.America’s Student Loan Debt Crisis is On A Downward Spiral
With a total of $ 1.4 trillion in student loans owed by almost 44 million Americans, this debt has slowly become a sad reality for many graduates. About 70% of college graduates leave school with student loan debt. The average debt for each borrower by June 2018 was $ 33,000 with more than 2.5 million borrowers owing $100,000 and above.
It’s Only Getting Worse
These statistics point towards a looming crisis that may only get worse. As more students continue to pursue degrees and postgraduates, the number of loans being acquired is at an all-time high. The cost of tuition is only getting higher and borrowing rates are increasing as well. According to the US Dept of Education, the interest rate is now at its highest with 5% for undergrads and 6.6% for postgraduate degrees.
A report by the Brookings Institution states that almost 40% of borrowers are likely to default on their loan by 2023. Although the repayment plan for federal student loans requires full payment within 10 years, it takes most borrowers for almost 20 years.
Major Factors Driving Student Loan Debt
A College education today is not the same as it was several years ago. Acquiring a job soon after college was much easier then. Things have changed. Parents and post-secondary students face a lot of pressure to acquire a degree as a ticket to success.
Unfortunately, a four-year college degree does not guarantee that graduates will acquire high paying jobs to enable to them pay back the loan. It doesn’t help that the corporate market place puts a higher value on certain degrees over others.
For example, medical degrees and post grad law more often result in a high return on investment. Graduates are able to pay back easily with these six-figure degrees. However, this is not always the case.
With the current job market and high costs, there will continue to be a high number of graduates failing to pay back and this debt crisis will continue. Especially when students continue to pursue an education that do not bring a good ROI.
High Tuition Costs
Student loan debts continue to rise with increasing tuition costs. The major reason for high tuition costs is the available demand for education. Students will pursue higher education at whatever cost to secure a ‘bright future’.
In order to attract students, colleges are competing by investing heavily in expanding and improving their campuses with modern amenities to provide a wide range of exciting experiences for their students. They are hiring more qualified professors and administrators who require high salaries. Some college heads earn as much as $ 1 million. In the end, the students end up paying for all of it.
Why Borrowers Default
Despite the increment in interest rates, salaries have not increased, making it difficult for borrowers to pay off their debt.
Some borrowers do not make it an obligation and priority to pay off their debts. They default intentionally. After college, they are able to get good jobs with a substantial income. This means they can pay off their student loans without much difficulty. However, they don’t make any payments with the hope that their debt will be forgiven as promised by country decision makers.
The Impact on the Economy
Student loan debt does not only affect graduates and current students personally. It affects the whole economy as well. Graduates live longer with their parents because they can’t afford to live on their own. Millennials are currently putting off important milestones like getting married, having children and owning a house.
Although reports have stated that millennials are not interested in home ownership, the Urban Institute discovered that 53% of them do not own homes because they simply can’t afford it. The demand for housing is on a downward spiral.
The economy has more to gain when people have a good standard of living. They can buy goods and services that keep the economy running. However, with this burden of debt, almost all the money graduates earn goes back into paying off their loans. This affects the demand for products and services.
Borrowers are less likely to get car loans or use credit cards. This means that banks and other lenders make less revenue and this affects economic growth.
Having debt makes borrowers less likely to join low paying and yet important careers like social service and teaching. This may have an impact on the education sector. Graduates target higher paying jobs for example in consultancy and finance.
Possible Solutions to this Crisis
First and foremost, parents and students should be properly informed on marketable post-secondary education options. A four-year college degree is not the end all and be all. Imagine paying off debt for nearly 20 years. Taking the time to consider alternative choices will go a long way to solving this crisis.
The IRS recently agreed to a request exempting employee from contributing to their 401(k) plan if they are making payments towards their student loan debt. With this new development, the employers will be allowed to match the debt payments in the employee’s 401(k) plan. This allows employees to pay off the loan quicker, more info here, while saving for retirement.
Employers that offer low-interest loans and provide educational workshops that enable employees to properly manage their finances and loans is a helpful endeavor to curbing the debt crisis.
Colleges can also help with solving this crisis through the reduction of tuition fees. This can be achieved by cutting off unnecessary administrative expenses like exorbitant salaries and focusing on providing quality education rather than amenities.
Another viable solution to this crisis will be canceling the debt. It sounds like an over-ambitious proposal, but economists have not ignored it. The Levy Institute revealed in a study that debt cancellation will greatly benefit the economy by improving GDP growth and employment. Additional available jobs and consumer activity will add almost $100 billion dollars to the economy each year.
The student loan debt crisis is alarming and without immediate action, it will only worsen. Although the major government decision-makers have a huge role to play in solving this problem, everyone including employers, colleges and students have a part to play.