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Mellody Hobson is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS news.

Tom: We are talking about the student loan problem this morning?

Mellody: That’s right, tom. It seems like every month or so we get more information that highlights just how out of hand the student loan debt problem is in this country, and how it is impacting young Americans. This month is no different. A recent study from Gallup and Purdue University has found that student loan debt not only stunts people financially, but it also impacts personal well-being.

Tom: What are we talking about when we say personal well-being?

Mellody: We are talking about the whole spectrum of an individual’s life, tom. The survey asked over 30,000 college graduates about their finances, their health, their social lives, sense of purpose, and happiness within their community, and then inquired about whether grads like what they do every day and if they have enough money to meet their needs in these different categories. What the researchers found was that not only do students with higher levels of student loan debt face financial limitations – they are less likely to start a business, or own a house for example – they also suffered decreased well-being in all of these categories, across the board. Overall, college graduates without any student loan debt were seven times more likely to be happy in most areas of their lives compared to those with more than $40,000 in debt

There are many examples of the non-financial consequences of debt. Take marriage, for example. In the last few years, there has been a flood of stories that document how some individuals in relationships are postponing marriage due to the debt burden of their partner. One researcher found that women with student loan debt are less likely to get married than women without it. Another study found that high student loan debt leads to increased likelihood for depression, as well as physical illness. Alone, these are big problems, but when combined with the financial impact, the can obviously have very, very negative consequences for individuals.

Tom: There doesn’t seem to be a solution on the horizon. Costs continue to rise – interest rates are expected to go up this year – and this hurts graduates.

Mellody: You are right, tom. Interest rates on loans are set to rise for students this fall. Students taking out government student loans could pay nearly a percentage point more in interest rates, based on rates set at Wednesday’s Treasury bond auction.

But the broader problem is really that the cost of education is rising much faster than inflation. Since 1982 a typical family income increased by 147%, while college tuition prices have risen nearly 500%. According to the book the college trap, if the cost of college tuition was $10,000 in 1986, it would now cost the same student over $21,500 if education had increased as much as the average inflation rate.  Instead that education now costs an average of $59,800 rising by over 2 ½ times the rate of inflation.

This is bad for all graduates, but it impacts minorities in America disproportionately. Education is the great equalizer in this country, but these costs are making it more difficult for students of color. For example, 27% of black bachelor’s degree holders had more than $30,500 in loans, compared with just 16% of white bachelor’s degree holders. more black students who left school without finishing a degree cited student debt as the reason than their white peers – 69% versus 43% – and 74% of Latinos who opted out of attending college cited finances as the reason. I believe wholeheartedly that college is worth it, and the data backs that up. However, when students have to saddle themselves with debt to get an education, there is an increasing belief that the short-term costs are not worth the long-term benefits, and that is a problem.

Tom: How should parents and prospective students approach paying for college these days then?

Mellody: The most important thing is to begin preparing early, by saving up over time. But on this front, my first piece of advice might throw you for a loop: avoid a savings account. If you are working hard to put money away for college, the very least you can do is make that money work for you in return. Invest that money in stocks, so that you get a good return. When you run the numbers, this becomes very clear. If you invest $1,000 per year for 18 years in a savings account, on a good return of 1% you would have around $21,000 by the time your kid goes to college. If you invested the same amount in the stock market, at a low rate of return of 5.5%, you would have nearly $32,000. That is $11,000 that won’t be student loan debt. So save up over time, and make your money work to pay for your children’s future.

The second thing is to really consider all of the options. In the same study that showed student debt was correlated with negative impacts on well-being, researchers found that elite colleges are not correlated with graduate happiness. So perhaps your child can explore junior colleges, or in-state schools, for the first two year before transferring to her preferred school. This will help keep the need for large amounts of student loans to a minimum.

Tom: Great! Anything else you would like to share today?

Mellody: Tom, I really want to highlight the impact of the student loan debt on younger people, and our country as a whole. 60% of students incur student loan debt, with the average per person debt being over $24,000. Student loan debt has passed credit card debt to be the second largest debt category for Americans, after mortgages, with more than $1 trillion dollars in debt outstanding. These numbers are huge numbers, and the burden of paying off debt hurts other areas of the economy, such as the housing market and consumer spending. Graduates who are able to enter the workforce without a debt burden have huge financial and personal advantages, so it’s important to remember this when considering your future or your child’s future!

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(Photo Source: PR Photos)

Student Loan Debt – It’s Not Just Impacting Finances Anymore  was originally published on