The opportunity cost of education and student loans.

Stagnant wages, decreasing buyer power, rising costs, and inflation are realities for the average American citizen. These issues are exponential for college students with student loans. In my early twenties, I had limited financial capability. This became an uphill battle as I did not have a mentor to guide me through opening a checking account and clarifying the differences between an open and a secure line of credit. Over time, my mistakes have showed me that success comes from financial freedom and how it can be a sustainable and achievable goal. I aim to discuss the opportunity cost of education and student loans.?

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Student Loans and their Transition to Student Debt

??????????? According to Investopedia, student debt refers to borrowed money to cover tuition-related expenses. Student loans become debt when the borrower cannot commit to the repayment options. This can create a ripple effect, potentially undermining our progress toward homeownership and retirement.

??????????? According to the Daily Mail (HALFF, 2024), a nurse making a six-figure salary cannot achieve homeownership. Shirin Tajani moved from Pakistan and obtained her business degree in 2002. She faces having to secure a second job to afford necessities. Additionally, a CNBC article (Dickler & Nova, 2024) further explains how a retired parent is at risk of losing their home as they co-signed their daughter for a student loan. As the daughter provided documentation of her disability, this obligation was transferred to her mother who only receives $1,650 through social security. These examples demonstrate the liability of student loans. First, many student loans require a co-signer as the primary borrower has no credit history. This is done as students are categorized as high-risk borrowers and are likely to default on their loans and the loans are transferred to the co-signer, usually a parent. Secondly, because interest on student loans capitalizes, making minimum payments prolongs the life of the loan. Meaning, the minimum payment does not cover the accrued interest being added to the principle. In essence, if the monthly payment followed the accrued interest, one month it would be $150, the next month $300, thus following an upward trajectory to have good standing with the loan.

Meanwhile, there is a rise in federal student loans with one million borrowers owing more than $200,000 (Nova, 2024). According to the article, the contributing factor is rising costs and inflation.

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Rising Cost & Inflation

??????????? What are rising costs and inflation? Many news sources use these terms interchangeably. Rising costs refers to an increase in goods and services. Inflation relates to the decrease in the value of money. For example, a dollar in 2014 could get you a McChicken. However, you require three dollars for the same sandwich today. How does this apply to our education? In 1994, public school tuition prices were on average $4,000. In today’s economy, it’s an average of $10,000. (Dickler & Nova, This is how student loan debt became a $1.7 trillion crisis, 2022)

??????????? Many would argue the value of education. According to the National Center for Education Statistics, the average median household income for a bachelor is $66,000 versus $36,000 with only a high school diploma. While the value of education corresponds to higher-paying jobs, the opportunity cost when applying for skill-set-based jobs as opposed to taking student loans, 40% of students will opt to drop out of college and enter the workforce.

I propose eliminating the option for interests to capitalize. Simple Interest. Simple interest is based on the principal amount rather than the principal and the interest combined.

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Predatory Student Loans

??????????? How did student loans become a trillion-dollar crisis? “Tuition must be accompanied by adequate loans to be paid back after graduation ...” Ronald Reagan said in his 1967 statement on tuition address. What was once a public good, became a commodity for private interest. (Mark J. Drozdowski, 2024) This opened doors for universities to increase tuition. Student loans expanded in 1965 through the Federal Family Education Loan (FFEL) program and with the reauthorization of the Higher Education Act by President Nixon, this gave birth to Sallie Mae. Policies like The Middle Income Student Assistance Act, removed income-based eligibility requirements, and the Auxiliary Loans to Assist Students (ALAS), introduced origination fees on new loans, significantly contributing to the privatization of education financing.

??????????? The most recent filing against Sallie Mae is Villalba V. Navient. In 2022, Navient, formerly Sallie Mae, settled a case over unfair student loan practices. The settlement addressed issues like denying debt cancellation requests, despite evidence of fraud by ITT Tech. Since the 2000’s, Navient has been engaged with predatory loan practices with for-profit colleges in exchange for a steady supply of borrowers. (Warren, 8 Senators Press Navient to Cancel Loans of Borrowers Scammed by Fraudulent, For-Profit Colleges and Servicer Misconduct, 2024) And with loans being transferred to the Higher Education Loan Authority of the State of Missouri by the end of the year, students face a hurdle to stabilizing their financials.

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In Conclusion

??????????? College students frequently must decide between deferring their education or committing to the terms and conditions of a student loan. FASFA, grants, and scholarships are integral to students as they do not require repayment – thus paving the way for students, such as myself to graduate debt-free, and acquire financial freedom.

Works Cited

Dickler, J., & Nova, A. (2022, May 6). This is how student loan debt became a $1.7 trillion crisis. Retrieved from CNBC: https://www.cnbc.com/2022/05/06/this-is-how-student-loan-debt-became-a-1point7-trillion-crisis.html

Dickler, J., & Nova, A. (2024, August 17). This 85-year-old mom co-signed her daughter’s student loan years ago. Now she fears the lender may take her house. Retrieved from CNBC: https://www.cnbc.com/2024/08/17/mom-who-co-signed-student-loan-for-daughter-fears-losing-her-home.html

HALFF, N. (2024, August 26). Nurse, 46, earning six-figure salary and working six days a week says she cannot afford to buy a home after amassing astonishing debt. Retrieved from DailyMail.com: https://www.dailymail.co.uk/news/article-13780571/New-York-nurse-afford-home-student-debt.html

Mark J. Drozdowski, E. (2024, April 24). What Caused the $1.6 Trillion Student Debt Crisis? Retrieved from Best Colleges: https://www.bestcolleges.com/news/analysis/what-caused-the-student-debt-crisis/

Nova, A. (2024, July 29). 1 million people now owe more than $200,000 in federal student loans. Retrieved from CNBC.com: https://www.cnbc.com/2024/07/29/student-loan-borrowers-who-owe-over-200000-become-more-common.html?&qsearchterm=student%20debt

Warren, 8 Senators Press Navient to Cancel Loans of Borrowers Scammed by Fraudulent, For-Profit Colleges and Servicer Misconduct. (2024, April 18). Retrieved from Elizabeth Warren: https://www.warren.senate.gov/newsroom/press-releases/warren-8-senators-press-navient-to-cancel-loans-of-borrowers-scammed-by-fraudulent-for-profit-colleges-and-servicer-misconduct

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