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  • Steven Lee

"Nothing Is Certain, Except Death and Taxes...And Student Loan Debt": Part I

It has long been predicted that student loans would become a problem for the nation. In 2010, for the first time in United States history, student borrowing surpassed credit card debt. Recent figures cite a $1.5 TRILLION figure in total education liabilities. At around 44.7 million borrowers, that comes to an estimated $34,000 per student. Given the total estimated number of Americans at 329 million people, that means 14% of all Americans are saddled with student loan debt. Remember, that's total Americans--including people in comas, nursing facilities, those who hate the prospect of learning, and newborns in hospitals.

Responses to the student loan debt crisis often boil down to poor decision-making on the part of borrowers, often stemming from financial literacy or just a lack of common sense. Others say it depends on the major chosen: students who select medicine, law, business, or engineering are better positioned to score high-paying jobs than those who study philosophy, liberal studies, or art. Still others point to more viable alternatives such as trade schools or the military to get ahead in life. Unfortunately, for many Americans, vocational school still means debt, an average of $33,000 to be exact. If you attend an in-state public school and serve 36 months or more of active duty, the Department of Veterans Affairs will cover 100% of your tuition and fees. If you select private school, the VA will cover about $24,000 per year. The College Board's average cost to attend a private institution of higher learning in the US during the 2017-2018 academic year is about $35,000. This is the result from an average inflation of college tuition of 8% per year. That's more than double the regular inflation rate--even three times some inflation estimates.

The purpose of this post is not to debate whether there is a student loan debt crisis or even the causes of it. Rather, it's a response to the argument of, "Don't go." This line of reasoning suggests that students today are better-off (and consequently can still achieve the American Dream), if they don't attend college. But are they?


The first of this two-part post examines the assumptions this analysis will employ to compare average life trajectories of a Baby Boomer with a Millennial, namely:

* Baby Boomers (born 1946 - 1964) and Millennials (born 1980 - 1996) both, on average, begin attending college at age 18;

* This means the average Boomer (born 1955) and Millennial (born 1988) started college at 1973 and 2006, respectively;

*College, on average, requires four years of study; Graduate/professional school requires another three years;

*Both individuals enter the workforce at age 18;

* The average cost of obtaining a four-year degree in 1973 was $2,341 per year;

* The average cost of obtaining post-secondary education increases by 8% per year;

* The average cost of living adjustment (inflation) that covers day-to-day expenses (but not food, gas, or other expenses with highly volatile prices) is 3%;

* The average sale price of a new home in 1973 was $32,800;

* On average, a worker becomes a "home owner" the moment (s)he has saved 20% for the down payment, and then carries a 30-year mortgage;

* The average increase in new home prices in the United States is 5% per year;

* The average growth in wages in the United States is 6% annually;

* The average high school graduate earns minimum wage for the year in question;

* The average college graduate makes 65% more than minimum wage;

* The average professional degree holder makes 160% more than minimum wage;

* The average worker pays a total of 25% in income and Social Security taxes; and

* The average worker spends 30 years in retirement and then dies;

NOTE: Certain things are not included in the calculation such as differences in lifestyle, particularly technology (cellular phones) and other "big ticket" purchases like automobiles or vacations, as well as differences in life expectancy, which can result from a multitude of factors.

One should note several limitations inherent in such analyses of inter-generational consequences of student loan debt, including:

*The student loan system dramatically changed between the Boomer and Millennial generations, as well as the college funding "stack" (federal and state loans, work study, personal savings, parental contributions, grants & scholarships, etc.). Over time, a greater percentage of external funding (meaning outside the family) has become constituted by student loans instead of grants and scholarships;

* Between the time the Boomers left college and the Millennials entered, there were significant effects that were at least tangentially related to student loan debt and overall wealth accumulation. One of these is the mass migration of employers from defined benefit retirement plans (pensions) to defined contribution plans (401k) across the board;

*Inter-generational effects necessarily play into this picture. Baby Boomers as a generation are simultaneously passing wealth to and sandwiching Generation X and Millennials by moving back into the same household. Between the rising costs of medical care, the increased tension on both Social Security and Medicare, and the fact that the Boomers were the first generation, generally, to absorb their own retirement risk (see the previous point regarding pensions), this will all negatively affect Millennials--both in terms of raw inheritance dollars as well as less comparative wealth transfers compared to that which the Boomers received from their parents.

Conclusion to Part I

Despite these limitations, I will endeavor to reconstruct the typical life trajectory for Baby Boomers and Millennials as a function of student loan debt accumulated and satisfied over the life-cycle of each generation. To reiterate, the primary difficulty associated with this analysis is that so many institutions in our society work fundamentally differently today than they did 20 or 30 years ago. The process (and probability) by which a recent college graduate was hired, the life span of one's tenure at a single company, family makeup and dynamics, retirement responsibility and means of saving, and day-to-day expenses required to keep up with the Joneses--or even participate in major cultural moments like the advent of the smartphone--have all greatly differed between generations.

I hypothesize that Millennials, as a generation, will lag behind every major milestone compared to their Boomer counterparts, including buying a home, paying-off the mortgage, affording college for their children, building a sustainable retirement, and establishing a legacy for the next generation. I plan to use a combination of time value of money calculations in Excel, Monte Carlo analysis in Octave, and statistical tests using SAS Enterprise Guide. I will begin Part II with a full methodology including the data set used in the analysis followed by findings, discussion, and future research possibilities.

Until then...