How bad is the student loan crisis in America?
Student loans help students and their families to fund the high cost of obtaining a college education, but not without consequence. According to recent statistics, student loan debt in the U.S. reached an all-time high of $1.56 trillion in 2018. This means that a typical college student graduates with around $29,800 in debt and an average student loan payment amount of around $393 per month.
While this data may seem surprising, these numbers will only continue to increase as the cost of college tuition rises at a rate of around 5 percent per year. During the 2017 and 2018 school year, the average cost of a college tuition ranged between $20,000 at public institutions to nearly $47,000 at private colleges and universities. If this trend continues throughout the next five years, students could pay more than $117,555 for a public college education or as much as $266,850 to attend a private university.
But the picture may not be as bleak as it looks. In fact, some experts argue that the panic about student loans is overblown, especially when you consider how many repayment options students have. For instance, borrowers who meet certain eligibility requirements and work in public service or health care may not even need to repay their full loan amount. Even those who do not qualify for loan forgiveness may have other options like income-driven repayments and deferments.
With all of these types of student loan help available to borrowers, is student debt really a crisis?
Pros and Cons of Private and Federal Student Loans
Without private or fed student loans to help students fund their higher education, many would not be able to pay for the high cost of obtaining a college degree. Of the students who graduated in 2018, for instance, 69 percent relied on a national student loan to fund their college education. Additionally, 14 percent relied on a parent PLUS student loan.
But what happens to the students who take these loans? With the rising costs of college, it’s no wonder that those who borrow money for school sometimes struggle to repay their loan debt on time. During the first quarter of 2018, for example, 11 percent of borrowers were delinquent in repaying their loan debt by at least 90 days. While student loan default rates have declined in recent years, this data shows us that many borrowers are still unable to make timely payments on their loans.
It’s not just individual borrowers who are affected. The high amount of student loan debt appears to be taking a toll on the economy as well. Due to the financial burden of federal and private student loans on recent graduates, college graduates delay homeownership by an average of seven years. When paying off student loans, young borrowers typically purchase fewer vehicles, use their credit cards less frequently and spend less money overall.
This means that the rising cost of college tuition and a lack of student loan help and forgiveness may affect the economy as a whole. According to a survey conducted by U.S. News, around 63 percent of borrowers do not regret borrowing money for school, but 97 percent struggle to achieve their post-college goals such as saving for retirement or buying a home.
Are existing student loan repayment plans enough?
Right now there are several student loan repayment options available for students who have college debt. However, many college graduates find that there are downsides or issues with existing repayment plans that make it difficult to lower their overall balance significantly.
For example, many individuals applying for debt forgiveness may encounter issues with their federal student loan servicing company incorrectly filing paperwork or misapplying payments. As a result, students may continue to accumulate debt or fail to qualify for forgiveness through no fault of their own.
Additionally, a whopping 99 percent of students who apply for debt forgiveness through public service are rejected today. As a result, millions of Americans who pursued public service with the intent of seeking loan forgiveness remain saddled with expensive loans even as they embark on careers that often have lower average incomes.
Although there are numerous repayment options in place, some of them may enable students to pay rates low enough that the accumulated interest ends up growing faster than they can pay down their student loan debt. Some individuals report that they have been paying their balances down for a decade or more only to see their debt growing due to high interest rates and unclear payment plan options.
If borrowers cannot afford to make timely payments on their student loan debts while participating in a standard or income-driven repayment program, they may be forced to forebear or defer their loans. During the fourth quarter of the 2018 year, 3.7 million Direct Loan borrowers were in deferment, while 2.6 were in forbearance. Another 5.1 million borrowers were in loan default. This has a significant impact on the economy overall. So what’s the solution?
Debt Education vs. Free College
Some politicians have argued that the best way to reduce student loan debt is to prevent students from accumulating it in the first place. These individuals favor better debt education, arguing that students would not take out large student loans if they knew of the potential financial consequences. However, some preliminary research and efforts in this theory have not proven successful.
For example, many colleges have begun periodically sending educational debt letters to students that summarize their current debt and how much time it could take to pay it off. However, this experiment has shown to have little to no impact on how much student loan debt an individual accumulates. This may be because once students begin a path toward a degree, they see no reward in dropping out regardless of how much debt they may acquire.
In the 2020 presidential election cycle, many Democratic candidates have come up with a new potential solution to the debt crisis: free college. For example, Bernie Sanders and Elizabeth Warren have both proposed free college courses in public schools, allowing individuals to earn a degree without taking out student loans.
Those who attend private colleges may still accumulate debt, but a free option could exist for others. Additionally, both Warren and Sanders have made proposals to cancel most or all of the existing student loan debt. Candidate Julian Castro has also suggested at least tuition-free college in public schools.
Sen. Amy Klobuchar has proposed free community college but not free public college, and candidate John Delaney has proposed cancelling student loan debts for individuals who move to rural parts of the country for at least 10 years.
With the national conversation currently focused on education and student loans, it is clear that student loan debt and the national debt crisis will play a major role in the coming election.