Student Loan Debt is Worse Than We Thought

A report from Liberty Street Economics, shows that the federal student loan debt bomb has not only ignited, it’s threatening to blow a huge hole in the U.S. consumer economy. 

The report, entitled “Who Borrows for College – and Who Repays?” pegs outstanding student loan debt at over $1 trillion – a fivefold increase since 2003.

It also shows that federal student loans are much easier to get these days. According to the paper, there are 43 million active student loan borrowers in 2019, compared to just 19 million in 2003. In that time period, U.S. federal loan activity has risen to $33,500 in 2019, up from $13,300 in 2003.

Here are some more statistics on federal student loan debt from the report:

• 2010 U.S. college graduates only repaid 9% of their student loan debt by 2015.

• While college critics habitually take aim at rising tuition prices, college loan debt rose twice as fast as college tuition fees in a 10-year period from 2008 to 2018.

• 20% of U.S. college students with student loans have a student loan balance of $50,000 or more. Additionally, 7% of borrowers, about 2.9 million overall, have student loan debt balances of over $100,000.

• Millions of student loan borrowers have student loans in default and delinquency. The Federal Reserve report shows that 15% of student loan borrowers were ninety or more days past due or in default on a student loan, as of mid-2019.

Why is Student Loan Debt Increasing

There’s a good reason for that skyrocketing rise in student loan debt over the last two decades, study researchers say.

“The spectacular growth in student loan debt has been due to an increase in both average balances and number of borrowers, defying the credit cycle through the Great Recession when balances on other types of debt contracted,” the report states.

Between 2008 and 2018, the average balance per student loan borrower grew at about 5% per year, even surpassing the rapid growth in tuition, the report added. 

College financing experts say the blowout numbers in federal student debt is no surprise to anyone who’s been paying attention.

“Default rates on student loans are high because standard commercial lending standards are ignored,” states Richard Vedder, an economics professor at Ohio University and a former member of the Spellings Commission on the Future of Higher Education. “Schools that encourage students to take out loans have no “skin in the game,” and face no financial consequences when their students disproportionately default on their obligations.”

“In short, the student loan program is dysfunctional and needs substantial modification—arguably elimination,” Vedder notes in a research note for the James G. Martin Center for Academic Renewal.

As Vedder notes, student loan borrowers shouldn’t be in this deep, as average outstanding consumer loan balances usually fall in bullish economic times, as currently is the case with credit cards and auto loans. That’s not so with student loans, as borrowers are starting to believe they can get away with paying low amounts on their loans, or potentially not have to pay them at all, with no penalties attached.

“A host of more accommodating repayment programs (for example, income-driven repayment plans and the ability for graduates to take public service jobs for student loan forgiveness after just ten years, have contributed to slow repayment), he states. “Then you have the plans of major presidential contenders like Elizabeth Warren and Bernie Sanders to cancel all or a large part of student debt.”

“Why be a sucker and repay your obligation when the government may agree to let you off from paying?” he says.

Get The U.S. Government Out of the Student Loan Market?

Vedder touts a new and improved student loan system where the federal government gets out of the student loan game and focuses on improving (and maybe reducing) other forms of college financial relief programs, like Pell Grants. In its place would be a private-based student loan model with “sane and realistic loan policies,” he says. 

For its part, the New York Federal Reserve, doesn’t offer a cure for current federal student loans ills. Instead, it issues a real-world warning about tradeoffs and impacts.

“The federal student loan program enables many Americans to finance a college education and improve their economic prospects,” its report states. “With many policy proposals aimed at easing the burden faced by troubled student loan borrowers, and with a goal of making college more affordable for all, it is important to carefully consider the heterogeneous experiences of borrowers in trading off the program’s costs and distributional impacts.”

How to Deal with Student Loan Debt 

If you are struggling with student loan debt, there are ways to lower your payments. Some options for dealing with student loans, include:

Can you qualify for student loan forgiveness? Many jobs, including nurses, teachers and lawyers could potentially qualify for student loan cancellation with meeting specific requirements.

Is refinancing student loans right for you? Refinancing student loans could potentially lower your interest rate, allowing you to save money and pay off your loans faster. You may also be able to reduce your monthly payment. Keep in mind that refinancing federal loans into a private loan means you’ll lose federal loan perks, including the possibility for student loan forgiveness, an option to be on an income-driven repayment plan and generous deferments for times of unemployment or economic hardship.

Could you find a job that offers student loan repayment assistance? More and more employers are offering student loan repayments as a benefit to employees. SoFi, Abbott Labs and Fidelity are just a few.

You can find ways to earn more to reduce student loans and save money to pay off your debt quicker.