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Thursday, June 6, 2013

Generation X and Crippling Student Loans

Warning:  This post involves a lot of math but you don't have to be good at math to follow and understand the points being presented..  Besides, we did all the adding and multiplying for you..

Its Thursday.. let's see how the market is doing..

Down 30pts to 14,930 as of 2:15p..

Its amazing how artificially over-inflated that stock market is...  Back on March 2nd, 2009 which was the official bottom, the market closed at 6,628.. Then QE1 began..

So take 14,930 minus 6,628...

So as of this writing, the stock market has been inflated by 8,302 pts..
A 125% increase based on trillions of dollars thrown into the market for banks, corporations and professional investors to directly benefit and profit from...

That's your 'recovery'...

But let's move beyond all those mumbo-jumbo numbers and focus the rest of this posting on what matters-- people

Last week we addressed what are known as 'Millennials'; young people between 16-30 who are suffering through a 16% unemployment for their age demographic.

Today let's talk about Generation 'X'..

These are the people now in their mid-30's to late 40's..  Wonder how this continual recession-depression is affecting them..
From ABC news:

" A Pew Charitable Trust study, titled "Retirement Security Across Generations," examined the savings behavior of five age groups before the Great Recession hit and found that Gen Xers - the group of Americans following the baby boomers that range in age from 38 to 47 - fared especially poorly during the recent economic down swing.

As a result, their retirement years will likely be more tarnished than golden.

The study found that between 2007 and 2010, Gen Xers lost nearly half of their overall net worth, an average of about $33,000, and also had higher levels of debt than previous generations."

That's not good is it..
Gee, wonder why that age group is struggling financially on the whole..  It couldn't be they were the first generation to Truly feel the affects of crippling student loans as tuition rates started dramatically rising in the mid 1980s..

Could it?

"A large part of the reason their debt is so high is because of student loans and credit card debt..."


That same destructive ball and chain thrust upon Generation 'Y' and the Millennials..  The problem no one wants to address or fix because its such a vital part of the US economy.
So politicians will express empathy and very articulately explain the problem but solutions are few..  'Elect me and I will cut interest rates on the loans...'  or 'Vote for me and I'll pass legislation to allow borrowers to have 20 years to repay instead of 10.. and if that's not good enough, then 30 years'

Whatever number you want... It's just... well you Are going to pay back the loans and We the banks and the US government Are going to profit off your living, breathing existence from the time you sign those student loan papers at the innocent age of 18...

We could have picked many Universities to provide examples of how much tuition has dramatically increased, especially within the last 10-20 years but we chose University of Pennsylvania because its a private Ivy League school; the type of University you want to attend if you wish to go far in life...
In 1960, tuition at Penn was $1,250 with an add'l General Fee of $100

This is for the entire school year.. not a semester.

By 1970, tuition was $2,370 with an add'l General Fee of $200

In 10 years, tuition rose a total of $1,120...


By 1980, tuition was $6,000 which included General Fees
So in the 1970's, we see tuition at Penn increased by $3,730 over a 10 year period.

Now this is the time we really start to see tuition spikes both at Penn and virtually all Colleges and Universities across the nation..

By 1985, tuition is $9,525 with an add'l General Fee of $825 and by 1990, tuition at Penn for a full calendar year cost $13,420 with an add'l $1,500 in fees...

In that 10 year window of the 1980's, tuition rose by $7,420.

So let's stop a moment... why such a spike during the 80's?
Simple-- the 1980s were the first decade where requirements to receive student loans were lowered..  You didn't need mandatory co-signers and laws were passed allowing for banks to lend to students across the country using uniform interest rates..

In the past, interest rates were set by the individual states.  This also applied to credit cards..  Once laws were changed so that the lender's base state was the interest rate to be applied to All US states, it opened the doors to greater lending..

And with loans so easy to come by, there's absolutely No incentive for colleges to curb their tuition spikes.. Whatever they charge, people will take out necessary loans to pay..  They'll never be a shortage of prospective students..

In 1995, tuition at Penn cost $17,974 with an add'l $1,800 in fees, and by the close of the decade in 2000, tuition for undergrads cost $22,682 with an add'l $2,300 in fees...

So to refresh thus far:

     1960 -- $ 1,250 + $100 fees
     1970 -- $ 2,370 + $200 fees
     1980 -- $ 6,000 including fees
     1990 -- $13,420 + $1,500 fees
     2000 -- $22,682 + $2,300 fees
In 2005, tuition spiked up to $29,030 with add'l $1, 448 in fees and by 2010, tuition at Penn cost students $36,208 with $4,400 in add'l fees..

Those attending Penn this upcoming calendar year 2013-14 will be shelling out $40,574 plus an add'l $4,750 in fees...

That totals $45,200 est..  it doesn't count room/board or books..

And that is One year!
Now let's follow this through...

Four years at Penn will cost $200,000 for tuition (we're modestly adding tuition hikes each year and textbooks into this amount)  To keep things super simple, let's say the student lives locally and doesn't have to pay for room and board.

Right now, student loans' interest rate is 3.4%

So using an amortization calculator...
If someone had 10 years to repay that student loan, the monthly payment on the debt would be $1,968.36...

Yes, that's a little under two-grand every Month!

Let's say they have 20 years to repay..  That would be $1,149.67/mo.

If a student had 40 years to repay it, which is unheard of, the monthly payment based on 3.4% is still over $750/month!

This is why the economy is horrible.. and why it will continue getting worse and worse...
These debts are too large to re-pay.. But they can't be discharged in bankruptcy so someone will be paying or having their assets and paychecks seized..

And if these debts have to be written off the books..  over $1 Trillion in loans to this point, the taxpayers will foot the bill..

And young people can not buy cars and homes and furnishings, etc with this debt load on their shoulders..   And working post-graduation at Sports Authority or Best Buy just isn't going to hack it...
So Generation X and Y and Z is supremely fucked and no one in power really wishes to do a thing about it because the economy is too dependent on people becoming indebted to come up with solutions to minimize it...

But..hey.. that stock market's looking good isn't it??