Loan Payments and Unemployment

By Kim Smiley

In recent years, the cost of attending a college in the US has risen about three times faster than inflation and the average student loan amounts have increased accordingly.  Combine this with the highest unemployment rates of college graduates since 1979 (4.8% in May, up from 2.1% at the start of the recession) and lower starting salaries during recessions, and there are many recent graduations struggling to make their loan payments.

As with any problem, it is possible to perform a root cause analysis of the issue. To begin let’s assume the production goal of an individual considering college is to earn a comfortable living and the potential impact to this goal will be difficultly making loan payments.

The causes of this potential problem repaying loans could be unemployment after graduation, lower starting salaries for new hires during a recession and large loan payments.  The causes of each of these factors can then be explored.  Click on the Download PDF graphic above to view an intermediate level Cause Map with more causes added.

A recent USA Today article entitled “In a Recession, Is College Worth It? Fear of Debt Changes Plans” discussed how many students are rethinking their college plans.  Enrollment at community college is soaring and many students are choosing a less expensive option and skipping the big name private institutions.

This makes sense when considering the potential difficulty repaying college loans because the only cause that the student has direct control over is the size of the loan payments.

The bottom line is that each individual needs to think through their particular situation, consider how much the college costs and how much the starting salary for their particular degree is projected to be.  There are very real dangers in amassing large student loans without calculating the monthly payments and ensuring that they are within a realistic budget.

The reality is that some universities cost more and there is no guarantee that attending a more expensive college will result in a higher salary.  It may well be a smart decision to choose a less expensive option when selecting a college.

If you’re interested in reading an analysis of the 2009 Financial Mess, please click here.