Educational Loans: The Economic Consequences to the Next Generation of

Consumer Spending

By Carlton L. Lawson

Introduction:

The United States’ economy has experienced a great amount of strain in the last

decade due to the collapse of the financial systems and the subsequent recession. There

are potential risks presented with high educational loan debt levels that could restrict

future economic prosperity for higher-education graduates. Educational loans in higher

education pose serious financial debt liabilities to students matriculating to universities

during and after The Great Recession (2007).

The rise in the cost of college tuition has caused students to borrow large amounts

of money through educational loans. Student loan debt is ominous because of the high

interest rates on these loans that create long-term debt burdens for graduates. Government

legislators are not addressing this growing national debt problem.

The purpose of this research is to indentify key issues surrounding student loan

debt and how they may affect participant’s financial decisions in the next five to ten

years. The objective is to collect data from a purposeful sample of individuals who are

affected by student loan debt and provide discourse about future financial decisions with

big-ticket items.

Educational loans have become a necessary means to pay for higher education

tuition. Higher education is a means to afford graduates with greater career opportunities

after graduation. High tuition and educational loans have escalated into an unmitigated

risk and does not necessarily produce the results desired for some graduates. According

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to a case study by the Federal Consumer Financial Protection Bureau, “total student debt

appears to have surpassed $1 trillion late 2010 that would be roughly 16% higher than an

estimate earlier in 2011 by the Federal Reserve Bank of New York” (Chopra, 2012).

Student loan debt must be closely evaluated because it may affect future financial

planning for graduates. In this research, I will examine various elements involving the

educational loan crisis. One element is the development of the U.S. educational loan

system in higher education. Another element is an analysis of how the loan repayment

may have an impact on spending behavior as it relates to large ticket items. The final

element in the study is the sociological issues and life planning decisions such as

marriage and child rearing.

The US education loan crisis is multi-faceted and poses consequences at both the

micro and macro-levels of the economy. Some of the questions regarding student loan

debt include: (1) How will graduates with high debt to income ratios participate in large

consumer purchases such as cars and real estate? (2) How will decisions such as marriage

and child rearing be influenced by student loans? (3) How do interest rates affect student

loan debt and repayment obligations? In the wake of the U.S. housing crisis, and the

significant banking failures of 2008, the U.S. financial system is not capable of

withstanding another calamity (NACBA, 2012).

Careful consideration must also be given to future educational loan borrowers. If

the system is severely damaged because of debt circumstances now, then it may not be

available to assist others in funding education later. To reference the mortgage loan crisis

of 2006, the housing market system collapsed due to problems with loan borrowers and

their debt obligations, coupled with poor market valuations. Banks then began limiting

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access to mortgage loans by requiring very high financial standards such has specific

credit scores or income. This limited loan borrowing adversely slowed real estate

investment. In a similar fashion, university tuition is being increased year after year at

expediential rates while the return on the investment is not equivalent when seeking

employment post-graduation (Cordray, 2012). As a result, educational loans may face the

same peril as home mortgages, if there is not public policy addressing the processes of

borrowing and repaying education loan debt (Bateman 1998, NACBA 2012).

Literature Review: A Brief History of Student Loans

The first federal student loan program was established through the National

Defense Education Act of 1958 (NDEA). These loans were directly capitalized and

backed by the United States Treasury. The NDEA was a national response to the

scientific advancements of the Soviet Union and their space program (Urban, 2010). This

education policy was designed to compete against the Soviet Union and maintain the

United State’s position as a global super-power. The NDEA encouraged young U.S.

students to seek educational advancement with careers in mathematics and sciences.

Through his presidential campaign and during his limited time in office John F.

Kennedy made higher education a public policy priority. During a speech in 1960, at the

Valley Forge Country Club, Kennedy advocated for a new frontier in education that was

a similar idea to the New Deal initiatives of Franklin Delano Roosevelt (Kennedy, 1960).

President Kennedy’s vision included providing more young citizens with the necessary

skills to participate in economic prosperity and scientific advancement. The NDEA

included providing means for low and middle-income children to attain higher education.

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Kennedy’s assassination ended his facilitation of his future education agenda, but

it survived through his successor Lyndon B. Johnson. Johnson strongly valued the higher

education objectives, as much as his predecessor, and firmly believed that a strong

system of higher education would be a powerful force for economic growth (Urban,

2010).

President Johnson, an educator by profession, shared the view that the U.S. would

only be great if it could insure that all children were provided with the best educational

opportunities. In a speech quoting Thomas Jefferson, Lyndon Johnson said “Today no

nation can be both ignorant and great” (Johnson, 1964). Student loans were a part of

Johnson’s Great Society Plan and were directed at building America’s strength.

Johnson’s Great Society ideology was a public policy agenda that targeted specific

problems such education, poverty, innovation and governmental infrastructural

deficiencies. By the government investing in these programs, a young American could

benefit from the access to education and acquire the skills necessary to achieve

prosperity.

In order for this plan to work, Johnson first needed Congress to pass legislation

supporting his public policy agenda. Developing the education loan system was a public

policy response to the rising cost of tuition. One issue during the inception of the

educational loan legislation was that the average tuition at private universities had

increased to $2,370, an increase of approximately forty-percent more between the years

of 1955 and 1965 (Pouty, 1965).

At the same time public institutions had also increased by approximately thirty-

percent for an average tuition of $1,560. These dramatic increases in tuition created a

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significant burden on middle-class families wishing to send their children to college.

Fearing rising tuition costs would deter individuals from acquiring a college education or

force families to take out high interest commercial loans, Congress decided that they

would have to intervene.

Senator Yarbrough, a Texas Democrat, became one of the first advocates for

providing educational loans to students. The increase in university tuition became a

financial roadblock for low and middle-class income families wanting to send their

children to college. Some families began taking out very risky loans in an attempt to pay

for college (Glater, 2011).

Senator Yarbrough spearheaded an inquiry on the issues pertaining to financing

college tuition and the risks with families taking out commercial loans (Glater, 2011).

Senator Yarbrough was a politician who was concerned, along with others in Congress,

that these costs would not only result in fewer Americans attending college, but also that

the debt burdens would weigh down families from economic prosperity, overall reducing

national growth. High tuition rates were contrary to the goal of creating an advanced,

educated and competitive nation (Glater, 2011).

Congress responded by passing the Higher Education Act of 1965. One of the

pressing challenges during this time was that educational loans were high-risk. The

borrowers had little to no credit, minimal collateral and decreasing employment.

Congress finally decided that the government would guarantee repayment on these loans

in order for the banks to provide the line of credit to students and families. In order to

facilitate the disbursement of funds, Congress had to design a lending system, negotiating

agreements with different banks, state entities and federal departments such as the

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Department of Treasury and the Department of Health, Education and Welfare (United

States Senate 1965, Glater 2011).

Many economists during this period criticized the manner in which Congress

enacted this law because the guaranteed loan would appear to have no upfront costs being

collateralized by banks. One of the problems is that payments for defaults or interest

incurred by the government would not be accurately accounted for in the congressional

budget (Glater, 2011). This economic strategy of guaranteed government loans would

limit exposure for any Congressional member seeking re-election. The second option was

direct government loans. This option would have created an upfront cost on the budget as

a loss for the first year but would have presented the total costs of each loan on the yearly

congressional budget (Glater, 2011). This option was not as appealing to legislators

because guaranteed loans appeared to be a better fiscal bargain purely on paper. A

significant problem with the guaranteed loan option was that Congress was creating

financial agreements without properly accounting for the costs incurred (Glater, 2011).

Main Study:

When analyzing student loans as an economic problem there are multiple issues to

criticize. Individual citizens, private entities, public policy and political actors are some

of the variables in the education loan debt equation. More importantly is the aspect of

financial structures. James Crotty, a scholar of economics, suggests that there are

structural flaws coupled with “rapid financial innovation that stimulates powerful

financial booms that end in crisis” (Crotty, 2009, pg. 563). Crotty describes the economy

and its actors as the financial architecture, that are the framework of how the economy

operates (Crotty, 2009).

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Inquiry into the structures of the financial environment is important, but there

must also be an intensive evaluation of the educational system. There are two key

educational system structures that exist: non-profit institutions (state and private higher

education institutions) and for-profit institutions (corporate institutions). In both

structures, the consumer is paying for a service. But payment is also made by capital

from governmental allocations and private investments such as grants and endowments.

One of the reasons that higher educational loan borrowing is increased is because

of a shortage in state and federal budget funding. With many states crippled with budget

deficits, the funds to academic institutions are restricted and more students rely upon

loans to finance their education (Lewin, 2011). According to the Bureau of Labor

Statistics, college tuition has increased faster than the overall inflation rate since 1979

(BLS, 2012). During the 1980-81 academic year, four-year public universities had an

average total undergraduate tuition rate (including room, board, and fees) of $8,756 per

year (National Center for Education Statistics, 2012). During the 2010–11 academic year

the annual current dollar prices for undergraduate tuition was estimated to be around

$13,600 at public institutions and $36,300 at private, not-for-profit institutions (U.S.

Department of Education, 2012; National Center for Education Statistics, 2012). As this

research will demonstrate increases in tuition have led to more students having to acquire

larger loan amounts to cover tuition rates.

Another threat relating to the rise in student loan debt is the trend of for-profit

schools. For-profit institutions are different from traditional state and private institutions

because they are private corporations that operate for a profit. Many for-profit institutions

offer career training and occupational certifications, rather than a traditional 4-year

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degree. For-profit institutions offer degree programs, however credits earned are

sometimes not transferable with private or public schools due to their lack of

accreditation. For-profit institutions have a reputation of aggressively marketing their

services to students that have not been well served by traditional college and universities

(Tierney, 2007). These students usually include low-income minorities and veterans that

may lack the academic preparation to attend traditional non-profit institutions (Ruch,

2001).

Institutional accreditation is important when selecting a school. There are two

types of institutional accreditations: regional and national. Accreditation requires that a

governing educational agency evaluate the institution to insure that they meet certain

education standards. Regional accreditation means that schools are divided in

geographical locations in the United States and is considered a higher level of

accreditation (Huffman, 2013).

All colleges and universities in the region must meet the criteria set forth by the

regional education accreditation agency. Approximately 97 percent of non-profit

institutions and 3 percent of for-profit institutions have this type of accreditation

(Huffman, 2013). The National Association of Accredited Commercial Schools uses

minimum quality standards as required for career development institutions in the United

States (Huffman, 2013). More than 90 percent of for-profit schools and 10 percent of

non-profit institutions have national accreditation (Huffman, 2013). Accreditation is

important when earning and transferring academic credit between schools.

One significant problem is that many students are unaware that some for-profit

institutions are not regionally accredited and their credits may not transfer to traditional

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regionally accredited universities or when applying to graduate school. Some students do

not realize this until they have already acquired student loan debt or are trying to enter the

workforce (Ruch, 2001).

The second problem with for-profit institutions is that tuition rates are commonly

higher than those at state universities. However in a report by the Center for College

Affordability and Productivity, economist Daniel L. Bennett argues that “average tuition

at for-profits is higher than what a public school would charge an out-of-state student, but

it is still lower than the average tuition charged by a non-profit institution” (Bennett,

2010, pg. 21).

In order to address the problem of student loans, there are different funding

options available including federal loans, private loans and grant endowments. One of the

best ways to pay for higher education is through receiving grant money from the school

or a private donor. These are funds provided by the academic institution that do not have

to be repaid after graduation. They are usually based upon scholastic achievement, but

some grants are available for students that may come from underrepresented backgrounds

or pursuing degrees in unique fields of study. Grants are optimal, because they do not

create any debt for the student while attending school or after graduation.

Federal loans or direct loans are funds that are borrowed from the U.S.

Department of Education. They offer the borrower a fixed interest rate and have differing

options for repayment. There are five different loan options for students and parents, each

with different requirements depending on the need of the student. There is the (1)

Stafford Loan, (2) Perkins Loan, (3) Direct (4) Subsidized and Unsubsidized, (5) Direct

PLUS loan and Graduate PLUS loan.

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The Federal Perkins Loan is an undergraduate student loan reserved for

individuals that have financial hardships, carries an interest rate of 5%, and are

guaranteed by the federal government (U.S Department of Education, 2012). The higher

education institution, in this case, is the lender and the loans are repaid to the institution.

Stafford Direct Subsidized Loans are governmental loans that carry an interest rate of

3.4%. Interest is not accrued until the student has graduated or stops attending school for

six months (U.S Department of Education, 2012). Stafford Direct Unsubsidized Loans

are government loans that carry an interest rate of 6.8% with the interest accrued during

the matriculation period (U.S Department of Education, 2012). The U.S Department of

Education and are the lender of both subsidized and unsubsidized loans (U.S Department

of Education, 2012).

The final two loan options are PLUS loans, also provided by the government that

are based upon credit and other financial requirements. Direct Plus Parent Loans are

loans taken out by parents of dependents that are going to school and have an interest rate

of 7.8%. Graduate or Professional PLUS loans are monies borrowed for post-graduate

degrees and are borrowed with an interest rate of 7.9%. PLUS loans require payment on

accrued interest during school with the student or parent responsible for paying the

Department of Education after graduation (U.S Department of Education, 2012).

One element of Federal Direct and PLUS loans is that they have a fixed interest

rate and the government cannot raise the interest rate after the loan agreement has been

made. Fixed interest rates are not a benefit that is included when borrowing a private loan

because the financial institution can raise interest rates for a late payment or other

reasons. Federally backed loans also have the benefit of income-based repayment, that

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allows for monthly payments that cannot exceed 10% of the monthly income (Income-

Based Repayment Program, 2012).

According to a study conducted by the Project for Student Loan Debt, an

education policy research group, for-profit institutions had the largest proportion of

students taking out private loans and the largest increase in private loan borrowing.

Private student loans are one of the riskiest ways to pay for college. The reason why they

are such a high risk is because the majority of these non-federal loans are given to

students through private banks. Just like other lines of credit, such as, credit cards, car

loans, and mortgages, they are subject to interest based upon a borrower’s credit score.

Private loans do not provide flexible repayment options like federal loans, such

as, income-based repayment, unemployment deferment, and loan forgiveness programs

for public service careers. Private loans, unlike federally disbursed loans, may have

astronomical interest rates, sometimes between 13% and 20% (Consumer Financial

Protection Bureau, 2012).

The main issue here is that a student attending a for-profit institution is acquiring

large amounts of debt often without receiving an accredited degree that can transfer into a

regionally accredited school. A 2012 study conducted by The Center for Analysis of

Post-Secondary Education and Employment, demonstrated that for-profit graduates are

less likely to find employment and face lower earnings (Deming, 2012). A student’s

inability to find employment creates high default rates and those students large student

loan debt find their interest rates skyrocketing with the overall debt becoming even more

cumbersome to manage.

Traditional state and private post-secondary universities are the second structure

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in the national higher educational system. A recent policy study conducted by the Center

for American Prosperity, stated that “There is great variation in tuition rates among the

1,057 colleges, with average debt figures widely ranging from $3,000 to $55,250”

(Johnson, Ostern and White, 2012). Students who acquire debt at these non-for-profit

institutions account for the majority of educational loan debt in the United States.

A contributing factor to the student loan debt crisis is that students and parents do

not clearly understand the details and fine print of loans. Many times educational loan

borrowing occurs with a limited amount of information when determining how to pay for

school. Information regarding educational loans is available by online formats and

through paper literature, but face-to-face expert consultation is not always provided to

students when making significant decisions on loan borrowing. Education loans are an

investment for career advancement. In comparison, many people who decide to invest in

the financial markets acquire the expertise from financial advisors to guide them through

the maze of different options, best suiting their goals. In the case with students, they may

borrow loans equaling thousands of dollars without seeking similar counsel or

information from an advisor.

This troubling lack of knowledge before and during the borrowing process leads

to students acquiring high amounts of educational loan debt. Grants and scholarships are

often overlooked or insufficiently presented in-depth during the financial planning

process, yet they provide options to fund education without having to repay debt post-

graduation. Still, for many students, the substantial increase in tuition rates, have made

student loans unavoidable.

Insufficient knowledge of interest rates, loan repayment requirements, and

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alternative options of funding education are contributing variables to the student debt

crisis. However, these problems do not afflict all groups equally. There is suggestive

evidence that minority students are subject to greater risks in acquiring higher levels of

student loan debt over non-minority students (Center for American Progress, 2012).

Minorities are adversely affected because of a lack of experience and less guidance prior

to borrowing loans. Additionally, many minority students are the first in their family to

attend college, thus they are the first to run the gauntlet in applying for college and

securing educational funding.

This correlative observation can be better argued when evaluating the amount of

student loan debt by racial demographics and unemployment rates. In a study conducted

by Algeron Austin of the Economic Policy Institution in Washington D.C., minority

students, particularly African Americans, faced 27% higher student loan debt versus

white students who ranged around 16% of white students that have loan debt over the

amount of $30,000 (Austin, 2010). The study also demonstrated that African-Americans

were shown to have higher unemployment post-graduation versus whites (Austin, 2010).

This analysis of race groups and student loan debt is important to the discussion of the

consumer spending, because certain racial groups may show different patterns in

consumer spending.

Investment and Spending with Student Loan Debt:

The 2007 recession was different than other economic discords after World War

II (Ohanian, 2011). Economic scholar Lee Ohanian argues that due to the high level of

damage to the labor markets, this most recent recession more closely resembles the Great

Depression. According the Bureau of Labor, unemployment skyrocketed from 4.3% in

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Q1 of 2007 to 10.0% in Q4 of 2009 (Bureau of Labor Statistics, 2012; Ohanian, 2011).

Although there has been a slight decline in unemployment claims since the stimulus of

2010, the confidence of investors in financial markets is still volatile.

Older generations in America have seen an overall wealth decrease due to a drop

in asset values with younger generations enduring the largest drop in employment income

(Hur, 2012). Since the great recession, there has been evidence that this decline in

consumer spending has begun in common everyday purchases. The younger generation

has experienced a large decline in non-durable (food, beverages, utilities and apparel) and

durable (home, cars, large electronics) consumption and housing investment (Hur, 2012).

High employment and underemployment for younger generations plays a particular role

in the lack of consumer spending. The younger generation, (ages 18-29) is twice as likely

to be underemployed than older adults (Jacobe, 2012). This lack of labor employment is

significant in regards to spending because this demographic is critical in spending in

retail markets such as apparel, cars and electronics. Many graduates have opted to move

back home with their parents to try lower their living expenses due to decrease their

expenses.

Educational loan debt certainly plays a pivotal role in this inquiry of consumer

spending. Students attended college to earn a degree with the rational that their degree

will would provide an advantage in finding employment. However, many find themselves

in the same position they were before college, jobless, but now they have tens of

thousands of dollars in debt. Not having employment directly affects the ability to repay

loans and contributes the current education loan default problem.

The reality of the situation mainly surrounds the fact that the younger generation

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is not afforded the financial liquidity to make these purchases even if they may want to.

Those who have acquired educational loans by attending undergraduate school in

addition to graduate school face debt that is equitable to a home mortgage. According to

the American Bar Association journal, private law school debt averages around $125,000

and public law school graduates averaging around $75,000 (Cassens-Weiss, 2012).

Medical school graduates are also plagued by enormous tuition rates as well; the average

medical school debt hovers around $162,000 (Krupa, 2012). This means that graduate

loan monthly payments are sometimes over $1,000 per month for up to thirty years.

Clearly, a debt of this size will affect their consumer spending behavior and financial

planning.

Marriage, Childrearing and Educational Loan Debt:

Most recent inquiries on student loan debt deal specifically with financial burdens

such as tuition rates, loan amounts and loan defaults. However, there are some significant

factors that are overlooked and are directly related to the overall education loan problem.

For some graduates, with large amounts of student loan debt, life-choices like marriage

and childrearing may be affected.

Those with student loan debt may not be in a position financially to make the

same life decisions that previous generations did. This can greatly affect life decisions

and may impair a person’s quality of life. Since repaying student loan debt is a huge

financial burden, marriage may not be as big of a priority as focusing on career

advancement.

One significant issue of marriage is a legal merger of assets and debt. If the

marriage is not successful, educational loans are not dischargeable through bankruptcy as

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other forms of debt in a divorce. For an example, if party A in the relationship has

significant loan debt and party B does not, is party A willing to acquire their partners

debt? This is especially damaging to both sides and could be a determining factor when

making significant life choices. Presumably, love is not the only factor in the equation of

determining long term happiness. Such debt could potentially halt decisions to get

married even if individuals wish to do so. As aforementioned, education loan debt has

encroached into the areas affecting quality of life.

There is supporting evidence that with every $10,000 a student borrows in

educational loan money, the probability of getting married decreases by approximately

7% (Gicheva, 2011). There is also documented evidence that financial debt places

considerable stress on relationships. According to financial scholars Jeffrey Dew and

Robert Stewart at Utah State University, their research has found that many marriages

end up in failure due to disagreements about finances and debt. If having significant debt

curbs marriage, this could have a considerable effect on the economy and society. There

is significant commerce that is generated through the institution of marriage with

property and financial investments such as retirement plans and other long-term

investments (Dew and Stewart, 2012).

Another facet between marriage and commerce is that newlywed couples usually

make larger consumer purchases jointly, such as financing a home to raise a family.

Furniture and electronics also become a joint investment. If a couple decides to marry,

the credit of both parties becomes a significant factor. Individuals who defaulted on their

education loans now possess adverse credit scores that create an array of problems when

trying to establish a life together.

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There is recent evidence that education loan debt may cause some couples to

delay starting a family. In a 2011 report by the United States Department of Agriculture,

the cost to raise a child born in 2011 to 18 years of age (2028) would cost approximately

$295,560 (Lino, 2011). This does not include other possible costs such as medical or

special needs. The average cost of living, plus a child, matched with the overwhelming

burden of educational loans, and monthly expenditures make it very difficult to manage a

budget. This indeed can be a contributing factor when young couples are making life

decisions.

The negative consequences of student loans influence many parts of society in

different ways. Many graduates not only deal with the daily stress of trying to find a way

to repay their loan debt, but many are faced with a difficult job market. This makes it

difficult for graduates with loan debt to participate in commerce and have a high quality

of life.

Financial Planning & Education Loans:

Money management and financial planning are relevant topics when discussing

student loans. Many students enter college around the age of 18 and possess a limited

knowledge of financial planning. Younger students fail to evaluate how their decisions

about money prior to college may have more significant consequences after graduation

(Cude, Lawrence, Lyons, Metzger, Lejeune, Marks & Machtmes, 2007). Financial

planning is one of the ways to limit education loan debt and keep future graduates from

financial hardship. A personal financial plan is a way to measure quantitative financial

progress as well as evaluate education loan debt (Lee, 2001). One of the key elements to

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financial success involves being actively engaged in financial planning process and

making the necessary decisions to achieve prosperity after graduation. The financial

planning process must occur well in advance before the first semester of college.

Education loans are a debt liability. Many students do not know this nor are they

provided with a complete picture as how their education loan debt will affect their

financial budget post-graduation. Unlike other forms of debt, education loans are not

dischargeable under federal bankruptcy law. This is what makes financial planning an

even more important process for students. In a study conducted by Wells Fargo in a 2013

Millennial Survey, 79% of the participants articulated that personal finance should be

taught in high school (Wells Fargo, 2013). Graduates in the same Wells Fargo study

stated that they wish that they had more information about the loans they borrowed them

(Wells Fargo, 2013).

Creating and implementing a budget is a key part of personal finance. This is

commonly overlooked by a multitude of students when they borrow student loans. “The

relationship amongst the personal balance sheet, cash flow statement and budget provides

the basis for achieving long-term financial security” (Kappor, 2007). Like with all

financial plans, this will mean the student will have to prioritize expenses and make

sacrifices for long-term gain.

Career planning is an important component of financial planning. Students are

encouraged to pursue academic disciplines that interest them, but college advisors rarely

articulate details of employment after graduation. Certain degrees have a higher return on

investment than other degrees, and should be something that is evaluated and weighted

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when borrowing education loans. Students earning degrees in areas such finance,

accounting or hard sciences may have better job opportunities after graduation than

students majoring in theater or liberal arts (Dewey, 2012). Institutions should charge

different rates on tuition based upon the average expected income after graduation.

Since not all degree fields may provide a new graduate with the necessary income

to pay back the debt, having a financial plan to establish the expected averages on income

after graduation based upon the selected field of study can help evaluate an average range

for debt to income ratio figures after graduation. Although theses figures are not concrete,

using resources, such as, the National Career Development Association or Career One

Stop.org will help provide a student with information on career choices that should be

included in their financial plan for college.

Managing loan borrowing is essential to keeping education loan debt under

control. There are a few financial planning strategies that can help reduce a student’s

education loan debt liabilities. First, just because a student may qualify for a certain

amount of student loan money does not mean that the student has to take the full-amount.

Students can choose to take partial amounts as needed for essential expenses such as

tuition, housing and food. As tempting as it is to have the extra liquidity in the bank, it

also comes with a borrowed interest rate. The majority of unsubsidized loans begin

accruing interest upon disbursement. This can add to the overall debt load and should be

avoided if possible. As the results of this study will demonstrate, these figures can

amount to thousands of dollars even over the aggregate student loan borrowed.

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Living within your means is another important financial strategy to employ when

borrowing student loans (Thakor, 2011). Prior to the semester, it is advantageous to draft

an expense sheet to detail all expenses related to attending school. Major expenditures

such as tuition, fees, books, housing, food, and transportation should be included. Then

while evaluating these expenditures, identify those things that could be could be reduced

in cost such as finding a roommate to cut down on housing expenses, taking public

transportation if it is a viable option versus owning a vehicle. Cooking meals at home

instead of eating out at restaurants or even at the university cafeteria can save additional

money. Cutting a little whenever possible can amount to thousands of dollars in savings

each semester and less student loan borrowing.

The financial plan established before a student’s first semester should not be the

exact same financial plan for all four years. According to finance scholars Robert Cooper

and Bruce Worsham, financial plans must be constantly evaluated and amended based

upon economic circumstances (Cooper & Worsham, 2004). Amending the financial plan

insures that all current data is being used to create an accurate plan that will suit the

student’s needs and keep them on path of fiscal responsibility.

Methodology & Research Design:

To answer questions involving education loan debt and future consumer spending,

the research design used a grounded-theory that is a qualitative research method. This is

not testing a hypothesis, but instead developing a theory. This study used theories

already established through research as part of a conceptual framework. Data was

collected through interviews with random participants with student loan debt. They were

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asked a series of questions that allowed for open-narrative about their financial situations

in regards to their student loan debt.

The qualitative method “uses a systematic set of procedures to develop and

inductively derive grounded theory about a phenomenon” (Strauss & Corbin, 1998, pg.

24). Themes that are developed by constant comparative method are the foundation for

developing this ideology. Because the education loan debt problem has not fully matured

into a national debt crisis, inquiry into spending behavior at this time may provide insight

on critical areas of the economy. Certain ethnic groups may be affected differently than

others. Certain individuals with large amounts of education loan debt may delay life

decisions such as marriage and childrearing. This is definitely a difference from previous

generations including those that have endured difficult economic times.

The goal of this research is to create a theory from interview participant data.

Allowing this data to dictate certain themes that appear in the participant interviews aids

in developing a theory on education loans. Solid categories may not be appropriate

because this theory will be designed to evolve. Evidence will reflect differences in the

economy and in individuals. Face-to-face interviews allowed for the participants to

articulate their stories about education loan debt. Narrative inquiry highlights ethical

matters as well as shapes new theoretical understandings of people’s experiences

(Clandinin, 2010). By using the qualitative grounded theory, the emerging design of data

allowed the narratives to develop the core phenomenon. Narrative inquiry is a way of

understanding and inquiring into experience through “collaboration between researcher

and participants, over time, in a place or series of places, and in social interaction with

milieus” (Clandinin & Connelly, 2000, p. 20).

21

Data collection was accomplished through open-ended interviews from

purposeful sampling and secondary data analysis. The collection instrument entailed

developing an interview protocol that was used during the face-to-face interviews. Based

upon a participant’s answer, follow-up questions were asked to acquire data in

unexpected themes (Clandinin, 2010). Open-ended questions allowed for the participants

to articulate their narratives and provide additional data.

There were 15 participants interviewed (N=15). Participants were selected at

random and the only requirement for participants was that they graduated or attended

college after 2006. Interviews took approximately 30 minutes to 1 hour depending on the

participant.

Analysis of established case studies and surveys was conducted in tandem to

compare new research data and already existing data such as graduation rates and

national education loan debt figures. Data collected from the interviews in this study

developed themes regarding graduates and future consumer spending and financial plans.

Time and context was an important factor because new data may be different than

previous research because student loan debt is a rapidly evolving phenomenon

(Clandinin, 2000).

Questions were centered on three major areas of inquiry. First involves

participant’s education loan debt and their intentions on home-ownership and/or large

consumer purchases in the next five to ten years. The second inquiry was regarding life

choices such as plans to get married or delay in marriage in relation to a participant’s

education loan debt. The third area of questions was regarding childrearing and education

22

loan debt. Open-narratives regarding future financial plans were also collected to see if

any unexpected themes emerged.

All data collected was expediently transcribed and then coded for themes that may

emerge from the interview participants. Open coding allowed for synthesis of the

interview narratives (Creswell, 2005). Data was organized in Microsoft Excel. After

establishing categories, participant responses were grouped to show how the participant

answered. Similar participant answers were categorized together to get the final study

results.

Graphs were used with significant data such as the average amount of loan debt,

interest rates and gender of the participants. This is important in answering the research

questions and to make meaning of the phenomenon consumer spending and education

loan debt issues.

Selective coding was done through the use of hand coding and using Microsoft

Excel for data entry. A final results section organized the findings and reported the

conclusions. This presents the reader with substitutive evidence to support the research

questions. Multiple narratives were reconstructed to provide a conclusion to the research

questions (Strauss & Corbin, 1998).

Results:

This research study acquired narratives and financial data from 15 random

participants. The participants came from various academic disciplines, ages, ethnic

backgrounds and locations around the US. All research participants graduated or were in

the process of graduating after the 2007 academic year. There was only one international

student included in this study, this individual attended universities in both Europe and the

23

United States. The majority of participants interviewed (14 out of 15) were US citizens

and matriculated to universities within the United States.

Interview participants were first asked basic questions regarding where they

currently resided, worked, age, sex and ethnic affiliation for coding purposes. The next

series of questions involved their most recent or current academic institutions. Options

for education institutions included: technical colleges, private college, two-year public

college, public or private university. Participants were asked whether or not they would

have education loan debt related to their graduating institution. Names of the schools and

lending institutions were omitted.

The next section of questions was to determine whether or not it was a necessity

for them to borrow education loans to attend school. They were asked if they had any co-

signers for their student loans. Participants were asked to identify the total amount of

their education loans for all of their schooling. They were asked whether their loans were

government loans, such as Stafford, Perkins, PLUS loans, or private loans that were

borrowed from lenders such as banks, credit unions or the schools themselves.

After identifying the education loan amounts, participants were asked questions

regarding their academic discipline and career choices. Each participant was asked about

their degree and highest level of degree earned. Most of the participants earned or were

completing requirements for a bachelor degree (n=13) and two participants had or were

currently pursuing master or professional degrees (n=2). Participants were asked whether

or not they had applied for educational grants or scholarship. Depending on the answer

24

and depth of the response, participants were asked to provide additional narratives

regarding their answers.

The third section of questions was about spending and life planning choices.

Participants were asked whether or not they anticipated making any purchases on things

such as real estate (home or investment), vehicles or investing in the financial markets in

the next one to five years. Participants were asked two significant life planning questions

about getting married and childrearing in the next one to five years. The interview then

concluded with the participant discussing their personal perspectives in open narrative

regarding how education loans affected them and their future financial decisions.

The participant demographics included a gender split of 7 men and 8 women in

total. Out of the total male participants interviewed: 5 of the males were coded as white

and 2 male participants were coded as black for ethnicity. The average age of the male

participants interviewed was 28.2 years old. There were no Asian or Hispanic

demographics interviewed in this study. Out of the total 8 female participants the

ethnicity breakdown was 5 white females and 3 black females. The average age of the

female participants was 29.5 years old. The only prerequisite for being a participant in

25

this study was that they had to have graduated after the 2007 academic year.

Men (7) Women (8)27.5

28

28.5

29

29.5

30

Average Age Of Participant

Age

GenderFigure 1

Age

Although having education loans was not a qualifying requirement to participate,

all of the participants had some form of education loan debt. 15 out of the 15 participants

interviewed had education loan debt. There were no participants interviewed that had

attended for-profit universities. This study included participants from 7 academic

disciplines. Participant interviewees earned degrees or were currently completing degree

requirements in areas of political science (5), media arts/film (3), English (2), Education

(2), International Affairs/Environmental (1), Chemical Science (1), and Anthropology

(1). The majority of the participants currently resided in the Midwest and 93% of the 15

participants were United States citizens and matriculated to universities in the United

States.

The average total amount of student loan debt of the 15 participants was $59,567

dollars. The following figures were calculated using a student loan debt calculator from

(FinAid.org) that uses the total amount of education loan debt, loan fees (typically 1%)

26

and a fixed interest rate of 6.8%. This is a useful tool for students and parents to use when

they are developing financial plans for colleges.

Men (7) Women (8) Total Average55,000.00

56,000.00

57,000.00

58,000.00

59,000.00

60,000.00

Education Loan DebtFigure 2

Education Loan Debt

One of the reasons that this study used the Stafford Loan fixed interest rate of

6.8% is because when participants were interviewed, many could not articulate the exact

interest rate on their loans because of participants did not have all their loan documents in

front of them during the interview. So this interest rate was used to derive an average for

all of the participants.

Using the average loan balance of $59,567 for all 15 participants, the adjusted

loan amount is $60,168.69 with a fixed interest rate of 6.8% and a 1% loan fee as input

data. Then I calculated that a loan term of 10 years (120 payments) equals an average

monthly payment of $692.42 for 119 months with one final payment of $692.98 (See

Figure 4 on page 33). The total amount of interest paid on 10 years would be $23,523.96

and total amount of education loan debt over 10 years would be $83,090.96 (See Figure 3

on page 33).

27

This means that each graduate would need an annual salary of at least $83,090.40

to be able to afford to repay this loan. This estimate assumes that 10% of your gross

monthly income will be allocated for student loan payments. This corresponds to a debt-

to-income ratio of 0.7. If each student were to take 15% of their gross monthly income to

repay the loan they would need an annual salary of $55,393.60. Based upon the income

and student loan debt means that each student would have a debt-to-income ratio of 1.1.

This does not included other debt liabilities such as car loans, credit cards or revolving

lines of credit in a monthly budget.

Most of the participants said they opted for a 30-year repayment plan or that they

were on an income-based repayment plan (IBR) because they could not afford the

monthly payments of a 10-year repayment plan. The 30-year repayment plan was

calculated using the average loan balance of $59,567 from the 15 participants. The

adjusted loan amount is $60,168.69 with a fixed interest rate of 6.8% and a 1% loan fee.

The 30-year plan would lower the monthly payment to $392.25 (see figure 4 on page 33).

That is $300.17 per month less than a 10-year repayment plan. However, the total interest

paid over 30-years would equal $81,648.69 which is $58,124.90 (247.1% more) than the

10 year repayment plan (see figure 3 on page 33). This calculation also assumes that 10%

28

of the monthly income will be used to pay student loans.

10 Years 30 Years0.00

40,000.00

80,000.00

60,168.69 60,168.69

Student Loan Debt & InterestFigure 3

Loan AmountInterest

Loan Repayment Plan

In D

olla

rs

120 Payments 360 Payments0

100200300400500600700800

Monthly Student Loan PaymentsFigure 4

Amount in Dollars

Total Payments

In D

olla

rs

The grand total of student loan debt for 30 years is $141,215.69 per student with

the original loan amount of $59,567.00. Using the debt calculator at FinAid.com, each

student would need an average annual salary of at least $47,070 to be able to afford this

loan and that the debt-to-income ratio was be 1.3 and is still very high. The high debt-to-

income ratio means that the participants in this study will have less discretionary income

for consumer spending. This means that graduates will have less money to spend in

markets such as retail sales, real estate and financial investment resources.

29

One important variable to consider when examining the data from this study is

that there are only 15 participants interviewed in this study. Many of the studies on

student loan debt conducted by other organizations survey hundreds or thousands of

applicants. These student loan debt averages also assume that the participants are recent

or soon to be graduates, with a total repayment plan of 120 cumulative payments (10

years) or 360 cumulative payments. Since some of the participants are still in school and

some have already graduated, calculations based upon the total amount of debt over the

total repayment plan may vary for each individual.

Participants in this study were asked about their income and salaries for 2012.

These are averages in ranges rounded to the nearest $5,000. 11 out of the 15 participants

stated that they had worked in 2012. 9 out of the 15 participants said that they had full-

time employment in 2012. 4 out of the 15 participants said they had part-time or

temporary work in 2012. Three of the participants were unemployed (for more than 6

months) during 2012.

In order for the debt to be manageable, a graduate’s monthly income must be a

certain amount. In this study, the salaries required to have a healthy debt-to-income ratio

were lower than what financial planners would recommend. The average salary of the

participants was $27,066 per year. Based the average total student loan debt of this pool

of participants, when compared to their average salaries, demonstrated a deficiency of

$56,024.40 per year for a 10-year loan repayment plan. That means that on average the

participants needed to earn $56,024.40 more than they were currently earning. For a 30-

year repayment plan the participant had an annual salary deficiency of $20,004.

30

One of the variables that must be considered when evaluating this data is that

there were 3 participants that were unemployed due to being a full-time student and that

they received some money from family. Salaries of the participants also varied from

$5,000 per year to $65,000 per year. The figures calculated are the averages for the total

participant pool. One fact that was found by the interviews is that only 13% of

participants had secured full-time work directly relating to their degrees. In a 2012

Forbes article, James Crotty noted that 60% of graduates do not find full-time work in

their chosen profession (Crotty, 2012). The results of this study provide a similar

conclusion to the study from James Crotty.

Participants were asked questions regarding consumer spending and their future

financial goals. The purpose was to acquire a narrative about future intentions on big-

ticket purchases such as cars and home. The second category of consumer spending

questions was regarding life decisions pertaining to childrearing and marriage.

When participants were asked about purchasing a car, 8 out of the 15 stated that

they would not purchase a new car in the next 5 years. 4 out of the 15 participants noted

that they would like to but that they did not have the financial ability to do so. 3 out of the

15 participants noted that they have intentions and financial plans to purchase a new

vehicle in the next 5-10 years.

One of the common themes that developed through the narratives was that

participants wanted to purchase a vehicle, but since they already have a working vehicle

they did not want to take on more debt. Some of the participants had recently purchased

vehicles and so it was not necessary to do so again in the near future. Another common

31

theme that came from multiple interviews was that one of the main reasons for not

planning on purchasing a vehicle is because of their current financial situation, but that

they would like to purchase a vehicle if their financial situation improved. Since the

question gave a such a large parameter of time up to 10 years, many did not know what

their financial status would be that far in advance.

Home purchasing was the second consumer-purchasing question that participants

were asked about. Interviews revealed that 4 out of the 15 participants would like to

purchase a home in the next 5-10 years. 11 out of 15 participants stated that they did not

have plans to purchase a home. 8 out of the 15 stated that they did not have the financial

stability to take on a mortgage. Responses regarding why participants did not have

buying property as an investment option was ranged from financial instability, lack of

income and not being able to save for a down payment on a mortgage. A couple of

participants noted that they would rather rent, because it does not require expenses for

maintenance and provides flexibility in moving.

To provide a more comprehensive perspective of education loan debt, participants

were asked about their life planning decisions for marriage and childrearing. The average

age of the male participants interviewed was 28.2 years old and the average age of female

participants was 29.5. Thus the age of the interview pool was within the population

average for having children and marriage. According to the National Vital Statistics

Report, “In 2010, the mean age of mother at first birth increased to 25.4 years from 25.2

in 2009. The mean age rose for nearly all race and Hispanic origin groups.” (Martin,

Hamilton & Ventura, pp. 2-3, 2012).

32

In a similar report from the National American Community Survey and United

States Census Bureau, the average age of marriage for men in 2010 was 28.4 and the

average age for women was 26.9 (Elliot, Krivickas, Brault & Kreider, 2012). The average

age of the participants, both male and female, in this study are is comparable to the

national averages for marriage and childrearing.

Participants were asked if they had plans for marriage in the next 1-5 years. Only

2 out of 15 participants responded that they did have plans to get married. 8 out of the 15

participants answered that they did not have intentions on getting married in the next 1 to

5 years. 5 participants answered maybe when asked about marriage plans and that it

would involve meeting the right person. An almost equal number of women and men

claimed that they were not planning on getting married.

The final question regarding life planning asked participants about childrearing in

the next in 1-5 years. Over 93% of the participants, both male and female, answered that

they have no plans to have children with one female participate stating that she has plans

to get married and have children within 1-5 years. In one narrative, a participant

commented that if he were to get married that it would probably change, but it is not his

current plan at this time to have children in that time span.

When participants were asked in more detail about why they plan not to have

children, one of the most common responses was that they are not in the fiscal position to

do so. Additionally, many of participants commented that they would have to be with the

right person and more than likely get married before planning to have children. None of

the participants interviewed were engaged, married or raising children when they were

asked these life-planning questions.

33

The final section of the interview involved an inquiry about investing in financial

markets for personal finance or retirement. When asked about whether or not they have

plans to invest in financial markets 46.6% of the participants that are working currently

have a retirement plan with their employers. 5 out of the 15 noted that they would like to

have a retirement investment plan if they can acquire jobs that offer the opportunity to

invest through their employer. Most of the interviewees expressed that their retirement

investment strategy was closely connected to their employment. All of the unemployed

and full-time students articulated that they would like to invest, but cannot do so at this

time because they are not working.

Discussion:

Interview participants were also able to provide an open narrative regarding their

views or issues with education loans. The responses were different for each participant,

but a common theme was that they all attended school to better themselves and have

more career opportunities after graduation. Many could not understand why schools

charge so much for an education. One participant commented that she wished that she

were more educated when she started school about student loans before attending college.

For her, the education loans are okay now with income-based repayment, but when they

increase over the next two years her payments will increase to consume almost 50% of

her monthly income. She also said that this was one of the main reasons that she does not

have any plans to have children stating, “I can barely take care of myself”.

Another participant noted that prior to going to college he lacked any financial

planning knowledge. “When I was 18, it was not a priority; I had everything provided by

my parents so I was comfortable. I didn’t look at debt the same way I do now.” He noted

34

that the tuition at his university was very expensive totaling about $43,000 a year and

tuition increased about 8% each year from his freshman to senior year. “The education

system is flawed; the quality of education was not equal to the price of tuition.”

Participants often said that when they started their freshman year, there was little

guidance from the financial aid office on taking loans. One participant stated in her

interview, “It was amazing how quickly it took to get a student loan. In 15 minutes, the

advisor said I qualified for this amount and then I signed the papers. It was too easy.”

Another participant felt that she should have been given more information and guidance

when she got her student loans.

This narrative inquiry provided many insights on decision making of graduates in

their late 20’s. As the evidence has demonstrated, the average amount of student loan

debt for this study proves to be far higher at $59,567 than average figure of $26,600 by

The Project on Student Loan Debt (Reed & Cochrane, 2012). Interest rates are also a

contributing factor of the student loan debt problem. The total amount of interest paid on

$59,567 is $23,523.96 and total amount of education loan debt over 10 years inflates to a

total of $83,090.96. For a 30 year student loan, the total interest paid over 30-years would

equal $81,648.69 which is $58,124.90 (247.1% more) than the 10 year repayment plan

leaving each student with a debt liability of $141,215.69.

Conclusions:

Student loan debt is a significant problem for many higher education graduates.

Based upon the data collected in this study, education loan debt will have negative

consequences on consumer spending for large ticket items such as new homes and cars.

35

Education loan debt causes graduates to have less available income to invest in consumer

products and financial markets. Investment in financial markets is important because it is

a resource for retirement savings and financial growth.

Participants provided narratives regarding how their education loan debt

negatively affects their finances and future financial decisions. Decisions regarding

marriage and child rearing appear to be different than with previous generations.

Graduates around the age of 28 with student loan debt are delaying getting married or do

not have immediate plans to get married in the next 1-5 years. A majority of participants

both men and women also articulated that they do not have plans on having children in

the next 1-5 years.

One of the strategies that can help students from incurring large amounts of

education loan debt is to have a financial plan before and during college. Not using loan

money on non-essential items is key to keeping loan debt to a minimum. College is an

investment for the future and for many students borrowing student loans are unavoidable.

Financing options for college should be evaluated with due diligence like other

significant financial decisions. Including information such accreditation and potential

career information in the college financial plan can help students understand how loan

repayment will affect their finances after graduation.

This study answered some key questions regarding consumer spending, but

further research should be conducted on how graduates that have education loan debt

from for-profit institutions will spend money. More research on minorities and student

loan debt is needed to determine how educational loan debt affects different racial

groups.

36

Education loan debt is a significant financial burden to the graduates who borrow

these loans. If tuition rates, interest rates and student loan options are not evaluated and

changed, many graduates with student loan debt will have a difficult time achieving

economic prosperity in the future. This problem may have negative consequences at the

macro-levels of the United States economy.

37

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