More than five years after the binge of irrespon-
sible lending led to the credit crisis and Great Recession, the amount of consumer debt in the United States has begun to rise again, but with an important difference. This time the credit standards appear far tougher. Those who should not borrow generally do not. Fewer consumer loans became seriously delinquent last year than in any recent year, the Federal Reserve Bank of New York reported this week. Except, that is, for one type of debt: student loans. There delinquencies continue to rise, and loans continue to be made.
Those who should not borrow generally do not. Fewer consumer loans became seriously delinquent last year than in any recent year, the Federal Reserve Bank of New York reported this week. Except, that is, for one type of debt: student loans. There delinquencies continue to rise, and loans continue to be made without regard for the ability to repay. At one time, student loans were a clear way to provide economic opportunity to people who might not have been able to attend college otherwise. In many cases, they still are. But increasingly it is becoming obvious that student loans are creating large problems that may persist for decades to come. Until 2009, young adults with student loan debt were more likely to own homes and were more likely to have car loans outstanding than were people of the same age without student loans. Those loans had enabled many of them to obtain college degrees and earn more mon-
ey, qualifying them for mortgages. Those with student loans generally had better credit scores than those who did not. The student loan industry is booming, saddling over 37 million college students and graduates with $1.08 trillion in loans in 2013. Student loan debt continues to pile up on America’s college graduates, topping an average $29,000 per graduating student. The average cost of a Bachelor’s degree at a private college or university is $45,000. Students attending public schools in their home state pay just under $23,000 on average, while those paying out-of-state tuition can expect to pay more than $36,000 a year. A possible explanation for the growing number of student loans is that tuition prices has increased over the past decade and continues to do so.
Total Student
Loans Per Year 2002 - 2012
Degrees of Debt If a student intends to be an engineer and has the
“We’re offering millions the opportunity to cap their
monthly student loan payments to 10 percent of their income, and I want to work with Congress to see how we can help even more Americans who feel trapped by student loan debt.” Barack Obama
grades in math and science to suggest she can do so, she is an excellent credit risk. Engineers are very likely to be hired right out of college, to command premium salaries and to see their incomes increase steadily through their careers. Someone majoring in fine arts is not nearly as good a credit risk. Jobs are simply harder to come by and don’t pay as well. Yet students majoring in highly coveted STEM disciplines (science, technology, engineering and mathematics) are evaluated in the same way as those focusing on fine arts, history, English, social work, etc. when loans are awarded. Government is trying to address the problem. There has been talk of refinancing student debt at lower rates. But that discussion has largely stalled. President Obama is pushing for a new funding model, where the amount of student financial aid available to universities is tied to things like their graduation rate and the initial salaries of their graduates. But the rating system, which might eventually hold tuition hikes in check, is at least a year away.
Sources:
Long
Term Effects A whopping 40 million Americans owe an even
more whopping $1.2 trillion in student-loan debt. “Unlike other consumer credit products, student debt keeps growing at a steady clip. Students borrowed $117-billion in just federal loans last year. And students continue to borrow private student loans, which lack the income-based repayment and deferment options of federal student loans.” The average total loan debt for undergraduates is $26,000, with the debt for those choosing to attend law school, medical school, or business school obviously much greater. This
enormous amount of debt has consequences for all of us since although few economists discuss it at length it represents a tremendous drain on the economy and is slowing our recovery from the recession that began in 2008. College graduates and postgraduates, instead of buying cars, buying houses, getting married, having children in other words, becoming full-fledged consumers are, as Nance-Nash puts it, “running back home.” That hurts us all. High student debt also threatens retirement security. According to the Center for Retirement Research at Boston College, 62 percent of workers ages 30 to 39 are projected to have insufficient resources in retirement. This is a far higher concentration than older age groups, and it has increased by 9 percentage points between 2007 and 2010. As nearly 20 percent of people in this age group hold more than $50,000 in student-loan debt,
this burden could further undermine their ability to save for retirement. The solution to the student-loan crisis will have to be sweeping and dramatic. It will have to begin with the realization that if a college education is today’s equivalent of the high-school education of yesteryear, then it should also be free, as K-12 schooling is. That means realizing, as I think relatively few people do, that the education of college students is the whole country’s responsibility. If the country fails, in time, to realize that, students will continue to borrow tuition money until eventually they cry “uncle,” stop attending college and start defaulting in massive numbers. As a society, we actually aren’t doing students a favor if we grant them loans they can’t repay. A typical student amasses $27,000 in debt in college, and it isn’t possible to walk away from a student loan even in dire circumstances, as it is with other consumer debt. With student loans, the government can garnish wages to force repayment, so students may be saddled with debts that last a lifetime. Meanwhile, the lack of discrimination in handing out loans has created an enormous risk for the federal government, which either grants the loans or guarantees them.
Designed by: Michael Batiste 2014