Failure to launch hurts all of us

The debt levels of college graduates have reached crisis proportions. The issue was highlighted last week when President Barack Obama expanded a program in which 5 million more college graduates will be able to cap their annual college loan payments at 10% of their income.

In a memorandum announcing the change, the president noted that the average tuition at a public four-year college has more than tripled in the past three decades, while family incomes have increased only modestly.

That means more students have had to borrow money to attend college. According to the memo, 71% of those coming out of school with a bachelor’s degree have student loan debt, up from 68% in 2008. As of 2012, the average debt level was $29,400, a rise of about 6% annually over the previous four years.

Student loan debt now exceeds the amount owed on credit cards. In fact, it is the largest form of consumer debt outside of home mortgages.

The impact of this rising debt is widespread. Most people know someone, be it a family member, friend or co-worker, who is paying off one or more student loans. If not, many people have children who will eventually be going to college and will face steep tuition bills. For many future students, the only way to afford college is by borrowing money.

Apart from any direct impact, there is a growing awareness that rising college debt is beginning to affect our economy. Even if they have been lucky enough to land a job right away, many recent graduates don’t have much left for anything else after making their monthly student loan payments.

ON HOLD

In the past, these young people might have bought a car, rented an apartment, put a down payment on a house, married, started a family — or even begun saving for college for their children or future children.

Many of those plans are on hold, and a large number of 20-somethings are still living with their parents. This constitutes an enormous drag on the economy in terms of consumer spending that every American should be concerned about.

Financial advisers have begun to observe the effect of college debt firsthand. As reporter Darla Mercado reports in this week’s cover story, graduates hamstrung by college debt are in no mood to talk about saving, investing or starting a retirement fund.

Many of the young people advisers will want as clients are among those with the highest debt levels.

BIG BURDEN

Consider young doctors or lawyers, who ultimately might command an income in the high six figures. But their income is much lower when they’re starting out — and they still could be facing student loans of $150,000 or more.

Based on a 10-year payback at 6% interest, the monthly payment on $150,000 is $1,665. That could easily be one-third or more of their take-home pay.

No matter its cost, a college education is still an investment that studies show pays off for the average American in lifelong earnings. And, despite their problems, U.S. universities remain the envy of the world. From a public policy standpoint, however, we have to come to terms with the consequences of the costs for college, which have outstripped inflation for quite some time, and the ever-increasing debt load of graduates.

Financial advisers would do well to educate themselves on how best to advise clients who are in the process of selecting a college for their children — as well as those leaving college with a stack of student loans. It will only add value to the services you can offer them as an adviser.

Ultimately, sound college financing and loan repayment guidance can free up more money for what will be important to their other long-range financial goals.