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College Debts Hold Back Economic Recovery; Need Assistance

September 10, 2014 By Lee Egerstrom, Economic Development Fellow

Rising college debts are holding back recovery in the housing markets while housing costs converge with college debts to also hold back recovery for the broader U.S. and Minnesota economies.

This drag on economic performance isn’t perfectly documented and analyzed yet. It is coming in bits and pieces. Yet an increasing body of financial house studies and analytical journalism finds linkages too strong to be ignored.

Two sets of data should grab everyone’s attention, said Darryl Dahlheimer, program director for Lutheran Social Services of Minnesota’s LSS Financial Counseling Service, who actually has suggestions for ways to help students and the economy cope.

The first data set is that college debts for recent graduates and current students have reached $1.2 trillion. The second, he said, was Federal Reserve Bank of New York’s findings earlier this year that 31 percent of college loans are now delinquent.

“This has to have an enormous impact on the overall economy,” Dahlheimer said, and is a crisis calling out for public policy assistance.

College students need debt management counseling when they take on college loans, similar to the way the U.S. Department of Housing and Urban Development (HUD) provides mortgage and foreclosure-bankruptcy counseling, he said. “Right now, all across the country, the only counseling college students get is how to get loans; nothing on how they will repay them.”

Such counseling could be provided for in the overhead cost of the student loans, and the 600 members of the National Foundation for Credit Counseling (NFCC) are in place to provide low-cost financial services, he added. LSS Financial Counseling Services, for instance, is a fully accredited nonprofit counseling service in Minnesota and Wisconsin. It is part of a pilot program, along with Urban Edge group in Boston, providing counseling through a unique Center for Excellence in Financial Counseling program at the University of Missouri.

Ideally, Minnesota and national leaders should be looking at debt relief, or debt forgiveness programs similar to efforts underway to get doctors and medical personnel into rural and underserved communities, he added. That could be a third public policy response. 

Student debt problems are nationwide. Minnesota is no exception.

The Project on Student Debt organzation found in its student of 2012 college graduates that Minnesota ranked fourth, after Delaware, New Hampshire, and Pennsylvania, for graduates holding the highest amount of average college debt at $31,497. Minnesota was also ranked fourth highest among states with 70 percent of its class of 2012 graduating with debt.

Overall, 71 percent of 2012 graduates from four-year colleges nationwide held student loans, according to the Institute for College Access & Success research group, averaging $29,400—a 25 percent increase from the previous survey in 2008.

How this spills over on the economy is obvious in the trenches where people work on community and economic development and on housing issues, said Jim Erchul, executive director of the Dayton’s Bluff Neighborhood Housing Services on St. Paul’s East Side.

It is keeping recent college grads out of the home buying markets, he said. It has made them working poor, despite their educations; and they compete with low-income families for rental properties. And it delays any hopes for recent college grades to use their educations as a springboard to become entrepreneurs and launch new businesses.

When Erchul started college, public universities in Minnesota were on a quarterly school calendar and tuition cost about $100 for the quarter. “It was $1,000 a quarter when I went to graduate school, a thousand percent increase,” he said.

Much later, when another member of his household started graduate school, the cost had gone up to $10,000.

Meanwhile, home values in most of Minnesota peaked in 2005-2006, with the subsequent collapse in the housing market nationwide triggering what has become known as the Great Recession. By 2013, the collapse meant $1 billion in home equity was wiped out in just the East Side of St. Paul where Erchul works.

There has been an uptick in home values in the past 18 months, he said. But this reversion to mean in home pricing has only recovered about half the lost home equity, still leaving a high percentage of home mortgages underwater and pinching homeowners’ abilities to do repairs and pay off other household debt. Whether this was ever good financial planning or not, home equity has been the leverage for would be entrepreneurs to start businesses that, in turn, create jobs and spur economic activity within communities. For these reasons, the broader economy has shared reasons why it is important for college graduates to get on with their lives, buy homes and ultimately start new businesses.

Sarah Strain, research and communications intern at Minnesota Housing Partnership, finds the financial world is taking notice. (See accompanying blog.) For instance, a Goldman Sacks study found that six to seven percent of grads have $50,000 in college debts, lowering their chances of home ownership; and that millennials paying 10 percent of monthly income on students loans have a 22 percent lower home ownership rate that their classmates.

Strain’s research finds the connections. Erchul sees it play out. And Dahlheimer knows it won’t get better until student loans also buy college debt management counseling.

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5 Comments:

  • tony says:

    September 15, 2014 at 9:08 am

    Our parents arranged for college subsidies, so when I went to college in the 70’s, you could pay for college with a part-time job. We used to subsidize 70% of the cost of the U of MN and now it is only 7%. Obviously our parents loved us a lot more than we do our kids. Now they come out, like my son, with over $100,000 in debt (w/grad school) and a 25 year payback. A little hard to afford a house when you already have the equivalent of a mortgage on your back. I guess that’s why they called our parents the “greatest generation”...

  • W. D. (Bill) Hamm says:

    September 15, 2014 at 10:02 am

    Good Morning Lee, it is clear to see your gift for understatement has not diminished. In all that explanation as to the effects and depth of the Student Debt problem, not a single word on the cause. Not a word about our longest and most costly WAR, the “DRUG WAR”, not a word about how EDUCATION funding was converted to wages and benefits for Upper Middle Class, Union, Public Employee’s involved in the RACIST “Prison Industrial Complex” here in Minnesota. Education, the Mentally Ill, and the poor all paid for this growth of the Middle Class. We should be proud that ONLY 51% of our prisoners are in for drug crimes when the National average is 66%, right? Perhaps we should first also remember the cost of those in the probation system, all still under direct control of well paid Union Public Employee’s. The RACIST, Socialistic, Police State costs us all very REAL money. Trouble is the farther down the socio/economic scale you are the larger your student debt is going to be and the more certain your children will have bad education outcomes. Those well above the 6 figure mark can actually afford to save for College yet, again advantage Rich and Upper Middle Class. This is a fixable problem, end the idiotic judicial attacks on addiction and turn it back over to healthcare where it always belonged. Our most dangerous drug dealers are already regulated and contained, (Alcohol, Tobacco, and Big Pharma).

  • Peter Kelley says:

    September 15, 2014 at 11:47 am

    There is another half to this discussion also needs to be noted; and fully understood.

    The cost of education is not just a one time thing - wage earners today needed to return to school several times over their lifetime to be considered to be current for employment.  Some companies seem to employ by the philosophy that if a student has not found employment in 9 months of graduation their out of date educationally!  This philosophy goes on to suggest/encourage that if the employee has worked of 5 years its ‘OK’ to with hold job promotions if they have not gone back to college - or even worse lets fire them because they’re ‘dead education’ weight.  [some of ... ] Our parents held ONLY one job over their lifetimes.  Today’s children may have 10 to 12 or even more jobs in their lifetime because our corporate structure says ‘current, current, current’.  And persons with disabilities certainly have no chance in h*ll to stay equal in this work situation.

    The technology vs. employment demands need to be slowed down and rebalanced.  At some point society will collapse because people will not be able to find the money to go back to school to be able to stay employed.

    Peter Kelley
    St. Paul, MN USA

  • Roland Westerlund says:

    September 15, 2014 at 1:54 pm

    Below you will find one of the best kept secrets in the State of Minnesota; namely, Section 12 of the Charter of the University of Minnesota, which has been incorporated into the Minnesota State Constitution.

    Section 12 documents the fact that the writers of that Charter, the Territorial Legislature that adopted the Charter, and the early State Legislature that incorporated the University Charter into the State Constitution, supported free, universal public education - yes, even unto the University level!

    As you will see below, Section 12 states that tuition in all of the University Departments SHALL (A COMMAND WORD) be without charge to all Minnesota residents, when, in the opinion of the Regents, the income of the University permits it!

    Of course, the challenge is to find a way of achieving this Charter and Constitutional mandate for free tuition.

    Clearly,  a succession of Minnesota State Governors, Legislatures, Regents and University of Minnesota Presidents have failed in their duty to find a way of achieving this mandate; in sharp contrast to such governments as those of Finland, Norway and Sweden.

    In the United States some Michigan State Legislators have proposed to end tuition in all public, post-secondary educational institutions in that State by 2020. To finance their plan they proposed to end SOME business tax expenditures; using those revenues instead to provide higher education free from the bondage of student loan debt; while also providing a trained workforce, whose training the private sector has demanded, but has been otherwise unwilling to adequately finance.

    In 2004 Adolph Reed, Jr. and Sharon Szymanski published an article in ACADEME (An AAUP publication) titled “Free Higher Education”, in which they predicted the current student debt crisis and described the benefits of free higher education. It is worth reading if you are concerned about student indebtedness and its adverse effects on the national economy.

    While in recent years the University of Minnesota, with the aid and comfort of the Minnesota State Legislature, has
    been able to find several hundred million dollars to build a duplicative football stadium, to pay $300,000 to avoid playing in two athletic events, $300,000 to get rid of a female athletic coach, at least $2.5 million to get rid of a male athletic coach, and spend $118,000 annually on each student football ball player; to my knowledge, not one red cent has been invested in trying to find ways to develop and implement a plan to carry out the Section12 mandate of the University of Minnesota Charter. And, given the characteristics of both the Legislature and those appointed to the Board of Regents, that won’t happen without considerable pressure from Minnesotans themselves.

    Having said all of that I invite you to read Section 12 of the University of Minnesota Charter, which appears below.


    University of Minnesota Charter

    University of Minnesota Charter
    Territorial Laws 1851, Chapter 3
    Perpetuated by the Constitution of the State of Minnesota, Article 8, Section 4.
    Chap. III.—An act to incorporate the University of Minnesota, at the Falls of St. Anthony.
    BE IT ENACTED BY THE LEGISLATIVE ASSEMBLY OF THE TERRITORY OF MINNESOTA, That there shall be established in this Territory an Institution, under the name and style of the University of Minnesota:

    Sec. 12. The admission fee to the University and the charges for tuition in the several Departments thereof, shall be regulated and prescribed by the Board of Regents; and as soon as in their opinion, the income of the University fund will permit, tuition in all of the Departments shall be without charge to all students in the same, who are residents of the Territory.

    You can find the entire Charter on the University of Minnesota Regents’ website.

  • Carol Lantow says:

    September 15, 2014 at 3:10 pm

    Regarding the hypothesis of the last sentence and the supposed “fix” for the problem which has outrageously targeted the next generation, college debt management counseling will in NO WAY help alleviate the problem.  The problem is greed and absolute abandon of any semblance of fairness in educating this segment of our society.  Education costs need to be micromanaged by society and government and should be interest free.  Administration salaries and huge new buildings need to be trimmed way back in all scholastic endeavors.  Education can be achieved without magnificence in buildings, grounds, and administrators who are paid more in one year than most people can save over a lifetime.