Is the level of college debt in the U.S. a ticking time bomb? Second only to home mortgages as the largest form of consumer debt, student loans affect nearly 40 million Americans. And an alarming number of borrowers may never recover financially.
Indebted families face a cascading financial burden—with parents paying off their own student loans when they should be saving for their children's education, then paying for those kids' college expenses when they should be saving for retirement.
"If I just make the regular loan payments, I'll be paying until well into my 70s," said Julia Nock, 59, a library assistant from Closter, N.J. Nock, who was 52 when her youngest child started college, borrowed more than $100,000 to supplement her daughter's loans and now devotes her entire salary to repaying it.
"When I finish, I'll have zero dollars available for retirement," she said. "I was incredibly naïve. I didn't think it would be this much of a life wrecker."
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The federal Consumer Financial Protection Bureau estimates that outstanding student loan debt is approaching $1.2 trillion: $999 billion in federal student loans, plus $165 billion in private student loans, which are used disproportionately by high-debt borrowers.
A 2013 Bloomberg report found that tuition costs have increased 538 percent since 1985, compared with a 286 percent rise in medical expenses and a 121 percent gain in the Consumer Price Index.
Individual debt loads may be worse than we realize.
"It's frustrating to me to see the statistics," said Garry Allen, chief college consultant at College Funding & Consulting. "They are usually grossly underreported. They only report the federal student loan balances and don't reflect that 70 percent of students have private student loans in addition to federal loans." He noted also that private loans are typically not reported by the schools.
Recent student-debt levels have been linked with significant wealth loss over a borrower's lifetime. A 2013 study from Demos found that "an average student-debt burden for a dual-headed household with bachelor's degrees from four-year universities ($53,000) leads to a lifetime wealth loss of nearly $208,000" due to lowered retirement savings and home equity.
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According to the report, this translates nationally into a "total lifetime wealth loss of $4 trillion for indebted households."
The housing and vehicle markets are starting to feel the impact of this decline in wealth. A report from the Federal Reserve Bank of New York found that people with student loans are now less likely to hold housing and auto debt, due in part to tighter underwriting standards, higher delinquency rates and lower credit scores.
"Something's got to give—the system is unsustainable," warned Robert Applebaum, co-founder of nonprofit advocacy group StudentDebtCrisis.org. "We keep graduating students into the workplace without the jobs to support them. Someday it's going to collapse in on itself—all these people with debt and no way to pay it."
College debt and affordability hit the national radar screen over the summer when Congress scrambled to pass a bill reversing a steep rate in repayment interest rates.
Last August, President Obama introduced his three-step plan to make college more affordable, which calls, in part, for rating colleges based on value. The plan links federal funding to performance, promotes innovation to cut costs and lets borrowers cap loan payments at 10 percent of income.
Congress is now drafting legislation to reauthorize the Higher Education Act, which expired at the end of 2013. A series of hearings over the past year solicited input on subjects such as college affordability and student financial aid.
Borrowers frequently don't understand what they're getting into.
"Look at who's giving the information," said Kalman Chany, president of Campus Consultants and author of "Paying for College Without Going Broke."
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"There's a disconnect [in terms of goals] because guidance counselors want to get kids into the most prestigious schools; their main competency is admission, not financial-aid planning," he said. "Another disconnect is with admissions offices: Their job is to get people to pay the most they can. It's about leveraging—what's the least they can offer you and you'll still come."
Borrowers often think colleges work like nonprofits, with the mentality of a charitable organization, but they actually have to act like businesses in order to survive, said Chany.
Consumer overconfidence can also be a problem.
"People think 'I'm smart; I can figure it out,' and consequently they make costly mistakes," Chany said.
Did Nock seek advice before taking on her loans?
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"Who would I have asked? There was nobody on my side," she said.
"I'm not a numbers person; I didn't even know what compounding interest was," Nock added. "Even though you're educated, it doesn't mean you're financially educated."