In 1965, the federal government mandated that cigarette packaging include this warning:

Caution: Cigarette smoking may be hazardous to your health

The intent was to educate consumers about smoking, and emphasize the health risks, e.g. lung cancer, coronary disease, bladder cancer, and pulmonary disease.

In the same year, as part of President Lyndon Johnson’s Great Society domestic agenda, Congress passed, and the president signed, the Higher Education Act of 1965, which established multiple grant and loan programs to make it easier for students to pay for college. This legislation planted the seeds for today’s student loan crisis by leading the government into taking massive steps into intervening in the financing of post-secondary education.

Primarily, remembered in history for mishandling the Vietnam War, LBJ missed a golden opportunity to redeem himself with the Higher Education Act. He could have had those federal student loans labeled:

Caution: Student loans may be hazardous to your financial health.

Going to college is risky these days because of the high cost and imbalance of Supply versus Demand.

If you are one of the seventy percent who need student loans to balance the ledger, you are significantly increasing your exposure.

A Trap For The Unwary

The federal student loan system is fatally flawed, because the system is based on three faulty assumptions:

1. Every high school graduate is entitled to go to college.
2. Colleges and universities are selective.
3. A college degree in “anything” leads to a well-paying job.

Assumption  #3 actually used to be, pretty much, true when Demand (well-paying, professional jobs) exceeded Supply (college grads).

However, college doesn’t work that way today.

Almost any high school graduate, despite their academic shortcomings, can find a college or university that will accept them. They are free to explore their passion, which can be almost anything, e.g. Underwater Basket Weaving. Most dependent, undergraduate students can borrow $27,000 over four years from the federal government just by signing their name.

What could possibly go wrong?

The Wealth Premium Has Collapsed

When economists try to answer the question, “Is college worth it,” they look at the Earnings Premium and the Wealth Premium.

How many times have you heard, “A college graduate will earn, on average, a gazillion dollars more than someone without a degree?”

IMHO, that statement is highly misleading, but I’m not going to argue that point here.

That earnings premium has been deteriorating over time.  What happens when that “so called” premium doesn’t translate into financial security?

I have included three studies of the Wealth Premium in the notes. If you are thinking about borrowing money to go to college, these studies should make you very nervous.

Federal Reserve Bank of St. Louis Review, Fourth Quarter 2019.

“Signs have emerged that the economic benefits of college may be diminishing.”

“The income advantage of recent college graduates remains positive but may have declined for some demographic groups relative to older graduates. Meanwhile, the wealth-building advantage of higher education has declined among recent graduates of all demographic groups.”

“Our results suggest that college and postgraduate education may be failing some recent graduates as a financial investment.”

Young Invincibles

The data shows:

The Wealth Premium has deteriorated over time.

In 2016 the median net wealth of a college graduate (25-34 years old) without debt was $99,000, versus a MINUS $1900 for a similarly aged graduate with debt.

The median net wealth of a college graduate (25-34 years old) with debt was $9800 lower than a non-college graduate of a similar age.

Magnify Money

Millennial households with student loan debt have:

An average net worth 75% lower than student loan-free households.

A median of 46% less in their savings and checking accounts than those without student loans.

About half the retirement savings of those with no student loan debt.

The high cost of college and the ensuing student loans are killing college as a financial investment.

Your Major Matters

According to US News & World Report, these are the ten bachelor’s degrees that lead to the highest median starting salaries. The median starting salary for these jobs is around $65,000.

• Computer engineering
• Petroleum engineering
• Electrical, electronics and communications engineering
• Industrial engineering
• Chemical engineering
• Computer science
• Materials engineering
• Nuclear engineering
• Mechanical engineering
• Aerospace, aeronautical and astronautical engineering

Majors, such as these, lead to “real” careers. Borrowing $30,000 to get one of these jobs is probably a reasonable gamble.

Now let’s look at the other end of the spectrum. Every year hundreds of thousands of college students graduate with degrees in:

• History
• Psychology
• Philosophy
• English
• Creative Writing
• Criminal Justice
• Communications
• Education
• Social Work
• Theatre Arts

The median starting salary for these jobs is around $40,000. Borrowing $30,000, hoping to find employment in one of these fields, is not a reasonable gamble.

Against The Odds

Let’s look at the basic math.

When a dozen students matriculate:

• Five drop out.
• Three graduate, but end up underemployed.
• Only four graduate, and end up fully employed.

Two out of three of those students, of those seventy percent who need to take out student loans, are going to be hard pressed to make their payments.

Notes

Is College Still Worth It? The New Calculus of Falling Returns (stlouisfed.org)

Financial-Health-of-Young-America-update.pdf (younginvincibles.org)

Student Debt Can Kill 75% of Millennials’ Average Net Worth – MagnifyMoney