At over $1.5 trillion, student loan debt has now surpassed credit card debt. Zack Friedman, “Student Loan Debt Statistics in 2018: A $1.5 Trillion Crisis,” Forbes, June 13, 2018. With a drastic effect on the ability of the millennial generation to keep up, student loans have come to the forefront of many political, economic, and social discussions and studies in recent years. Hit with a crashing economy, millennials were unable to obtain jobs after graduation with wages to justify their education investment. In fact, many were waiting tables or working free internships in the hopes of obtaining full-time employment with benefits in the future. As a result, millennials are not following the typical path they may have dreamed of when they were younger. They are not buying homes. They are not saving for retirement. They are not having children. All of these factors will come to have a drastic effect on the economy in future years.
How Did We Get Here?
Disparity in age. The first and most obvious disparity in student loans is between generations. In 1985, the average cost of private law school tuition for schools approved by the American Bar Association was $7,526 in 1985 dollars, according to the Law School Transparency Data Dashboard. Adjusting for inflation, that cost would be $17,520 in 2018. While inflation has played a large role in the increasing cost of attending law school, the bigger culprit has been the increased tuition rate between 1985 and 2018. The average cost of private law school tuition in 2018 was $47,754 (i.e., 2.7 times more expensive than it was in 1985). Many scholars blame this drastic increase in debt on decreasing public funding and the ability of private schools to continuously raise their tuition with no repercussion and oftentimes no justification except to say that tuition increases every year by the same percentage no matter what.
To compensate for the significantly increased cost, millennials incurred drastically increasing amounts of student loans, which will take them considerably more time to pay. That extra time to pay often translates into less investment in retirement and home ownership. With the cost of education continuing to rise, the disparity in student loan debt among older and younger Americans will continue to increase, unless something drastic is done to control costs.
Disparity in gender. According to a report by the American Association of University Women (AAUW), Deeper in Debt, women who graduated in the 2007–2008 school year have only paid off an average of 33 percent of their student debt, while men have paid off an average of 44 percent of their debt during the same time frame. This is an 11 percent disparity among genders who were all employed full time. The numbers are even more extreme when considering the rate of debt repayment for black and Hispanic women.
There is no more important factor in the debt repayment disparity among genders beyond salary, which is creating an almost insurmountable wage gap for women. When women earn $0.77 for every dollar a man makes, it makes it much harder for women to meet their financial goals, particularly if they are single mothers. Financial concerns also make women more risk-averse causing them to perhaps take a safer job with lower pay.
Finally, despite composing almost 50 percent of law school classes, women law school graduates are not typically recruited or hired at large firms, and even if they are, they are not likely to remain long enough to make partner, which would increase their income to pay off their student debt.
Disparity in race. Disparities in student loan debt and repayment are extremely pronounced when controlling for race. An estimated 86.8 percent of black students take out federal student loans to attend a four-year public college, as opposed to 59.9 percent of white students, according to the National Center for Education Statistics. Rebecca Safier, “Study: Student Loans Weigh Heaviest on Black and Hispanic Students,” Student Loan Hero, Sept. 17, 2018. This is due to the lack of generational wealth in black and Hispanic families, which means they oftentimes have no college savings or parental help through school. Regarding debt repayment, another AAUW study, Graduating to a Pay Gap, found the gap even more pronounced for black and Hispanic women. Compared with the 37 percent of debt paid by white women, black and Hispanic women had only paid 9 percent and 3 percent respectively, even though they were fully employed. Catherin Hill, “Pay Gap Especially Harmful for Black and Hispanic Women Struggling with Student Debt,” AAUW.org, Feb. 8, 2016.
One might ask why is there such a large gap in student loan debt by race? One key reason is income. High student loan debt is often the result of low income. Low income may be due to working in the public sector compared with the private sector or even failure to negotiate a better salary for fear of jeopardizing the job offer. Black and Hispanic students are not typically recruited into the big law firm environment and often work in the public sector for little pay. Even if they receive a big firm offer, they often do not remain with large firms because they often feel isolated or unsupported. With lower incomes, black and Hispanic students frequently are able to afford only an income-based plan, which will more likely than not increase their total loan debt by almost two times the original amount borrowed thanks to compound interest. Further, student debt relief programs like the Public Service Loan Forgiveness Program have paid out less than 1,000 of the almost 100,000 loans available for forgiveness. Black and Hispanic lawyers, many of whom counted on these forgiveness programs, are now facing years of payments due to low income and compounded interest over the life of their loans.
What Can We Do as a Society to Address the Student Loan Debt Crisis?
- Provide opportunities to diverse candidates both women and minorities and have a set salary for every new hire according to his or her position rather than who negotiates the best deal. As previously stated, high debt is often the result of low income. Paying all new employees a set rate according to position will likely lift many women, black, and Hispanic student borrowers to higher salaries that are equal to those of their white, male counterparts.
- Advocate for a reduction in interest rates. Lobby Congress to reduce interest rates for student loans, which skyrocketed after the mortgage crisis. Prior to the 2008 crash, student loan interest rates were notoriously low, usually in the 2–4 percent range on government-backed student loans. After the 2008 crash, those numbers seemed to double for many students seeking to consolidate previous loans or take out new loans.
- Be open and honest, and help those who do not understand the student loan and repayment process. No matter the age, there is always something new to be learned. I have had many discussions with baby boomers who did not realize the extent of the student loan crisis (e.g., how much costs increased, compound interest). Once it was explained, they heartily agreed that something should be done. I’ve also had discussions with high school and college students who had no idea that they would likely have to pay twice the amount of money they borrowed. Only by educating those around us can we prevent future generations from ending up with the same debt burden.
What Can You Do Personally to Avoid the Student Loan Blues?
Societal solutions are great, but let’s be honest—society moves at a snail’s pace and it is unlikely to address this crisis for the many borrowers who are already in it.
- Make a budget and stick to it. You have to have extra money after living expenses in order to afford your student loans. You should sit down no less than once a month and assess your income and expenses for that month. Be honest with how much you are spending so you are not running out of money and using credit cards to make it until the end of the month. The last thing you need is more debt. Once you have your budget created, tracking your expenses is essential to see where your money is going. Once you know where your money is coming from and going to, you will be able to create strategies to save money and put extra toward your student loans.
- Make as many extra payments as you can. I know, I know. We all still want to live and travel and do fun things. These are perfectly OK if they are within your plan and budget. Things go awry when we buy those $200 concert tickets or that nice pair of shoes. Somehow money disappears out of our budget during the month and we have no idea where it went. To put this into context, if you saved an extra $100 each month, over 20 years with a 5 percent interest rate, you would save $41,591, thanks to daily compound interest. Now imagine reducing your student loans by $41,591 just by putting an extra $100 a month toward the balance.
- Check your interest rates annually. Many student loans are obtained when students do not have jobs or other sources of income, allowing banks to charge them a higher interest rate. For example, the interest rate for a friend’s bar loan was over 10 percent. However, once she got a legal job and was able to show a steady source of income, she was able to refinance that loan to a 4.21 percent loan. An even better perk was that the loan was payable over 5 years rather than the 15–20 years of the original lender. That loan will be paid in a third of the time!
- Determine if you are eligible for an interest rate deduction through organizations in which you participate. Examples are DRI and state bar associations. Many companies will offer a .25 percent interest rate deduction, which may not seem like a lot, but it quickly adds up when you have many thousands, if not hundreds of thousands, of debt from your undergraduate and law school studies.
Valerie Fontenot is with Frilot, LLC, in New Orleans, Louisiana.
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