Student Debt: Why Even the Affluent Struggle

Student debt is soaring in the households of the well-off. Will this be a turning point in the way we think about education and how much we are willing to pay for a degree?

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The financial devastation wrought by excessive student debt is hitting even affluent households, a turn that might finally lead to meaningful change in the way Americans think about higher education—and how they choose to pay for it.

The relentless increase in the cost of college and the rise of outstanding student debt to about $1 trillion have been well documented. So too the increasing rate of students graduating with $50,000 to $100,000 of debt and only limited job prospects. It has long been assumed that affluent households could afford to pay as they go, and so avoid this debt trap. But often that’s not the case.

A Wall Street Journal analysis of Federal Reserve data shows that households with income between $94,535 and $205,335 saw the biggest jump in the percentage with student loan debt from 2007 to 2010. These affluent households also saw a spike in the size of their loans: On average, they owed $32,869 in 2010, up from $26,639 in 2007, adjusted for inflation. Meanwhile, the group experienced a sharp rise in average overall debt, indicating struggle as opposed to a simple shift in where they choose to borrow.

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The data further illustrates the degree to which the Great Recession and slow recovery have taken a toll on even upper income families. As recently as this spring 63% of wealthy Americans said they felt the country was still in a recession. They aren’t going to the dentist as often, and are walking away from homes that have declined in value by $500,000 or more.

Part of the tuition squeeze can be traced to the relatively low level of assistance that affluent households receive: The typical low-income household gets grants and scholarships totaling 36% of costs while higher-income households receive packages that total just 21%, the Journal reports. There isn’t a lot that families with big incomes can do about that. But what they can do is stop reaching deep to attend prestigious and costly universities, a trend that may already be in place. From the Journal:

“Even if the economy rebounds strongly, ‘this downturn has been long enough and severe enough that, for a generation, it will alter the way families think about price and higher education,’ says Richard Bischoff, vice president for enrollment management at Case Western Reserve University in Cleveland. A July 26 report from Moody’s Investors Service noted that reductions in net worth, lackluster job growth and stagnant incomes have ‘created the stiffest tuition price resistance that colleges have faced in decades.’”

To beat the high cost of tuition and stay away from excessive student debt, more students are starting out in a community college or local university, aiming to get enough credits to shave off a few semesters from the time they will spend at a pricier university. Other students are choosing to work for a year and save money rather than borrow right away. Another recently popular choice is staying in state and attending a public university at half the cost of a private institution—especially among students headed for relatively low paying careers in, say, education or law enforcement.

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How much student debt is too much? The rule of thumb is don’t graduate with more debt than your expected first year salary. But less is better. As loans become more burdensome and even the affluent back away from top tier schools, higher education will have to adjust. One promising development is the growth of free online courses. Imagine how much less college would cost if students were able to get a bunch of credits at no charge—or how much less a university would have to charge if through online courses one great teacher could reach millions of students. That’s where we are headed. But it will take a while.