College grads earn $1 million more than high school grads in lifetime wages.

Media accounts documenting the rising cost of a college education and relatively bleak job prospects for new college graduates have raised questions about whether a four-year college degree is still the right path for the average American.

The reality: Between 1968-2012 the college earnings premium has averaged about $20,300 (57%) per year more than a high school graduate. Over her lifetime, a college graduate can expect to earn $1 million more than a high school graduate in wages. College is the clearest path to economic prosperity.

The Towering Problem: Student Debt

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For people under 30, student debt increased 257.7% between 2004 and 2015. But for people 60+, debt increased 1090% between 2004 and 2015. While the balances are naturally lower for older people, the percent who hold any balance has increased dramatically; how can we explain such higher debt burdens for older people today? One answer is to understand that more people today have a harder time paying off student debt, even into their 60’s. From 2003 to 2010, the number of people with quarter-over-quarter higher student debt doubled from 10 to 20.4 million borrowers (27.5 million including those in delinquency and default). This is because of wage stagnation; individual year over year wage growth was approximately 3.6%, in 2017, up from prior years. However, 2017’s year-over-year inflation rate of 1.8% readjusts real change in purchasing power to just 1.8%. This means its much harder today to pay off debt, including student loans.

Student Debt Increases Your Tax Bill

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Entitlement programs are essential supports to keep America’s student debt load afloat; 611,598 are enrolled in Public Loan Service Forgiveness, 1.68 million in extended repayment plans, 2.62 million in pay-as-you-earn plans, and 3.62 million in income based (or income contingent) plans. Nevertheless, 3.6 million borrowers are in deferment, 2.6 million in forbearance (a more serious form deferment), and 4.3 million in outright default. Collectively, 287.9 billion dollars of student loans are repaid late or not at all. Student debt makes up 11% of the USA’s total 2017 second quarter consumer debt of 12.84 trillion. Year-after-year, student debt grows. Why? Use logic: our available data shows millennial student debt increased 257% between 2004 and 2015. Between the same period, millennial year-over-year wage growth has shifted from 3.6% to 3.7%. As with the bank bailout of the Great Recession, tax payers pick up the tab for unpaid student debt.

In a striking shift from our European counterparts, even public university students in 2012 graduated with an average of $25,550 of debt. That number is suspiciously high compared to the 2012 average of $32,300 at private non-profit schools. In fact, private schools are much more expensive than public colleges and universities, but also offer far greater financial aid packages than public schools, lowering final debt burdens. This is why it is often cheaper to attend Harvard than a mid-tier public state school.

In a striking shift from our European counterparts, even public university students in 2012 graduated with an average of $25,550 of debt. That number is suspiciously high compared to the 2012 average of $32,300 at private non-profit schools. In fact, private schools are much more expensive than public colleges and universities, but also offer far greater financial aid packages than public schools, lowering final debt burdens. This is why it is often cheaper to attend Harvard than a mid-tier public state school.

Turning To Credit

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High student debt burdens force credit leveraging to afford the daily necessities of life. But millennials are not the most endemically indebted group in the USA; credit card debt peaks for individuals between 45 and 54 years old at $9,096.

This progression makes sense, given the projected break-even point on the earnings premium of a college education falls between 20-30 years after graduation (the earnings premium represents extra cash to pay off debt and increase spending). The average American today holds 52% more debt today than they did a decade ago. It is telling that the only debt category that outweighs credit debt as a percentage of gross domestic consumer debt is student debt; student loans are a “jumping off point” for millennials, a ticket to systemic debt cycles. The trend of shifting purchasing power from cash to credit is most obviously represented here:

This makes sense given that rising student loan debt ties up cash, forcing more people to use credit for daily purchases. Somewhat paradoxically, delinquency rates during a household liquidity crunch are steadily rising for student loans, and falling for credit loans. This means borrowers are having to choose between paying credit debt, or student debt, instead of experiencing the wage growth that could cause both delinquency rates to fall in tandem. Wages are stuck in a “sweet spot” that allows a person to get by, but barely.

The Answer: Financial Interventions

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The data unequivocally supports that a person’s largest and most impactful financial decision is the choice to attend college; the earnings premium of a college graduate averages $1,000,000 more than a high school graduate over a lifetime, but the shorter-term economic burden of student loans depresses the economic mobility of graduates. The data also supports that well-intentioned financial literacy programs are ineffectual. Then, answering the question of how and when to deliver financial education is straightforward: with timed financial interventions, starting before a student takes student loans.

What We Do

Through a network of financial education labs in high schools, Money Study:

  1. Counsels students to best possible financial aid packages for college.
  2. Designs straightforward financial education rooted in real projects and experiences.
  3. Introduces youth to fair financial tools they can use in college and beyond.

Our Market

  • College-bound student only. While current college students, or high-needs students with limited college options could certainly be future candidates for programming, Money Study limits scope exclusively to college bound high school students. This keeps recruitment for new sites simple and targets the biggest change opportunity: student loan counseling.
  • High FRM, high math. When the market outsizes capacity, we turn to schools with both high free-and-reduced-meal rates and high math achievement. This approach balances the required scholastic achievement level with economic need. We prioritize serving these schools over student body size or economic need; we would rather serve 50 students whose academic ability allow them to carry forward the impact of Money Study than 200 students who can not find future value from the program.
  • Not math remediation. We don’t advertise an increase in math test scores, nor does our program serve as a math replacement.

Why Student Loans?

The most impactful consequence of Money Study is leading students to better financial aid packages. Research shows U.S. high school graduates left over $2.9 billion in free federal grant money on the table last academic year. 47% of all 2013 high school graduates didn’t complete this required first step that could’ve earned them Pell Grant money, which unlike student loans, does not need to be paid back. In California, our first market, over 100,000 seniors — about the entire population of high school graduates in New Jersey — could have qualified for Pell Grants if they filed their FAFSA. Students here lost $396,401,205 in Pell Grant dollars. We provide simple counseling to fill what amounts to a knowledge gap in completing this obscure step in college applications.

Why Applied Financial Education?

We choose to limit our market to college-bound high school students, which also limits the opportunities for applied learning with credit cards and bank accounts; most high school students do not regularly use these products. To create applied learning, we design community-based projects related to financial education. To date, our students have designed a cost-of-college tool for the Federal Reserve Bank, provided credit counseling to small businesses in Spanish, and produced a economics podcast about credit in the great recession. By deploying financial projects to the community, students create local change and reap the learning benefits of applied work.

55% rank student loans as their biggest financial concern; mean student loan balance increased from $10,649 in 2003 to $37,172 in 2017.

 

Federal Reserve Bank