Enterprise Human Resource division of the State of Minnesota
Student Debt: What are the
Possible Long Term Economic Consequences?
A Civic Caucus
Focus on Competitiveness
Interview July 25, 2014
Present John Adams, Dave Broden,
Pat Davies, Laura Gilbert, Paul Gilje, Randy Johnson, Sallie Kemper,
Dan Loritz, Paul Ostrow, Dana Schroeder. By phone: Janis Clay, Amir
The student-loan crisis
is predicted to be the next big financial crisis, says Laura Gilbert,
a writer and speaker on financing higher education and a consultant
for families facing college-financing decisions. Nationally, the
number of people with student loans increased by 70 percent from 2004
to 2013, so that the country as a whole now has $1.1 trillion in
student-loan debt. $155 billion of that debt is held by people aged 50
or older. In 2012, 70 percent of Minnesota undergraduates had student
loans, with an average debt of $31,500, the fourth highest in the
But the major problem, Gilbert says, is that
student loans amount to only 18 percent of the cost of college. While
30 percent of college costs are paid by grants and scholarships, over
half the costs are paid by parent loans, student income and savings,
parent income and savings, and friends and relatives. Gilbert notes
that because of that, college debt is a much bigger problem than the
$30,000 debt facing a college graduate at age 22 and a much bigger
problem than unprecedented tuition increases.
She recommends ideas for dealing with the
existing student-loan debt and a new framework for approaching college
funding that could help reduce future debt. Among the ideas are
looking at tax and business-friendly opportunities to pay down college
debt, considering lemon laws for students who were misled about the
quality of a program and are now deeply in debt, and encouraging
families and prospective students to borrow no more in student loans
than a low-end, entry-level salary can comfortably support and to
avoid debt that could affect major adult life choices.
Laura Gilbert is a consultant
and policy analyst for the Enterprise Human Resource division of the
State of Minnesota, a position she has held since March 2014. Since
2008, she has been a professor in Concordia University-St. Paul's
evening undergraduate and graduate business programs. Between 1991 and
2002, she was human resource director for Minnesota Educational
Computing Corporation and J3Learning, served as vice president of
organizational effectiveness for the ELCA Board of Pensions, and
provided transition and change management consulting to nonprofit,
public, and private companies. Following law school, she worked in
data privacy and security for Best Buy, the law firm of Redgrave Daley
Ragan and Wagner, and the University of Minnesota.
Outside the workday, Gilbert combines her
professional expertise and passion for higher education as a speaker,
writer and consultant for families facing college-financing decisions.
She is the author of three books: Back to School for Grownups,
Graduate School on a Budget, and How to Save $50,000 on
Gilbert has a master's in Industrial
Relations and a PhD in Educational Psychology, where she researched
factors that contribute to college degree attainment for
college-bound, traditional-aged students. She also holds a J.D. from
Hamline University's School of Law.
Laura Gilbert discussed three specific aspects of the student loan
debt crisis: (1) How did this crisis happen? What is
driving student debt levels? (2) Is the crisis as bad as it
seems? And (3) how can we recover from the current national
1. Drivers of student debt.
There has been a fundamental shift over time
that impacts the standard cost/benefit analysis for a higher
In the pre-1980s, said Gilbert, undergraduate school provided
the foundation for a lifetime career (generally a white-collar
career). An accounting major was likely to find an accounting
position with growth potential shortly after graduation. Student
loans were minimal in comparison to today and ran for 10 years or
fewer. It was an investment that paid off over a lifetime.
From the early 1980s into the early 2000s, a shift occurred, she
said. Higher education became a foundation on which to build a
career path over a lifetime. The expected outcome was that a
degree provided choices. An accounting graduate might be hired as an
accountant or a business analyst, sales representative, or something
else. Whatever the job title, a white-collar position was generally
available following graduation. As companies began to seek college
graduates to fill more and more entry-level or administrative
positions, a college degree was a "backstage pass" to get a foot in
the door and to move up. Student loans typically lasted 10 to 15
years, but the return on that investment was expected over a
Today, higher education is often the initial step toward the
first of many careers, Gilbert said. New grads may or may not locate
a job related to their degree before loan payments begin. Student
loans may last for 20 years or more, long after the student has
returned to school to change careers (predicted to occur every seven
to 10 years). Thus, the cost/benefit analysis of an undergraduate
degree can no longer be viewed linearly, that is, as one investment
that pays off over a lifetime. In contrast, today's student is
likely to make multiple educational investments throughout his or
her lifetime, while paying off overlapping, long-term student loans.
More and more employers are demanding
college degrees for jobs that don't necessarily require them. Many
graduates move into jobs where thesalaries don't support the debt the
student has incurred.
While there are many drivers of student loan
debt, a few examples include the following:
Schools are seeing higher expectations from
parents and students about non-academic offerings. Around 2002,
college administrators witnessed a shift in family expectations, as
helicopter parents started sending their kids to school and demanding
restaurant-quality food options, upscale living selections and
top-of-the-line sports and recreational facilities. "It was no longer
just about school," Gilbert said. "Fulfilling those expectations had a
significant impact on the cost of college."
There is increased student and parent
tolerance to allow students to repeat courses and to take six or more
years to graduate, rather than four years. A lot of the data on
graduation rates, she said, is based on six years now, not four. "That
can increase cost (and loans) as much as 50 percent," she said.
The economy crashed, which sent many people
back to school, some of whom saw school as a way to obtain student
loans to pay their rent and survive. Adults with clear
educational goals often borrowed extra money to pay for family
There are transparency issues with data from
schools on total costs, resulting in surprise expenses. This can
lead to more loans to pay for unexpected expenses, Gilbert said.
Reports on average student-debt loads often
fail to include private loans and other means of funding an education,
such as credit-card debt, second mortgage or home-equity loans, or
personal loans from friends or family.
There is a national push for access to
higher education by under-represented groups. While this is
essential for society and the right thing to do, there hasn't been a
parallel push to train first-in-family students on how to make good
financial decisions, such as which college to choose or which major to
select, Gilbert said. Consequently, she noted, these students can be a
target for low-quality schools with high debt rates.
As the cost of higher education has risen at
an unprecedented rate, there appears to have also been an increase in
the personal obligation parents feel to send their child to the best
school he or she can get into, no matter the cost. Gilbert has
spoken with a number of middle-class families who have borrowed
$70,000 to $100,000 to allow their children to "fulfill their dreams."
Unlike parents from decades past, who may have wanted that for their
children, today's parents tend to believe they must provide
their child with the best possible education. Unfortunately they
have realized too late that the "best" might have been a degree
without a 20-year debt drag on the family.
With the goal of making the U.S. a global
competitor, politicians are pressuring states to increase the number
of adults with college degrees by 2020. Although conceptually
worthy, this goal has offered a great marketing sound bite for the
lesser programs with low entry requirements and large average debt
loads, Gilbert said.
In the past 15 years the for-profit
higher-education industry has expanded to compete for working adult
learners and students of all ages who may have difficulty getting into
traditional schools. The for-profit sector includes many
established, reputable, career-oriented institutions. However, it also
enrolls thousands of students in low-quality, high-promise, high-debt
programs. Student debt can be particularly burdensome for these
students, whose training may not be as valued by employers or
transferrable to traditional colleges for further training. A
recent report from the Minnesota Office of Higher Education states
that the national for-profit sector enrolls 19 percent of students,
but comprises 47 percent of defaulters.
2. Why the crisis is worse than we realize.
Student loans used to be paid off in 10
years or fewer, but now 20- to 30-year loan repayments extend into
middle age and beyond. Previously, traditional-aged college
students, Gilbert said, could expect to pay off their loans by the
time they were in their early 30s and "had their whole lives ahead of
them." Now graduates might not pay off their loans until their
mid-40s, their 50s, or beyond, particularly if they choose (or find it
necessary) to return to school.
Nationally, the number of people with
student loans increased by 70 percent between 2004 and 2013.
Gilbert noted that 23 million people had student loans in 2004, while
39 million had student loans in 2013.
Studies show that while income is not
different between those with or without student loans, net worth
drops for those with loans. "That is likely to have a long-term
effect," Gilbert said.
According to the Minnesota Office of Higher
Education, in 2012, 70 percent of Minnesota undergraduates had student
loans, with an average debt of $31,500, the fourth highest in the
nation. For students graduating from private schools in 2012, the
average debt of $34,221 in Minnesota was the second highest in the
nation, Gilbert said. But a graduate with a debt of $30,000, who gets
a job paying $35,000, could pay off the debt in 10 years,
she said. Depending on the new grad's personal lifestyle choices
and needs, a salary of $40,000 to $45,000 is likely required to
comfortably support that level of debt.
The country as a whole has $1.1 trillion in
student-loan debt. $112 billion of this debt is held by Americans
50 to 59. $43 billion in debt is held by Americans 60 or older
(Federal Reserve Bank of New York). It is unclear how much of these
debt burdens were taken on for grandchildren or one's own education.
"Student-loan debt is reaching across generations," Gilbert said.
"It's a much bigger problem than a $30,000 debt taken on at age 22;
it's a much bigger problem than tuition increases. That's another
reason why the student-loan crisis is predicted to be the next big
But the major problem is that student loans
amount to only 18 percent of the cost of college. Subtracting out
the 30 percent of college that, on average, is paid by grants and
scholarships, for a student with loans of $30,000, the remaining 52
percent of college costs (which amount to an average of $86,667 for a
student with that level of debt) ends up being paid by parent loans,
student income and savings, parent income and savings, and friends and
relatives. "It's not just a $30,000 problem," Gilbert said. "It's a
$116,667 problem. And that figure does not include loans or cash
contributions the school is not aware of. That's why it feels so
terrible, even though the $30,000 is the number that's being bantered
around." (Figures taken from the Sallie Mae report
The total cost of loans will have long-term
effects on the student and the economy.
Cumulative Student Loan
2011 to 2013,
a 2014 report by the Minnesota Office of Higher Education,
shows the following median student loan debt in Minnesota in 2013 by
degree, projected monthly payments, and years to pay off the loan.
Gilbert added the total paid in principal and interest.
Total Principal & Interest Paid
"It's really a very long-term problem,"
3. Models for Recovery.
It will take lots of creativity and thinking
outside the box to begin to control the skyrocketing costs of college.
Ideas for dealing with the existing
student-loan debt of $1.1 trillion include:
Looking at tax and business-friendly opportunities to pay down
Considering something similar to lemon laws for students who
were misled about the quality of a program and are now deeply in
debt, without the credentials necessary to gain employment in their
Calling on employers to try innovative ideas like the new
Starbucks program that will pay for employees' last two years of
college through tuition reimbursement. Employees who have worked at
the company for one or two years and are working 20 hours a week
would be eligible for the program. According to Gilbert, Starbucks
has partnered with Arizona State to provide a quality, fully online
A new framework for approaching funding
college could help reduce future debt. Gilbert is working on a new
book called Our Plan, which recommends a new framework for
approaching funding college that:
Helps families think about what they can do today to avoid high
Is based on borrowing no more than a low-end, entry-level salary
can comfortably support.
Avoids debt that could affect major adult life choices, such as
marriage, children, home or car ownership, graduate school,
retirement and emergency savings.
Teaches families to ask what a reasonable debt is for their
family, for this student, for this degree, for this college, and to
set how much debt they want to have at end of the student's college
It would be positive if the governor could
offer in next January's budget message the opportunity for
organizations and companies to think about new ways of addressing
existing student-loan debt. Gilbert noted that there is a federal
cap on how much companies can reimburse their employees for higher
education. She suggested giving a tax incentive to companies that
offer, for example, $10,000 to top candidates as a hiring bonus, with
the money going toward paying down the new employee's college debt.
For this scenario to work, the monies would not be considered as
income to the employee as long as the funds were sent from the company
to the lender.
The state could offer assistance to help
people be better consumers. Gilbert said educational programs for
students on how to select a college, build and follow a budget, and
understand college expenses and loans would be helpful, especially for
first-generation students and adult students.
One type of debt is lifestyle debt. An
interviewer commented that many students expect to live in college
like they've lived growing up, such as having flat-screen TVs in their
rooms. Gilbert said she offered this advice in one of her books: "Live
like a student today, so you don't have to live like a student
High schools make so few demands on students
that academics has become a peripheral activity. The interviewer
continued that students think college will be just like high school.
Then they find that with that outlook, they aren't able to finish
college in four years.
The other type of debt is school debt.
The interviewer said it's been so easy over the past 25 years for
colleges to raise their prices that they "have raised them with
impunity. Now they can't do that, because the revenue side has hit a
wall." So, he said, grudgingly, colleges are now trying to work on the
cost side. But, he continued, "colleges and universities are so
unproductive, it's a sin." He commented that we need to intervene at
the family level and "stop people from being such stupid consumers.
The households are the problem. They enter this with no knowledge and
no easy place to get the knowledge."
Earning college credits in high school could
help more students finish college in three years, instead of four.
Gilbert has worked to get more information out on Minnesota's
Postsecondary Enrollment Options (PSEO) program, which allows high
school students to take classes for free at any postsecondary
institution in the state. She encourages college students to test out
of any classes they can.
She said one of the challenges is that this
only reaches a portion of the problem. The better solution is to help
students figure out how to graduate in four years, rather than five or
It's not the banks' responsibility to make
sure students and families pay back their loans. Gilbert said one
of the issues contributing to the debt crisis relates to understanding
the essence of personal responsibility. She commented that being naïve
about loan terms does not relieve a person of the burden to which he
or she has committed.
An interviewer asked what responsibility the
federal government has to assure that no predatory lending takes
place. Gilbert responded that there are a lot of studies and
initiatives underway to address that issue. "The challenge is getting
out the word to individuals," she said. "It's going to take awhile for
the students and the families to realize they can't trust e-mails and
phone calls. It's buyer beware."
Concern about the prediction that by 2020
there won't be enough people in Minnesota of working age to replace
people who are retiring has pushed the idea that by 2020, we want 60
or 70 percent of people to have college degrees. Gilbert said it
isn't clear what the skills are that are going to be needed. "What
really are the skills that are missing?" she asked. "And how do we get
people interested in and trained in those skills."
By 2020, 36 percent of the workforce will
belong to generation Z, people born after 1994. "The expectation
of where work is done and how work is done is about to change
dramatically," Gilbert said.
There are fewer students in for-profit
schools, but they have significantly higher average debt. In
2010, there were four million students attending for-profit
postsecondary schools nationally, Gilbert said, but they had 48
percent of the defaults and $25 billion in federal loans that year.
She noted that up to 90 percent of a for-profit institution's revenue
can come from federal student loans. In Minnesota, 26 percent of the
student body in 2013-2014 attended for-profits, but they made up 34
percent of the defaulters.
Putting more investment and offering more
scholarships in the high-need STEM fields would be a good policy.
The challenge, Gilbert said, is that an undergraduate math degree from
MIT is not the same as a math degree from certain for-profit
institutions. "Because of the extreme difference in program quality,"
she said, "general government investments become a challenge." In the
1970s, 1980s and 1990s, there wasn't a huge difference between an
English degree from one college to another, Gilbert said. She would
suggest loan forgiveness programs, but slightly different from those
A lot of data suggests that federal loans
make up the majority of student-loan debt, but there is a cap of
$31,500 for federal loans for dependent students seeking an
undergraduate degree. The challenge is that students and parents
are taking additional loans from banks and other private lenders,
Gilbert said. In addition, loan limits are significantly higher for
independent students (typically adult learners).
A 2013 government report showed that the
U.S. Department of Education generated $41.3 billion from federal
student loans last year, making it the third most profitable industry
globally, behind Exxon and Apple. However, the Department of
Education argues this profit figure is inflated, due to the accounting
method used in the report.
Don't change bankruptcy laws to treat
student loans like credit-card debt as a solution to the short- or
long-term debt crisis. Currently, student-loan debt is not
forgiven when an individual declares bankruptcy. Gilbert does not want
to change that, but she does believe some restrictions should be
Nationally, in 2012, Princeton University
had the lowest average debt load, $5,096, of any postsecondary
institution. Gilbert commented that some colleges are truly rising
to the challenge of helping students minimize debt. For example,
Princeton's pioneering financial-aid program is committed to providing
access and affordability to students from all economic backgrounds,
without a required loan. The success of this program is, in
part, attributable to Princeton's alumni organization. Gilbert called
the organization "incredible" and said part of the group's mission is
to help undergraduate students graduate with little to no debt.
The Civic Caucus
is a non-partisan,
tax-exempt educational organization. The Interview Group
includes persons of varying political persuasions,
reflecting years of leadership in politics and
business. Click here
to see a short personal background of each.
S. Adams, David Broden, Audrey Clay, Janis Clay, Pat Davies, Bill
Frenzel, Paul Gilje (coordinator), Randy Johnson, Sallie Kemper, Ted
Kolderie, Dan Loritz (chair),
Tim McDonald, Bruce Mooty, John Mooty, Jim Olson, Paul Ostrow, Wayne
Popham, Dana Schroeder, Clarence Shallbetter, and Fred Zimmerman