It’s September and you know what that means — back-to-school season! Which is also known to many as student debt season.
Our thoughts are with the thousands of new and returning post-secondary students who are about to plunge themselves — perhaps even further — into debt in order to get one step closer to obtaining a degree or diploma. The banks are very excited to meet all of you.
Student debt sucks. Like, a lot. A study done by licensed insolvency trustee firm Hoyes Michalos found that student debt contributed to almost 18% of Ontario insolvencies filed in 2018. In other words, people are filing consumer proposals and bankruptcies because they borrowed a lot of money for a degree that was supposed to get them a good-paying job that would help them pay off the debt, but hey, it turns out that they didn’t get that lucrative job after all, or maybe just not yet, or maybe not ever, and the debt is still there, and did we mention that it’s crippling them?
Sigh. Here are the best personal finance reads of August 2019 — stories that get to the heart of why ex-students are defaulting on their debt, how student debt is making millennials most vulnerable to a recession, and how tying tuition to post-graduate salaries could help solve the student debt crisis.
How Canadians go from student debt to default, via Global News
Student-debt insolvencies are on the rise. And in this article, writer Erica Alini aims to find out how, exactly, it is that ex-students end up defaulting on their student loans.
The answer shouldn’t surprise anyone: it’s because their income levels are too low. But as Alini finds out, this typically happens for one of two reasons. Either they take out a loan and they don’t actually graduate (“In other words, they incur some of the costs of investing in higher education without getting the return that normally comes with it."), or they do graduate but then find themselves stuck in low-paying jobs for many years.
Then, sadly, they wind up having to live off of credit to make ends meet, and the debt cycle begins.
The Next Recession Will Destroy Millennials, via The Atlantic
And what’s all that debt — student and otherwise — doing to young people? It’s making them extra vulnerable to the next recession, which economists say may not be all that far-off.
Every personal finance expert likes to dole out advice on how to recession-proof your money. And the first thing all of them advise people to do when a recession is looming is pay down their debts. That’s going to be really tough for millennials strapped with student debt.
In this piece, Annie Lowrey takes us through all the ways that millennials will find themselves screwed when the next recession hits. “For adults between the ages of 22 and 38,” Lowrey writes, “...the last recession never really ended.”
That’s because we graduated into a job market that is the worst it’s been in 80 years. “That did not just mean a few years of high unemployment, or a couple years living in their parents’ basements. It meant a full decade of lost wages.” Add to that the fact that millennials are saddled with massive student loans that need paying back, that their income levels aren’t high enough, and that their housing costs are exorbitant, and it’s no wonder why, in the face of a recession, we’re like sitting ducks.
Okay, this article is just one day shy of being written in August, but it’s too good not to include.
Austin Allred, the author of this piece, is the founder of Lambda School, an online computer science school that doesn’t charge its students tuition until they’re earning at least $50,000 a year. Once that happens, they pay 17% of their salary over the course of two years up to a cap of $30,000 total. If for whatever reason their income drops below $50,000, the tuition payments pause. If they don’t repay the full $30,000 within five years, the amount drops to zero and they don’t ever have to make another payment. Sounds pretty dreamy.
Allred’s formula relies on what’s referred to as an ISA or “Income Share Agreement,” where schools can effectively link student debt repayment with income level post-graduation. And in this article, he makes a great case for why ISAs could help solve the problem of crippling student debt and make for a better educational experience. “If institutions only get paid when their graduates do,” Allred says, “they’re incentivized to provide a service that actually gets students hired.” Of course, if they’re mismanaged, ISAs can become “predatory,” Allred says, but when they’re handled properly, they work well.
As Allred puts it: “If everybody got a six-figure job post-graduation, we wouldn’t have a student debt crisis.”