Student Loans in America
Next debt crisis?
Household debt is on the rise in the United States. According to the Federal Reserve Bank of New York, household debt has risen steadily for 11 consecutive quarters. Total household debt is now approaching $13 trillion and has surpassed the previous peak of $12.68 trillion in 2008. The largest and fastest-rising debt for households is student loan debt. The increasing amount of student loan debt is alarming, especially since student debt delinquency is also rising.
How Did We Get Here?
As the U.S. transitions away from a manufacturing and goods-based economy to a service and technology-based one, the need for higher education has increased. It has become more important for students to get post-secondary education to remain competitive in the modern workforce.
However, as demand for higher education has increased, so have the costs. In 1973, the average one-year tuition at a private university or college was just under $10,000 and an in-state public institution averaged around $2,000 in today’s dollars. The average one-year tuition for a private university or college is now over $33,000; in-state students attending a public university or college pay just under $10,000.
Increasing Student Loan Debt and Defaults
The dramatic increase in higher education costs has resulted in a steep rise in student borrowing. The average college student now owes more than $37,000 in student loans. These borrowers should expect to pay around $450 per month on a 10-year loan. Many graduates face daunting loan balances of more than $100,000, with monthly payments of more than $1,000. Luckily, the U.S. job market is strong, and with starting wages for college graduates averaging just under $50,000 per year, borrowers should be able to handle these payments.
However, what if recent graduates are not able to find jobs that pay well enough to cover the cost of their student loans? Or, even worse, what if a student drops out of college? He or she must still repay the loans, even without the benefit of a diploma. And often the burden of paying these outstanding debts falls to the parents of those with the debt.
As student loan debt has doubled in the past decade to $1.3 trillion, the default rate on student loans has also increased. Today, more than one in 10 borrowers are at least 90 days delinquent on their student loan debt. The delinquency rate for student loans is now much larger than for other forms of debt, such as mortgages, automobile loans and credit card debt. And this high debt is dampening home ownership rates as borrowers struggle to manage their high debt loads.
The Impending Student Loan Crisis
Compared to other forms of debt, it is much more difficult to erase student loans in bankruptcy. They can hang over the heads of borrowers for years or even decades. Student loan borrowers have said that the weight of their loans delayed other life events, such as getting married or having children. Others have said that their debt impacted employment plans, causing them to work in jobs outside their field, work extra hours or work more than one job. Many have said that their undergraduate education was not worth the financial cost.
Just as with the housing crisis of 2009, if borrowers become unable to keep up with their mounting student loan debt, the overall health of the economy could be severely affected.
Addressing the Crisis
It is imperative for borrowers, universities and policymakers to address the impending student loan crisis before it grows out of control. At the individual level, students need to be more responsible about the debt they incur and not borrow more than is necessary. Colleges and universities must be more proactive in helping students understand the debt load and future cost to pay off these loans after graduation.
Policymakers need to increase awareness about the seriousness of the crisis. Colleges must be given better tools to limit student loan debt, including allowing them to identify students with excessive debt and proactively reach out to them with help. It will take a concerted effort at all levels to address the crisis. Meanwhile, every day the problem becomes worse.
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