The debt factor: A closer look at the broke college student stereotype

A credit card can be a blessing. Possessions with loaded price tags were once only afforded by those fortunate enough to have a plentiful supply of cash on hand. The establishment of credit in this country has now made it possible for one to obtain virtually whatever is desired, which has credit card companies thriving on revenue from interest, late payments, and penalty fees. The more you charge, the more they earn.

And with each purchase, total costs rise, interest fees amass and the potential for credit card debt occurs faster than the salesperson can say, “Please sign here.”

Yet there is a different debt weighing down a specific 15 percent of the population — and it passed the credit card debt years ago.

Photo Illustration by Beth Walter and Chris Aldridge

The student loan debt has reached $1 trillion. In Michigan, some 60 percent of graduating students come out of college with an average of $25,675 in the hole — just shy of making the top ten “high debt” states as classified by The Project on Student Debt.

Almost equally as painful to face is the prospect of finding a job after college, which has become less of a promise than it once was, and rightfully so: Unemployment among graduates rose from 8.7 percent in 2009 to 9.1 percent in 2010 — the highest annual rate on record.

This leaves students with a bleak outlook toward the future, and an overwhelming question looms: How are they to manage such debt?

Finance professor Doug Iles favors a realistic approach. When he graduated, the concept of credit was nearly unheard of. At the turn of the 21st century, however, it was everywhere and most students had at least one credit card. Iles, a certified financial planner, identified this as being a contributing culprit to student debt. “Most of them [students] have never had any good role models about investing and no formal experience with financial training,” Iles said. “It’s a shame.”

The availability of credit has proposed a problem for some students that do not manage money wisely. This problem, according to Iles, has a simple solution: Any expense can be tackled if the proper planning is assumed — a plan that includes legitimately laying out expenses detailing how many hours will be committed to work and school. It’s determined by the skill the student has as an investor and a saver, he said, noting the importance of saving.

“It takes a lot of self-discipline and you’ve got to be proactive. Be realistic; most underestimate, leaving a margin for error,” Iles said.

What students are saying about the debt

Annalise Kransz, a senior majoring in broadcast and cinematic arts, is one of those students who is taking Iles’ advice literally. Kransz anticipates having to pay $2,500 toward loans upon graduation — a figure 10 times less than the average for students attending college in Michigan.

“It’s about living below your means and being conscious of what you’re buying,” she said.

Kransz has been employed since she was 16 and says that scholarships have saved her $20,000 over the last four years. Her parents have taken on some of the burden of the bills by matching the amount that she pays. She also created a budget in her personal finance class that has been a model for her personal and discretionary expenses. She has one credit card and pays it off every month, using it only for emergencies.

“A lot of kids just swipe their credit card and then wait for the bill,” Kransz said. “They’re not really conscious.”

A similar area in which students may not be so conscious in is the issuance of refund checks from financial aid. Both Iles and Kransz warn that students should not see this as free money and must realize that it needs to be paid back.

As far as finding a job after graduating and being able to pay off her loans, Kransz is unsure about the future, but can manage the loan on her salary working at a bakery in her home town of Portland.

Cody Herrmann, a physics and information technology double-major, feels that the debt college students face can be blamed on the “dwindling buying power of the U.S. dollar versus other global currency such as the Japanese Yen or British Pound Sterling.”

“This can easily be reversed if an insignificant amount of federal spending toward military use was rerouted toward education,” the Michigan Center junior said. He then contended that since “major players” in the economy (those earning more than $250,000 yearly) are the ones that make money from indebtedness of Americans, people are blindly willing to pay into the system and the situation is not likely to improve.

Herrmann expects to graduate with debt, and the one credit card he has represents loan money. “It is electronic debt. I have learned my lesson early and am working on paying back my loans while in college to minimize the cost of borrowing,” Herrmann said.

Sophomore Keith Lavielle, who recently signed his finance major, plays it safe when he is tight on cash and forgoes going out drinking with friends. His parents have helped him pay some of his expenses toward college, but he anticipates a $20,000 bill after graduating.

“I guess that’s about average; better than others who will have $100,000 or more,” Lavielle said.

Should tuition rates be lowered?

A full-time semester costs students anywhere from $4,000 to $5,500 or more in tuition at CMU. As this rate continues to rise, the university’s unrestricted fund expands the same. There is reported to be $275 million in the account — an account which is not restricted for use of future projects and of which the university can use at its discretion.

Members of administration from various universities have warned against using this fund to lower tuition, stating that it may help short-term goals but will end up hurting in the long run. Iles said that most of the money in that account is already accounted for in the use of scholarships, student services and other various projects, and that the money is not simply just “sitting around.”

“A lot of people do not realize the operating costs of a college,” Iles said referring to the seemingly large amount in the college’s unrestricted fund. He did not confirm the accuracy of this figure and declined to comment any further on the matter.

Samantha Reed, a junior from Grand Rapids, feels that lowering tuition would not be good for students or the university. “If we tap into the [unrestricted funds], it will go down significantly and maybe people won’t see as much value in the school. The money should be used for something else rather than lowering tuition because eventually the costs will rise again,” she said.

Some parents and students feel differently.

“I think it would draw more people to the university,” Physical Education major and junior Micheal Couture said.

Knake, a junior from Armada with a minor in finance, says that dispersing some of the university’s unrestricted funds would help students in paying their already atrocious bills.

“Knowing that the university has more than $275 million in unrestricted funds, I think using this fund to lower tuition rates would be a great idea.”

Photo Illustration by Beth Walter and Chris Aldridge

Obama’s plan: A break for students?

Over the past four years, the Obama administration has incrementally decreased the interest rate on Federal Subsidized Stafford Loans — a common loan that students acquire to help fund their education. The rate dropped to a low of 3.4 percent for the 2011-2012 academic year, down from 4.5 percent in the previous year. For the 2012-2013 academic year, however, the interest rate is scheduled to return to the normal 6.8 percent. Obama and other democrats have tried to pass legislation that will prevent it from returning to this mark in an attempt to control the massive student debt.

Obama voiced his concern about the growing debt in a speech at the University of Michigan, as reported by the Huffington Post:

“If you can’t stop tuition from going up, then the funding you get from taxpayers each year will go down,” the president said. “We should push colleges to do better. We should hold them accountable if they don’t.”

The keyword here is taxpayers, since they will pick up the slack where funding falls short due to decreased interest rates. This could amount to an extra $6 billion yearly, according to Rep. John Kline (R) of Minnesota and the chairman of the House Education and the Workforce Committee as reported in an article from The Christian Science Monitor.

The puzzle of student debt has a few solutions — though they are not exactly foreseeable when considering the complex effects and compromises that taxpayers and the Federal deficit would face. The future may be troubled for college graduates as they struggle to battle a climbing unemployment rate and default rate on loans, as well as a mounting student debt. Until a passable solution is found, the stereotype of the broke college student remains a reality.