan marketplace that has qualified lenders competing for your business. Credible provides real rates for you to compare so you can lower your interest rate and save. Getting a quote is easy and free. Take advantage of our low interest rate environment today!
2) Side hustle. Do not be too proud to take on a minimum wage job, or non ideal job while you search for your ideal job. Getting your ideal job is like winning the lottery. Often times, it takes a lot of paying your dues and a couple job hops before you get there. There's a massive sharing economy that lets you contract your services at $10 – $30/hour. Do that 40 hours extra a month, and you've got an extra $400 – $1,200 right there.
3) Cut expenses to the max.News flash. You are poor! Do not be too proud to live at home with your parents, share an apartment, share a room, take the bus, ride a bike, walk, and wear old clothes. If you are poor, don't act rich. Act poor! The biggest problem is folks expecting to get rich immediately.
4) Do not drop out. The worst thing you can do is go to college, incur a ton of student debt, and then drop out without getting your degree. If you are unsure of college, go to Community College for a year or two and test the waters. CC is an inexpensive option that allows you to transfer credits over to a four year school if you so choose.
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