Millennials and High Levels of Student Loan Debt

As we know, for the millennial generation, costs associated with pursuing a college degree are higher than ever. College tuition continues to rise each year at two to four times the rate of inflation, making it four times more expensive to attend school than it was 20 years ago. Tuition is also rising at a much faster rate than family income. The percent of median household income needed to pay for tuition is now 35 percent, compared with 19.5 percent 20 years ago.

More millennials are borrowing to pay for their education than the generations before them. The average cumulative debt among millennial undergraduates is also on the rise. The long-term impact of student loan debt will be significant. According to a recent study by Think Tank Demos, a college-educated couple with an average amount of student loan debt will see a reduction of more than $200,000 in lifetime wealth accumulation.

As student debt is increasing, the ability to pay a debt is decreasing. College graduates are now, more than ever struggling to realize the return on the investment in their education.

Not all college graduates face the same struggles on the job market. Graduates with degrees in Science, technology, engineering, and Math (STEM) fields are faring better than their counterparts with liberal art degrees. This highlights the American “Skill Gap” – or the mismatch between the skills possessed by job seekers and those required by employers. A recent report noted that while more than 70 percent of colleges and universities think graduates possess the right skills to enter the labor market, only 42 percent of employers agree.

Clayton Christensen, the preeminent scholar on disruptive innovation in higher education says this is a result of American Universities placing a higher premium on prestige than on the return on investment a student gains from the education.

Christensen explains that for decades, traditional universities- similar to businesses in many other industries focused primarily on getting “bigger and better,” under the assumption that becoming more prestigious and reputational would be the best way to serve all their constituents. As such, universities across the country made significant investments in “growing the number of courses and degrees offered, adding graduate programs, doing more research, and trading up to bigger athletic conferences,” all while increasing admissions selectivity.

Mitigating Strategy: 

Simplify Student Loans and Repayment

The federal government could consider a series of policy shifts to stabilize debt burdens among the millennial generation of students, which in turn would reduce delinquency and default rates. A good starting point might be simplifying the student loan system, which currently includes a complicated mixture of grants, loans, work programs, and repayment options that students struggle to navigate.

Streaming the student loan system, the government might consider offering a single type of grant and loan system for college students, with income-based repayment (IBR) as the default option- a measure that more than 75 percent of students support. A single type of financial aid with consistent and predictable application standards, interest rates, and repayment options, might mitigate the difficulties students face in understanding the loan process. In addition, IBR as a default option for loan repayment immediately following graduation could help students manage their debt levels during a volatile life stage. Though IBR is already an option for struggling graduates, of the 5 million Americans currently in default on their debt, only 1.1 million borrowers are enrolled in IBR plans.