The following is a guest post by Broke Professionals.
While the popular media has focused on the dearth of jobs,the fact that the cost of college has lapped the general rate of inflation, or the devaluation of college degrees in general (due to the glut of graduates compared with previous generations). The purpose of this article is to focus in on an underreported reason why graduating from college/graduate school in the past three (3) years may represent the worst timing in the history of higher education in the United States.
Specifically, this article will discuss the recent trend towards deflation and how this trend when coupled with a long period of rapidly inflating college expenses and a change to fixed Stafford Loan interest rates hurts recent college graduates in particular.
As the cost of college education inflated to levels of absurdity (despite the devaluation overall of most degrees), most students who graduated in the past three years were forced to take on more and more student loan debt. Adding to their misery, in 2005 Congress modified Stafford Loans (the most popular type of student loan) to a fixed 6.8% interest rate. Therefore, unlike students who graduated prior to 2005, recent graduates have been unable to consolidate their loans to account for periods of disinflation or even deflation. Above information summarized in this USA Today article.
Unfortunately, the “Great Recession,” has created a strong period of disinflation and even deflation. In fact, according to miseryindex.com, deflation (buying power’s increasing from the past) actually occurred in 2009–for the first time since the 1950’s. Therefore, even if you could find a job, your salary was likely deflated, making repaying student loans more difficult.
To be sure, when you owe a large sum of money, like most recent graduates do, the last thing you want is deflation or disinflation making the amount you owe more difficult to pay back. In fact, you probably want the exact opposite. The perfect scenario for those with massive amounts of debt would be for extreme levels of inflation to occur–I’m talking about 1920’s Weimar Republic Germany levels of inflation here. In short, when people start wheel-barrowing around piles of money to buy lunch, you know your six-figure student loan debt will likely no longer be a problem.
Luckily, the government understands our pain (having just a little bit of a debt issue themselves these days). That is why the government has now sanctioned several rounds of “quantum easing”, which may sound like a popular early 90’s television show starring Scott Bakula, but actually is a fancy way of saying “printing more money.”
The feds are (the thought goes) hoping that by putting more money into circulation (by printing more money and/or by purchasing outstanding government bonds, etc) that lending will improve and interest rates will be kept low so that banks will be enabled to extend credit like its 2007. Perhaps due to these pro-inflation policies, the inflation rate was in fact able to rebound slightly and stay in the low single digits for most of 2010.
The severity of the injury suffered from the current low/non-existent interest rates likely increases the younger you are. For example, retirees living on a fixed income and with little debt would, all other things being equal, benefit from deflation or disinflation. It is also likely that the older you are, the less likely you are to possess substantial debt in your name and the more likely you are to hold substantial savings.
Conversely, the younger you are the more likely you are to be repaying major expenses such as a home mortgage or paying off student loans (generally). That said, it should be noted that many middle-aged Americans are in the same boat as their children’s generation, having taken out student loans to pay for their children’s college.
We are taught from a young age that inflation is a dirty word. “Inflation devalues your savings.” “Inflation is the reason why it costs us $2.89 for a gallon of milk while our grandparents could buy it for just a nickel” (although nobody ever mentions our grandparents lived off a salary of $2,000.00 per year.
However, in general salaries have historically risen correspondingly with inflation. Moreover, although money kept in a savings account may not generally keep pace with inflation, during times of rapid inflation the stock market or more aggressive financial instruments likely have kept pace as well. There are now even specific financial instruments that provide their holders with guaranteed inflation protection.
Conversely, however, during a period of deflation, when a debt’s interest rates are locked and the debt cannot be consolidated–which is the rare but very real situation that exists with holders of Stafford Federal Loans; then deflation or disinflation presents a truly a dangerous and possibly toxic situation for the debt-holder. For instance, one could imagine an economic situation where deflation runs wild. Student loans are not dischargeable by bankruptcy (except in very rare instances), so if deflation or disinflation continues, student loan repayment would become more unbearable than it is already.
Because inflation has a negative connotation, I have had friends who are similarly situated to me (i.e. in their late twenties, with tons of debt and little in the way of savings) who will complain about the possibility of America entering a “period of rapid inflation” once the economy recovers. However, looking at the issue of inflation/deflation from a purely self-interested perspective (sorry China), a period of extreme inflation is looking pretty darn good.
In other words, Viva Le Inflation!
Editor’s Comments: What do you think of the guest poster’s premise(s)? I think that excess inflation is not good, as many countries can attest to, but some level of inflation can be good. Often times, inflation can be perceived as being all bad, but that’s not exactly the case all the time. I agree with the idea that an extended period of deflation would not be a fun experience for us.