2017 JPH FuturePlanner Scholarship Finalist: Galen Bearden, Texas Tech University

Editor’s note: The following is a submission to the JPH FuturePlanner Scholarship, which is awarded to a deserving student in a financial planning-related graduate or undergraduate program nationwide. Part of the scholarship requirements include an article on a financial planning topic of choice, focused on how the chosen topic relates to current American trends or events. The views expressed are the author’s alone, and do not necessarily reflect the views of JPH Advisory Group. If you enjoy this article, please feel free to share it on your favorite social media platform, as part of the scholarship selection process includes the social media “buzz” that the article receives.

The Challenge of Student Loan Debt

by Galen Bearden, Texas Tech University

One of the most challenging issues that people face in their lifetime is dealing with student loans. The problem of student loan debt is a systemic issue that is a result of some of the fundamental beliefs that society places on the necessity of higher education. The mountain of student debt is serious and needs to be addressed. In a TED Talk, Adam Carroll reported that “1 in 3 students are delinquent, 1 in 5 are in default.” The message given to kids today is that higher education is necessary to be successful in life. This assumption is subsidized by both society through the government and through individual families, by a government willing to lend unending amount of loans to prospective students and parents who will pay any price to give their child a college education. When kids are painted a picture of a life path with only the extremes of flipping hamburgers or a life of power and luxury, parents paying top dollar to fund this dream, and the government giving student loans anyone who asks, universities are a given almost unlimited ability to profit. To solve the problem of student loan debt, we need to reduce the incentive of universities to raise prices by introducing caps on how much they may raise rates each year, as well as creating programs to educate kids on possible career paths they could take, and implementing a rewards program towards those who diligently pay off their student loans.

Capping College Price Increases

Student loan debt is high because college is so expensive. It is expensive because prices have been rising for years at a high rate. USA Today reports that the price of textbooks has increased at three times the rate of inflation. College Board reports that the average cost of tuition has grown at a rate of 3.5%, while median family income has grown at only 0.4% . This means that the cost of tuition has grown nine times faster than income has. These statistics show a clear trend of price increases that outpace inflation and income growth. If this trend continues, the student loan problem will only get worse as people have to borrow more to fund their education. Government regulation capping the annualized increases at the rate of inflation could be a way to halt this trend. With prices tied to inflation, consumers would slowly catch back up to college costs as long as income rises above inflation. This option would avoid causing a major upset in University budgets, and would promote a slow, steady, normalization of prices.

A Variety of Career Paths

Programs designed to educate youths on the variety of career paths they could obtain would also help by reducing the amount of students applying for college. These programs would educate kids on a wide variety of options that they could do for a living. Topics would include college, but also teach kids about other options like trade schools, military service, and non-traditional occupational schools. This would cause Universities to compete for a smaller amount of students, which would encourage them to lower prices to compete. This also help reduce the amount of student debt by reducing the amount of college dropouts. One common problem is that some kids are not interested in a traditional college education, but feel they should still go anyway. This can be from a variety of reasons including a lack of direction, or pressure from authority figures in their life. This group of students will have higher dropout rate than other others. They are a significant risk of student loan default because they either incur additional loans as they muddle through college and constantly change majors as they try to find something interesting, or they dropout and have to pay their student loans off with a lower paying job. High School programs designed to assist kids in discovering their passion will alleviate this problem. Prospective students will be given information and placement on various degrees to help them decide on a choice. Unwilling students will learn about other options that are also viable career paths.

Rewards Programs

Online bank accounts, credit cards, and payment apps have made money feel increasingly intangible. Reminding students that the loans they take out are very real could increase the amount of responsible debtors. Rewards programs much like those used in corporate chains would be a great way to do this. Students would receive rewards points for making payments for a consecutive amount of months, which would be redeemable for appropriate rewards, such as discounts for certain goods. The key to this being successful would be cooperation from corporations. For instance, I imagine many would be more reluctant to skip a payment if that meant on missing out on a free coffee from Starbucks, or a free order of breadsticks from Pizza Hut. If the rewards program is successful, people will be able to equate tangible rewards with responsible debt payments, increasing the likelihood of that happening. Another version of repayment rewards is to offer lower interest rates to those who make steady payments over the years. An interest rate reduction like a quarter of a percent per year of repayment would make a noticeable change in their monthly payments, and would cause debtors to want to keep paying to increase their rewards.

The Bottom Line

The cost of college has for years raced higher. This problem was made possible by a society that was willing to pay any price for higher education. This has created a problem for many recent graduates as they deal with a mountain of debt and a modest income. Solving the problem requires responsibly stopping the colleges from increasing prices, shrinking the amount of students, and rewarding those who diligently pay their student loans. The enormous amount of student debt will create personal finance challenges for years to come, but implementing these changes could bring that amount of student loan debt to a manageable level.

  1. Adam Carroll “When Money Isn’t Real”. TEDX London Business School
  2. usatoday.com/story/money/personalfinance/2014/02/02cnbc-college-textbooks-expensive/5038
  3. https://trends.collegeboard.org/college-pricing/figures-tables/average-rates-growth-published-charges-decade