5 Reasons to be Concerned About Student Debt
Why should we care about student debt? For one, it contributes a great deal to the millennials negative 2 percent savings rate. It is also a growing concern for other age groups; 40 million Americans are currently affected by student loan debt. While there are some insightful arguments as to why the student loan debate may be overblown, anything that could cause significant short-term losses and long-term economic drag should be watched. These reasons alone are enough to warrant concern. Here are five more:
1. Total student debt has surpassed $1 trillion
As of Q3 2013, outstanding federal student debt hit the $1 trillion mark and has increased 13.2 percent to $1.14 trillion in Q1 2015. This number does not include private loans, which comprised 19 percent of student’s debt in 2013. But this trillion dollar figure does not account for the full cost of debt; according to Brookings, student debt can affect other economic outcomes like career choices, home ownership and retirement savings. Student debt also can affect non-economic issues like physical health and marriage rates.
2. 66 percent of students borrow to attend school
Source: National Center for Education Statistics
While the percentage of students taking out loans in public four-year schools and private nonprofit four-year schools is similar in 1999-2000 and 2007-08, borrowing rates in for-profit four-year schools increased dramatically over that time period – from 78 percent to 90 percent. The numbers can be even more discouraging when looking at borrowing rates within states. In 2013, 76 percent of New Hampshire students and 72 percent of South Dakota students had student debt, as compared to the national average of 61 percent.
3. Average student debt is more than $25,000 per borrower
Source: Recreation of Figure 13A, Trends in Student Aid 2014
Average cumulative debt levels per borrower in 2012-2013 represents a 21 percent increase from the 1999-2000 school year. If we look at student debt across all degree recipients, the number is slightly less alarming – the average student debt per bachelor’s degree recipient is $15,100 in 2012-13. But at least these students have a degree; those who take out loans but drop out of college face the shorter-term problem of paying off college loans and the longer-term problems associated with not getting a degree. This is no small issue; state six-year graduation rates range from 37.8 percent in Idaho to 70.8 percent in Delaware.
4. 13 percent of student borrowers take out $50,000 or more
Source: Federal Reserve Bank of New York Center for Microeconomic Data, 2013 Student Loan Overview
Recreation from Donghoon Lee
Roughly 4 percent of borrowers borrow over $100,000, and another 18 percent borrow $25,000 to $50,000. In total, 31 percent of all students are borrowing above the average student loan debt. Using the New York Times Student Debt Calculator, a $25,000 student loan at the current repayment rates – 4.66 percent interest for 2014-2015 Stafford Loans on a 10-year term – would have monthly payments of almost $300 and incur over $7,000 in interest before it is paid off. Average student debt payments represent 7 percent of monthly income for those who borrow.
5. 17 percent of borrowers are delinquent on their loans
For those currently in repayment, 31 percent are in default. Delinquency rates on student loans now outpace credit cards, or auto loans and mortgages combined. The increasing delinquency rate may even have an effect on those with debt but who are not delinquent; Equifax now ranks younger borrowers with student loans as riskier than young borrowers without loans. Delinquent and deferred loans now represent more than 50 percent of the student loan balance, which could have massive consequences for the biggest lender of student loans – the U.S. government.
What options are available to students?
Currently, the federal government offers a few ways to reduce student loan payments. The most well-known are income-driven repayment plans. These are tied to the individual’s annual earnings and include an Income-Based Repayment Plan, a Pay as You Earn Plan, and an Income-Contingent Repayment Plan. The White House Blog has a simple Q&A to help students understand income-based repayments.
The government also provides loan forgiveness programs, though they are contingent on meeting specific requirements. One of these programs is the Public Service Loan Forgiveness Program. This requires individuals to make 120 on-time, full monthly payments under a qualifying income-driven repayment plan while working full-time at a qualifying public service organization. Another is the Loan Forgiveness Program for Teachers. Some of the basic requirements include working in a qualifying school for at least five years, but this plan only forgives up to $17,500.
Another solution is to think younger; a 529 Plan is a tax-deferred growth and tax-free withdraw savings account for higher education expenses. While state plans may vary, these plans can generally be started from birth, and a few places – including Nevada and San Francisco– have started automatically depositing money into these plans for every child. Nevada’s Q&A of its Kick Start program can provide insight into why this state started its program
There is another simple (albeit challenging) solution to rising student debt: Stop the rising cost of tuition. Since 2001 average tuition has risen 33 percent, and while public institutions are still far cheaper than private, their tuition costs have risen nearly 40 percent. Some institutions have tried to cut cost and have seen a huge applicant increase, but after a few years student seem to forget this kindness and view the school as inferior to its peers.
Though there is no clear-cut answer to fixing student debt, keeping our eyes on the trends may help us better understand its long-term impacts.
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