Is graduating with student debt worth the degree?

University of Richmond graduates' loans are part of the growing rate of student loans across the United States that now total more than $1 trillion.

Two-thirds of college seniors who graduated in 2011 accumulated an average debt of $26,600, according to the Project on Student Debt website.

Forty-three percent of the students who graduated from Richmond in May 2012 had an average debt of $21,065, said Cindy Deffenbaugh, the director of financial aid at Richmond.

IS RICHMOND STUDENT DEBT WORTH IT?

Like any university or college across the country, it is possible to graduate from Richmond without any debt through the use of scholarships, grants and financial aid, but because of Richmond's high tuition, there are still students who leave with large sums of debt, said Jerry Stevens, a professor of finance at Richmond.

One graduate from the class of 2012 was given grant money each semester that partially covered tuition. Though her parents helped to pay some of her tuition each semester, she paid the rest of the tuition through loans, she said.

She graduated from Richmond with about $29,000 of debt, she said.

"I'm currently searching for a better job to be able to pay off large lump sums of my student loans per month because I would like to have them paid off in 10 years," she said. "But, I think the loans I have to pay off were definitely worth the education I received.

"I believe that my degree will open up of a lot of doors for future employment that will ultimately allow me to earn exponentially more than the amount of debt I'm currently in."

Another graduate from the 2012 class received financial aid while at Richmond and had about $7,000 worth of loans each year, so that she graduated with about $25,000 in loans, she said.

"I'm extremely grateful for Richmond's generosity with the financial aid package because of the experiences I was able to have at Richmond," she said. "I don't think I could have gotten my first job at an energy and managing consultant firm without the degree I earned.

"But, my debt was more than 50 percent of what I will make in my first year out of college, so it will definitely take awhile for me to be at all comfortable with it."

FACTORS INVOLVED IN THE RISE OF STUDENT DEBT

There are multiple factors that have contributed to the rise in college student debt over the years, Stevens said.

One of the main factors has been the rise of tuition, which is the fastest rising component in the economy, even above health care, Stevens said.

The combination of higher tuition and fewer people being able to work their way through college is one of the main contributing factors, he said.

"Tuition wasn't always as expensive as it is now, though," Stevens said. "In the past, most people didn't borrow money. Instead, they were able to work their way through school, so that they would graduate without debt.

"If people could get a part-time job that paid a few hundred dollars a month, then they could pay for their tuition. But with such high tuition costs now, people can't realistically have any part-time jobs that come anywhere close to helping with the cost of tuition."

Richmond's current undergraduate cost for the 2012-2013 school year is $56,070, Deffenbaugh said. This includes tuition, room, board, books and supplies, personal expenses and loan fees.

Another factor that has driven student debt higher during recent years has been the easy accessibility of loans that the government and higher education are providing to students who are typically borrowing as much as they can, Stevens said.

"Every college admission gives applying students all kinds of information about different loans available," Stevens said. "It's easy for students to think of that as free money, but when they graduate and have to start paying it back, it becomes a real financial strain on people."

Many high school and college-age students see loans as something that appears to be an easy, cheap source of money, Stevens said.

"Most students don't understand what and how these loans will work with payback, and being young, they typically don't think too far after college," Stevens said. "You put all of that together, and you start getting a rising amount of student borrowing because of how easy loans are to get."

Currently, there are three different types of student loans that most students get: Perkins Loan, Stafford Loan and an unsubsidized loan.

RICHMOND'S FINANCIAL AID

Richmond's Financial Aid Office staff is currently providing 69 percent of the undergraduate population with some type of financial aid, Deffenbaugh said.

The university's financial aid packet consists of grants, scholarships, loans and a variety of work-study aimed to help students pay for their education. The most common types of financial aid that students at Richmond have are forms of grants and scholarships, Deffenbaugh said.

Richmond even offers 50 merit-based, full-tuition scholarships to students in each entering class, which is about one out of every 16 students, Deffenbaugh said.

The Richmond Financial Aid Program has an endowment of about $1.75 billion, making it one of the top 40 nationally ranked higher education's endowments, Deffenbaugh said. The Princeton Review has even named Richmond No.6 for the best financial aid offered.

The average awarded amount of financial aid for current Richmond students is $33,800, Deffenbaugh said. For those students who qualify for need-based aid, the average financial aid package is $41,800, Deffenbaugh said.

IMPACT AND AFTERMATH OF THE LOANS

Though student loans and financial aid are readily accessible for students during their time in college, it is the impact of the loans once the students graduate that has become the problem, especially in the state of the economy, Stevens said.

Most students who graduate from college are given a six-month grace period where they will not have to pay anything. But, once that period is up, the graduate is required to pay back the loans over a 10-year period, Stevens said.

To outline the problem that a lot of graduates run into regarding their debt, Stevens created an example using the average amount of debt that students graduate with, $20,000, with a 5 percent interest rate.

This graduate would be paying $218 a month for the next 10 years to repay the loans. If the graduates do get a job right out of college, their first job would most likely pay somewhere between $25,000 and $30,000 a year, Stevens said.

The cost of housing will likely come out of that salary, which will be about $12,000 a year unless the person shares. Then, that person will pay insurance and a vast amount of taxes including federal income tax, state income tax, Social Security and Medicare, Stevens said. Yet now, the graduate has to pay $218 a month on student loans for 10 years.

"This 10-year period spent paying off loans becomes even more strained because no one thinks about the long-term effects when borrowing the money," Stevens said. "They become forced to deal with their past actions during a time when most people are thinking about truly starting their lives, getting a car, getting married and having children."

A good indicator of students' ability to repay their debt is through the university's default rate, which is calculated by the federal government, Deffenbaugh said.

The most recent release put the national 2010 Cohort Default Rate at 9.1 percent and the national 2010 Cohort Default Rate for private, non-profit schools at 5.2 percent.

Richmond's 2010 Cohort Default Rate was 2.8 percent.

WHY IS STUDENT DEBT A PROBLEM, AND HOW CAN IT BE DECREASED?

Student debt affects three major groups: the former students, their families and the provider of the loans, Stevens said.

"In any financial market, when pieces of paper are not worth what we think they are, somebody has to write them down as a loss," Stevens said. "The biggest loser will end up being the government because there is more government than private sector lending involved in student debt."

Stevens proposed two changes that could help to decrease the amount of student debt.

Instead of having an interest rate to determine how much someone owes a month, the government will be able to look at how much a person is making from a job and set up a payment schedule that is a small fraction of what the person is making, Stevens said.

That would make it so that if a person didn't get a high-paying job, the person wouldn't have to pay back the loans as fast, he said. That would provide some relief to people who don't immediately get a higher-paying job.

Another change that could be made to help decrease student debt would be to mandate that every freshman across America take a life-skills course where students would learn about personal finance, budgeting and the role of debt, Stevens said.

"This type of class would make students learn early on about debt and choices that will affect them after they graduate," Stevens said. "Graduates are going to be forced to learn about the consequences to their debt once they graduate, so why not try and be preventative of this through educating them before they make these decisions."

Though there are factors that could be changed to directly correlate with a decrease in the amount of student debt, the outlook for such change is unlikely, Stevens said.

"It will get better if tuition prices are lowered, if the economy gets better and if college students begin to understand the implications of borrowing money, but I don't count on any of that happening," Stevens said. "I'm just not that optimistic."

"Tuition wasn't always as expensive as it is now, though," Stevens said. "In the past, most people didn't borrow money. Instead, they were able to work their way through school, so that they would graduate without debt.

"If people could get a part-time job that paid a few hundred dollars a month, then they could pay for their tuition. But with such high tuition costs now, people can't realistically have any part-time jobs that come anywhere close to helping with the cost of tuition."

The current undergraduate cost for the 2012-2013 school year is $56,070 at Richmond, Deffenbaugh said. This includes tuition, room, board, books and supplies, personal expenses and loan fees.

Another factor that has driven student debt higher during recent years has been the easy accessibility of loans that the government and higher education institutions are providing to students who are typically borrowing as much as they can, Stevens said.

"Every college admission gives applying students all kinds of information about different loans available," Stevens said. "It's easy for students to think of that as free money, but when they graduate and have to start paying it back, it becomes a real financial strain on people."

Many high school and college-age students see loans as an easy, cheap source of money, Stevens said.

"Most students don't understand what and how these loans will work with payback, and being young, they typically don't think too far after college," Stevens said. "You put all of that together, and you start getting a rising amount of student borrowing because of how easy loans are to get."

Currently, there are three different types of student loans that most students receive: Perkins Loan, Stafford Loan and an unsubsidized loan.

RICHMOND'S FINANCIAL AID

The staff at Richmond's Financial Aid Office is currently providing 69 percent of the undergraduate population with some type of financial aid, Deffenbaugh said.

The university's financial aid packet consists of grants, scholarships, loans and a variety of work-study aimed to help students pay for their education. The most common types of financial aid that students at Richmond have are forms of grants and scholarships, Deffenbaugh said.

Richmond offers 50 merit-based, full-tuition scholarships to students in each entering class, which is about one out of every 16 students, Deffenbaugh said.

The Richmond Financial Aid Program has an endowment of about $1.75 billion, making it one of the top 40 nationally ranked higher education's endowments, Deffenbaugh said. The Princeton Review has even named Richmond No.6 for the best financial aid offered.

The average awarded amount of financial aid for current Richmond students is $33,800, Deffenbaugh said. For those students who qualify for need-based aid, the average financial aid package is $41,800, Deffenbaugh said.

IMPACT AND AFTERMATH OF THE LOANS

Though student loans and financial aid are readily accessible for students during their time in college, it is the impact of the loans once the students graduate that has become the problem, especially in the state of the economy, Stevens said.

Most students who graduate from college are given a six-month grace period where they will not have to pay anything. But, once that period is up, the graduate is required to pay back the loans over a 10-year period, Stevens said.

To outline the problem that a lot of graduates run into regarding their debt, Stevens formulated an example using the average amount of debt that students graduate with, $20,000, with a 5 percent interest rate.

This graduate would be paying $218 a month for the next 10 years to repay the loans. If the graduates do get a job right out of college, their first job would most likely pay somewhere between $25,000 and $30,000 a year, Stevens said.

The cost of housing will likely come out of that salary, which will be about $12,000 a year, unless the person shares. Then, that person will pay insurance and a vast amount of taxes, including federal income tax, state income tax, Social Security and Medicare, Stevens said. Yet now, the graduate has to pay $218 a month on student loans for 10 years.

"This 10-year period spent paying off loans becomes even more strained because no one thinks about the long-term effects when borrowing the money," Stevens said. "They become forced to deal with their past actions during a time when most people are thinking about truly starting their lives, getting a car, getting married and having children."

A good indicator of students' ability to repay their debt is through the university's default rate, which is calculated by the federal government, Deffenbaugh said. The number reflects the percentage of debtors who default, or fail to make debt payments, in a fiscal year.

The most recent release put the national 2010 Cohort Default Rate at 9.1 percent, and the national 2010 Cohort Default Rate for private, non-profit schools at 5.2 percent.

Richmond's 2010 Cohort Default Rate was 2.8 percent.

WHY IS STUDENT DEBT A PROBLEM, AND HOW CAN IT BE DECREASED?

Student debt affects three major groups: the former students, their families and the provider of the loans, Stevens said.

"In any financial market, when pieces of paper are not worth what we think they are, somebody has to write them down as a loss," Stevens said. "The biggest loser will end up being the government because there is more government than private sector lending involved in student debt."

Stevens proposed two changes that could help to decrease the amount of student debt.

Instead of having an interest rate to determine how much someone owes a month, the government will be able to look at how much a person is making from a job and set up a payment schedule that is a small fraction of what the person is making, Stevens said.

That way, if a person did not get a high-paying job, the person would not have to pay back the loans as quickly, he said. That would provide some relief to people who don't immediately get a higher-paying job.

Another change that could be made to help decrease student debt would be to mandate that every freshman across the U.S. take a life-skills course where students would learn about personal finance, budgeting and the role of debt, Stevens said.

"This type of class would make students learn early on about debt and choices that will affect them after they graduate," Stevens said.

"Graduates are going to be forced to learn about the consequences to their debt once they graduate, so why not try and be preventative of this through educating them before they make these decisions."

Though there are factors that could be changed to directly correlate with a decrease in the amount of student debt, the outlook for such change is unlikely, Stevens said.

"It will get better if tuition prices are lowered, if the economy gets better and if college students begin to understand the implications of borrowing money, but I don't count on any of that happening," Stevens said. "I'm just not that optimistic."

Contact staff reporter Ryann Dannelly at ryann.dannelly@richmond.edu