College degrees, starting wages, and student debt.
For the last 40 years the mantra has been “if you want to get ahead, just go to college”. It is partially based on the widely published assumption that those who do get a college degree will make 84 percent more than high school graduates in their careers. But the economy has changed radically in the last 40 years, and universities have not kept up with the times.
A recent New York Times article reported how student debt will exceed credit card debt and is projected to be more than $1 trillion in 2011. Student debt was $200 billion in 2000 and has grown more than $800 billion in 10 years. This leaves many students either unable to pay off their debt (defaults) or struggling with it for most of their adult lives.
This has become a serious problem.
The second problem: If you go to college which major will give you the best chance of getting a job with a wage to support a family? It probably doesn’t matter when the student remains single, but as soon as they get married and have children; they will need higher wages and benefits. Another question to ask: When you choose a major how much money should you borrow to graduate in the major?
I have written about problems of student debt and majors many times but up until recently there was no data to connect wages to majors and to student loans until a Census study from 2009 came out with data that connected wages and majors. It was the first time the Census asked people about their undergraduate majors enabling researchers to tie in salary data.
The study is “What’s it Worth? The Economic Value of College Majors”, and analyzes 171 college majors combined into 15 fields. It describes each field in terms of a median wage, which is misleading because the data is from an age group from 18 to 64 years old. Median wages could represent wages from someone who has worked 30 years out of college.
This article focuses on young people who are in college or about to graduate and find a job. So, I will use the lower wages on the scale that the study identifies as the 25th percentile as representation of entry level wages.
In this study the majors that pay the lowest starting wages below $33,000 per year are psychology and social work, arts, education, humanities and liberal arts, communication, journalism, industrial arts, and consumer services. According to the survey, these majors are 38 percent of all majors in the study.
The three highest starting salaries for majors are engineering, computer science and mathematics, and health care. The starting wages begin at $45,000 and represent 20 percent of the bachelor’s degrees awarded. The rest of the majors (42 percent) have starting wages from $33,000 to $45,000 per year.
One of the authors of the study, Anthony Carnevalle states the obvious, “We don’t have a system in the U.S. where we align what you take with career prospects. Nobody ever tells you when you go to college what happened to the other people who took it before you.”
When students talk to their advisors about financial problems, the answer is usually to just get a student loan. This decision is about staying in school and has little to do with the starting wages of the major. If the student is in a major that has low starting wages, he or she may have to spend many years paying off the loan and struggling financially to make ends meet when they get married and start a family.
The Horrors of Student Debt
If you are a graduate that does not have the income to make your payments or you can’t make the full payment, here are a few things you should know:
- The loan can be turned over to a collection agency.
- Student loans are generally not dischargeable with bankruptcy (with a few exceptions).
- The federal government can garnish your wages -- private lenders must first get a court order.
- The federal or state governments can take your tax refunds.
- If a borrower misses payments or makes partial payments, the interest and fees can increase the debt dramatically (just like credit cards).
A good example is a student in Springfield, IL who borrowed $4,000 at 5.5 percent interest. Three years later, her debt was $7,000 because she couldn’t make the full payment and accrued fees and interest.
A story that will make my point about student debt vs. starting wages is Joe who graduated with a chiropractic degree and $80,000 in student loan debt. In starting his practice he only earned about $1,000 per month and was unable to make payments on the debt.
When his income increased he asked if he could start paying on his loan again, but the lender said he had to pay back his loan in full. His chiropractic license was denied and then he had no way of working in his field so he quit making payments.
When the collection agency finally started chasing him his debt rose to $365,000.
These horror stories may be less than 10 percent of the loans, but the penalties for non-payment or reduced payment are very real threats. They clearly make the point that changes are needed. Here are a few suggestions:
- Universities need to accept their moral responsibility to inform all potential students about the entry level wages of recent graduates in each major.
- Universities should also reveal the average student debt for each major to give the student a better idea of costs versus benefits.
- There is movement in the Federal Education Department to re-evaluate what can be loaned per major. Instead of just loaning anybody the amount the university demands to stay in school, the lender will examine the major and the ability to pay the loan back.
I think this is a great idea because students should be prevented from naively getting over their heads in debt for a major with low earning power.
The problem is summarized well by Sriran Khe, an associate professor of Geography at Western Oregon University. He says, “The irony is that it doesn’t require an undergraduate degree to complete the tasks in service sector jobs. Yet we’ve managed to convince ourselves that a college diploma is a must for mere survival, let alone prosperity. Most students I talk to feel that they have no choice but to get a college diploma if they want to get any sort of job anymore, and that presents a horrible choice.”
“After spending $110 dollars per week for classes like mine, students graduate, typically, with about $20,000 in debt, only to realize the realities of employment. Despite all of my full disclosures in the classroom, they are shocked to find that there really isn’t a job waiting for them and that their diploma isn’t necessarily the guaranteed route across the unemployment gates,” continues Khe.
The bottom line is that more and more students have to borrow money to go to college and universities have a moral obligation to the new students and their parents to reveal the realities of entry level wages per major and their relationship to student debt -- from the first day of school. We are now transitioning to a service economy where good paying jobs require either advanced degrees or a major that teaches employable skills.
The university system is not recognizing that the middle class in America is going through an economic transition where both wages and living standards are going down. When confronted with this macroeconomic fact and the problems of student loans and majors with low starting wages, they generally clutch the cross of an excellent liberal arts education to their chests and announce that they are dedicated to a college education not training.
The fact is though that the economy is changing and everyone has to change with it (including universities). Like it or not few people will be able to afford a general degree that does not lead to a decent paying job or that saddles the student with long term debt. Whether they can see it coming or not the university system is on a collision course with the realities of the new economy.
Mike Collins is the author of Saving American Manufacturing. His website is www.mpcmgt.com.