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Examining the College Credit Bubble

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Expensive – Even for Medical Professionals!

By Rick Kahler CFP®, MS, ChFC, CCIM

The latest bubble forming on the horizon isn’t in real estate or stocks. It’s the cost of a college education, up four times the rate of inflation since 1985—twice as much as health care costs.

What’s Driving this Stratospheric Rise?

Just like the housing crisis, easy credit and poor government policy.

The Federal Government as Champion

For decades governments have championed making a college education affordable for all, just as they did home ownership. Since some segments of society couldn’t afford an education or a house, the answer was to encourage lenders to make loans they wouldn’t normally have made. This was done by guaranteeing lenders that if the loans went bad; the government would take them over.

Dual Results

There were two results of this seemingly noble policy. First, with easy credit available, almost any jobless teenager could borrow up to $250,000 for a college degree without a worry in the world of paying it back until graduation.

Easy credit drives up prices, as the increased demand exceeds supply. Colleges increased tuition at a dizzying rate, simply because they could easily fill classes with students who could easily pay the tuition by painless borrowing. Normal market forces were thwarted, and prices rose exponentially and consistently. Four years of tuition that cost $50,000 in 1985 costs $200,000 today.

The second result is a replay of the housing crisis. According to an article by Malcolm Harris in the September/October 2011 issue of Utne Reader, students now owe more than $800 billion in outstanding student debt, of which only 40% is in active repayment. The majority of student loans are in default or deferment. Since these debts are guaranteed to the lenders,U.S. taxpayers are on the hook for them.

Unintended Consequences

The government’s artificially gaming markets to give credit to those the market would normally deny, while well intended, causes unintended consequences. The distortions create a new set of problems, sometimes as bad as or worse than those that inspired the attempted fix in the first place. More often than not, most of the parties to the transaction ultimately lose.

The Students

Among the losers are the students themselves. Few take the time to calculate the overt cost of obtaining their education with the corresponding salary it prepares them to earn. But, Laurence Kotikoff, professor of economics at Boston University, describes the hidden costs in the September 2, 2011, InvestmentNews. These include the time spent learning rather than earning, plus the progressive income tax which taxes annual earnings rather than lifetime earnings. According to a recent study by economists Stacy Dale and Alan Krueger, going to more selective colleges and universities makes little difference to future income.

Of Doctors and Plumbers

Kotikoff compares two students, neither of whom borrows for their education. One becomes a doctor and the other a plumber. The doctor spends 11 years of her life in school in order to earn $185,895 annually. The plumber spends two years and earns $71,685. The bottom line is that the plumber’s sustainable spending is equal to the doctor’s.

Re-Gaining Affordability

If the government stopped guaranteeing college loans, the initial result would be significantly less demand for a college education. Tuition rates would plummet, eventually becoming affordable once again as the source of easy credit dries up.


Without easy borrowing as an option, parents and students would be encouraged to begin college saving early. Students would have new incentive to earn money for college and also do well in high school to qualify for scholarships. The result would be more students graduating without debt and feeling less pressure to take the first job available. Then, the money that today’s grads apply to student loans could instead be invested in retirement plans.

The Author

Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, is the founder and president of Kahler Financial Group in Rapid City, South Dakota. In 2009 his firm was named by Wealth Manager as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is a co-founder of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Learn more at KahlerFinancial.com


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15 Responses

  1. Federal Debt, Student Loans and the Physician Workforce

    As of June last year, Americans now owe more in student debt than they do in credit card debt. Student borrowers are winning the dangerous debt race as both amounts hurtle toward the $1 trillion marker, student debt rose by over 500% since 1999.

    To put this in perspective, student debt has increased at nearly double the rate of inflation seen in the housing bubble that caused the recent financial crisis.


    And, there are foreboding similarities between real estate and education.



  2. Eight [8] Myths About College Financial Aid

    In today’s tough economy, financial aid is one of the determining factors of where students attend college. It could either make or break their dreams.

    I know a lot of students who’ve also been blessed with the sufficient amount of financial aid to attend college they never imagined themselves going to, rich or poor. Believe it or not, those who are financially capable to pay for college are eligible for financial help.

    Does this sound too good to be true? Here are 8 other myths about financial aid.

    Link: http://www.infographicsarchive.com/education-careers/8-myths-about-financial-aid



  3. College Major Selection

    We’ve run into a lot of parents recently who are stressing because their teenagers are undecided about their college majors, or they’ve fallen in love with a major (think art history or gender studies) that is freaking out mom and dad.




  4. Obama tuition plan could get students sacked by bursars

    Critics say proposal will lead to less Federal assistance, and thus less financial aid. True or not?




  5. Scholarship Awards Not Taxable

    ORG is tax-exempt under Sec. 501(c)(3) and classified as a private foundation under Sec. 509(a). ORG requested advance approval of their grant-making programs under Sec. 4945(g)(1). ORG plans to offer a grant-making program that will provide scholarships to dependents of employees of Y and its subsidiaries for paying tuition and other related academic costs. ORG will make six scholarships available each year. Scholarships will be awarded by a selection committee of members who are completely independent and separate from ORG. ORG’s scholarships will not be used as a means of inducement to recruit employees and the dependent’s scholarships will not be terminated if the employee leaves ORG. Additionally, any scholarships granted will comply with the percentage test described in Sec. 4.08 of Rev. Proc. 76-47. ORG will publicize the program through the employee newsletter and other written communications to employees and subsidiaries. ORG requested an advanced letter ruling that the scholarship awards are not taxable expenditures within the meaning of Sec. 4945.

    Sections 4945(a) and (b) of the Code impose excise taxes on “taxable expenditures” made by a private foundation. Sec. 4945(d)(3) defines a “taxable expenditure” as any amount paid by a private foundation as a grant for travel, study, or other similar purposes, unless the grant meets the requirements of Sec. 4945(g). Sec. 4945(g) states that grants awarded on an objective and nondiscriminatory basis, approved in advance are not taxable expenditures within the meaning of Sec. 4945(d)(3) if the issuing foundation can demonstrate that: (1) the grant constitutes a scholarship or grant that is subject to the provisions of Sec. 117(a) and is to be used for study at an educational organization, (2) the grant constitutes a prize or award and is subject to Sec. 74(b) if the recipient is selected from the general public or (3) the purpose of the grant is to achieve a specific objective. Sec. 53.4945-4(c)(1) provides that to secure approval, a private foundation must demonstrate that: (1) its grant procedure is objective and nondiscriminatory, (2) the procedure is reasonably calculated to result in performance by grantees, and (3) the foundation plans to obtain reports to determine whether the grantees performed activities that the grants are intended to finance. The Service determined ORG’s scholarship program complies with the requirements of Sec. 4945(g) and ORG agreed that procedures in awarding grants will be in compliance with Secs. 4.01 through 4.07 of Rev. Proc. 76-47 and the percentage test of Sec. 4.08. Therefore, the Service held that ORGs scholarships will not constitute taxable expenditures under Sec. 4945 and are excludable from gross income of the recipients.

    Source: Children’s Home Society of Florida Foundation


  6. College Debt Looms Over Economy And Students

    The number of former students who are defaulting on student loans and the size of the loans has the potential to adversely impact the entire U.S. economy, as well as hurt the people holding the loans, according to experts in the field.




  7. More on the cost of college

    From the New York Times:


    Ann Miller RN MHA


  8. Sallie Mae CEO Albert Lord Rejects Education Loan Bubble Claims

    Rick – Albert Lord, chief executive officer of student lender SLM Corp. (SLM), challenged claims that education debt is ballooning to dangerous levels.


    What do you think?



  9. Student Debt vs Women’s Health

    Were you shocked to learn that Representative Nancy’s Pelosi’s political opponents have conspired to fund federal student loan subsidies by taking it from their favorite target of women’s health?

    The White House noted defunding women’s health could result in “hundreds of thousands of women” losing access to cancer screenings.

    Any thoughts?



  10. Help Students – Screw Small Business

    Did you know that the Senate Democrats proposed requiring Subchapter S corporations with three or fewer members and income levels of $200,000 per year ($250,000 for joint filers) to make payroll tax contributions on all income. This is to help pay for student debt interest rate reductions.

    The Republican solution is to repeal the Prevention and Public Health Fund.

    Doctors – beware!



  11. The Real Problem With Med Student Debt

    America might never agree on how much doctors deserve to earn.


    But, there ought to be much less debate on the immense debt today’s medical students incur on the way to becoming doctors.



  12. Elizabeth Warren on Spiraling Student Debt and What Should Be Done About It

    Here – The professor-turned-lawmaker talks about why people should care and what Congress should be doing to help ease the burden on borrowers.




  13. More …

    High school graduation is a time of optimism and possibilities. Commencement speakers all over the country urge graduates to follow their dreams and reach for the stars.

    But when it comes to funding the education you need to fulfill those dreams, you might be better off with a dose of negativity and pessimism.

    The transition into adulthood means making a host of major career and life decisions. Where should I go to college? Do I even need or want a college education? What career possibilities am I excited about?

    Your answers to these questions obviously shape your life in significant ways. Yet even big life decisions like college selections and job choices come with some “undo” buttons. You can change majors, change universities, and even change directions after you have finished a degree and started down a given career path.

    Another significant education- and job-related decision, though, isn’t so easy to change. Its impact will follow you even if you switch schools or majors, choose to pursue a new career, or decide higher education is not for you and drop out altogether. It will affect your lifestyle, your options for employment and additional education, your ability to support a family, and your long-term financial health.

    This irrevocable decision is whether or how much to borrow for your education. It’s a choice to take every bit as seriously as choosing the best school or the right career.

    A few weeks ago, Senator Elizabeth Warren of Massachusetts introduced legislation to allow refinancing of student loans for those who borrowed at interest rates higher than those currently in effect. In her speech announcing the effort, she said this: “There are more than 40 million people currently dealing with student loan debt. When their interest rates are cut, many will save hundreds of dollars a month and many more will save thousands of dollars a month.”

    Her proposal is part of a growing concern about the burden that college debt places on individuals and the U.S. economy. Instead of trying to ease this burden at the repayment end, though, here’s a better idea. The best way to prevent being overwhelmed by student debt is not to over-borrow in the first place.

    Here’s where the pessimism comes in. Before you sign on the dotted line to obtain a student loan, spend some time browsing at studentaid.ed.gov. In particular, use the “repayment estimator” to get an idea what your loan payments might be. Will the lowest range of expected income in your chosen career field support those payments?

    Hang onto that pessimism when you look at a potential financial aid package. It’s easy to think of financial aid as “free money.” But the loan portion of college financial aid isn’t a gift; it’s a business transaction. It’s a legal obligation, a loan secured only by your future earning expectations. As soon as you walk off the campus with your brand-new diploma, you have to start paying that loan back.

    If you have trouble repaying a loan, you might be able to postpone payments with a deferment. Interest keeps accruing, however, which means in the long term your debt can grow from difficult to overwhelming. If you default on a student loan, you will trash your credit rating. Plus your future federal tax refunds may go toward repayment.

    As a young adult, your future is indeed full of possibilities. Don’t burden that future with a heavy load of college debt. By all means, put your optimism and sense of possibility into following your dreams. But to support those dreams in a realistic way, borrow like a pessimist.

    Rick Kahler CFP®, MS, ChFC, CCIM


  14. Colleges Flush With Cash Saddle Poorest Students With Debt
    [By Annie Waldman and Sisi Wei]

    A ProPublica analysis of newly available federal data shows that some of the nation’s wealthiest colleges are leaving their poorest students with plenty of debt.


    via Bethany


  15. The end in sight?

    Finally, fewer parents raiding retirement funds to pay for college.


    Dr. David Edward Marcinko MBA


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