For millennials across the political spectrum, student loan debt may be the number one educational and economic issue, and it’s taken center stage for the 2016 presidential campaign. According to the White House, almost 70% of students who earn a bachelor’s degree will graduate in debt. Far beyond individual burdens, student loans have become a generational issue and a ticking time bomb for the American economy. Those carrying student loans may be unable to make large purchases like cars and homes and may delay getting married, starting a family, starting a business or saving for retirement.

Edvisors, a college planning website, found that the average debt for the class of 2015 will be over $35,000 for a bachelor’s degree. That number jumps to $51,000 for a master’s degree, $71,000 for a Ph.D. and $207,000 for medical school. The Federal Reserve reported early last year that the 40 million Americans with student loans have accumulated $1.27 trillion in debt, an amount only that is second to mortgages in consumer debt. According to the Federal Reserve, since 2004, the amount owed in student loan debt has almost multiplied fourfold and the number of defaults has nearly doubled.

Presidential Hopefuls Respond

Democratic hopefuls Senator Bernie Sanders and Hillary Clinton both have detailed plans to address the student loan debt crisis. The Vermont senator's College for All Act eliminates tuition at public colleges, caps student loan interest rates at 2.32 percent, and allows borrowers to refinance at lower interest rates. Clinton’s New College Compact calls for tuition-free community college, reduced public college tuition (so no loans are required), the ability to refinance loans and colleges being held more responsible for costs as well as defaulted loans. On the other side of the fence, Republican hopeful Senator Marc Rubio has the Dynamic Repayment Act, which pegs repayment rates to income and offers partial loan forgiveness after 20 years and complete loan forgiveness after 30 years. Even Republican hopeful Donald Trump has come out against student loans as a profit center. While he has no formal student loan platform, Texas Senator Ted Cruz said he only recently finished paying off $100,000 in student loans but voted against a 2014 bill that would have made it easier to refinance student loans at lower interest rates.  

During the November 2015 FOX Republican Presidential debate, Senator Marco Rubio, who himself only recently paid off $150,000 of student debt, suggested promoting vocational training over college degrees. “Welders make more money than philosophers,” said Rubio. “We need more welders and less [sic] philosophers.”

Great soundbite, except it’s not true. Both philosophy professors and those with philosophy degrees make a higher starting salary than welders and this gap grows substantially over time. According to Payscale.com, the average early salary of a philosophy major is $42,200 and the mid-career average is $85,000. And the the Bureau of Labor Statistics shows that the median salary of a philosophy professor is $63,630 while the median salary of a welder is just $37,420.

It’s a point not lost on millennials. They know that a bachelor’s degree is a minimum competitive requirement to succeed in today’s workforce. To secure their futures, they take on the burden of enormous student loans. As the price of higher education continues to skyrocket, most will carry these loans well through their young adulthood and even to middle age and beyond.

A Perfect Storm

How did we get here? Decreasing public support for higher education, skyrocketing tuition costs and inadequate financial aid form the perfect storm for today’s student loan crisis. As mentioned earlier, a college degree is vital in today’s workforce. In past generations, those without a bachelor’s degree could still make it. In 2014, a report from labor analytics firm Burning Glass showed that while only about 40% of managers hold bachelor’s degree, nearly 70% of new management job postings require a bachelor’s degree.

At the same time that bachelor’s degrees have become more important (which increases their demand), there has been a trend of decreasing state investment in higher education. Colleges and universities have plugged this budget shortfall by jacking up student tuition. So how to students pay for higher tuition? The basis of a student's financial aid package is the federal Pell Grant. These are free, government, need-based grants that do not need to be repaid.

The Institute for College Access and Success, a think tank that specializes in the affordability of college, has found that the size of Pell Grants have dwindled in real buying power over the past four decades. According to the Institute, in the 1980s, the maximum Pell Grant amount covered more than half of the costs at a four-year public college or university. Today, that same grant allocation doesn’t even cover a third of those same costs. Whatever a student cannot cover through Pell Grants, work, or help from mom and dad end up coming from student loans.

Delaying Home Ownership

The student debt crisis is changing the shape of the American Dream. Loan repayment is delaying when college graduates can begin to purchase the large-ticket item--like cars, condos and homes--that drive economic growth. It’s also difficult to responsibly get married, start a family or save for retirement when a substantial portion of your income is dedicated to paying off student loans. 

The Census Bureau tells us that among Americans under the age of 35, homeownership from the first quarter 2005 to 2015 dropped from 43% to 34%. This makes sense being that the 30-somethings are the age group most adversely affected by the increase in loan debt. Since the financial crisis, they went back to school and saw their outstanding debt nearly triple.

If there’s an increase in defaults from this escalation in debt, its effect on credit-ratings--in an already stringent lending environment--could be catastrophic to the housing industry. Not only could this prove devastating to housing starts, but as the aging Baby Boomer generation looks to sell, who are they going to sell too?

And then there’s the effect that the student loan debt crisis is having on job creation.

Stifling Entrepreneurship

Student loan debt is an obstacle to entrepreneurship, an engine to new business and job creation. A joint research project conducted by the Federal Reserve Bank of Philadelphia and Penn State found that an increase in student loan debt is correlated with a decrease in the creation of small businesses.

Mark Zandi, chief economist at Moody’s Analytics, spoke at an event last year where he used Labor Department statistics that demonstrated the fall-off of job creation derived from new businesses spanning the last three decades. In the 1990s, new businesses were generating in the neighborhood of 7 to 7.5 million jobs per year. In the year ending June 2014, that number was down to 5.2 million jobs per year.

The Bottom Line

The groundswell of support among younger voters for Democratic presidential hopeful Senator Bernie Sanders is no fluke. When you toss around the idea of free tuition to young voters, you speak directly to their ability to secure a future. To appeal to millennial voters and ensure the health of the American economy, the 2016 presidential candidates must address the student loan debt crisis.  

 

 

 

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