College loan debt
Part of being an adult seems to be debt. Whether it is credit card debt or a mortgage – most adults owe money. I think the first real debt that we encounter is often student loans. Like a mortgage it is often a good form of debt, and has relatively low interest. When I graduated university in 1996 I had roughly $13,500 in student loans (which I think was the average back then). My first job out of school as a media buyer paid $30,000 a year (I was thrilled to be paid so much) and with successive promotions I paid off the loan in three years. I then lived debt free until I bought my home in 2003, but I remember how great if felt to know that what I earned was mine and not promised to someone else.
Recently interest rates for Stafford loans (the ones I graduated with) increased from 3.42% to 7.14% this change came about because of the Deficit Reduction Act of 2005.  The average student now graduates with $20,000 in student loan debt. Generally students are given 10 years to pay off their loans and the target percentage of income is 10%. Let’s run some numbers:
$20,000 @ 3.42% for 120 months = $23,642 and $3,642 in interest payments
$20,000 @ 7.14% for 120 months = $28,039 and $8,039 in interest payments
The difference is $4,397 in interest payments. It also means that for a student to stay within the target debt ratio their first job’s income needs to increase from $23,642 to $28,039.
I think of this as a backdoor tax on recent graduates. It doesn’t directly raise the tax burden but it closes a subsidy, so the net effect is the same. It makes it harder for middle class college graduates to get out of debt, buy a home and save for retirement. A final note, 10 years later my good friend Brent’s younger brother just got a job as a media buyer – salary, still $30,000.
November 12th, 2008 at 2:30 pm
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