Student Loans; the Increase, Impending Crisis, and Their Financial Effect

written by Frankie Rose.

Student loans may have the ability to make dreams come true and help students with pursuing their passions. But does this opportunity come with a hefty price tag and an even far-reaching financial burden? Student loan debt has increased by 102% over the last decade. It is appropriate to understand how this increase occurs and how it impacts the financial decisions of students.

When students enter private, public, and for-profit institutions - they do not fully comprehend the severity of accepting a loan. They are misled and uneducated about the terms and conditions that come with such a big decision. The implications and extent of paying off such a large loan over time as soon as they graduate can follow them throughout adulthood. With that in mind, let's acknowledge the mere fact that often a loan repayment will take up a large portion of their starting salaries. Besides having a smaller monthly income, these loans manage to rack up a pretty penny in interest. Overall, students are ill-equipped to handle this type of financial responsibility.

“I grew up in Communist China and never had much money to my name, and then, all of a sudden, I had giant student loans.” -Li Lu

The latest reports state that “tuition has increased by 25%.” A four-year college degree could have been paid off using extra cash made from a summer or part-time job in the 1980s. Or a small loan, which they could pay off in a year or two. Today nearly 40% of adults aged 65 and older are in default on their student loans. 

Public policies set to uplift students hinder them instead, as the plans are ineffective and incorrectly implemented due to their complexity. For instance, the Forgiveness program forgives federal student loans when; an individual works a decade in public service. Instead of helping students, the program includes four gating criteria and leads to a loss of benefits. Also, students do not utilize college-provided saving plans but rather opt for a federal loan instead, under the guise of these programs that do not pan out in the long run. 

The novel COVID-19 pandemic saw policymakers put a pause on loan repayments. The recent increase has been due to a static balance coupled with prospective students entering college and borrowing loans. 

Student Loan Debt Explained

While tuition costs have increased, obtaining financial aid has become even more arduous to come by. Borrowing from federal governments and banks is the norm. Loans are profitable and, combined with an unregulated market, lead to further debt.

The market crash of 2008 left graduates with fewer opportunities, the labor market had destabilized, and employment was hard to attain. Repaying loans in the economic climate of ‘08 was nearly impossible. 

“For-profit higher education is today a booming industry, feeding on the student loans handed out to the desperate.” - Thomas Frank

According to recent data, “within one year of graduation, 20.9% of student borrows have had at least one delinquency.” Student debt cannot be written off by bankruptcy despite a student’s financial position. Surveys suggest that an increase of students list student loan obligation as a weighty financial burden. This leads to an ever-increasing rate of delinquencies and defaulting. 

Students are unfortunately borrowing large loans – without any benefit in the long run. They attend institutions or enter programs with less than desirable credentials. Loans can limit students’ opportunities and they may struggle to repay them. In addition to borrowing, students may not complete their studies or graduate and are then stuck with insurmountable debt. 

Inequality has a part to play in this crushing loan debt. Race and gender can affect the type of opportunities one may receive and the amount of money they earn. Women, predominantly African American women, borrow larger loans, yet an African American woman with a graduate degree earns the same amount as a man with a bachelor’s degree. Thus, women are expected to work harder and receive less than their counterparts. Black and Hispanic students are more likely to garner more student loan debt than their white peers. They owe $7,400 more on average. Reports have documented a disparity in delinquencies and defaulting between minority students and white students.

How this Debt Affects Their Future Financial Position

Students currently studying share that their main stressors are financial matters, such as repaying their loans and whether they will return the following semester. Recent graduates admit they earn just enough to pay their bills. A shocking 57% of African American women are unable to meet their expenses and repay their loans. 

These oppressive loans may even delay students from reaching milestones within their lives. Graduates delay marriage by an average of 7 years, and students or graduates in existing partnerships find them unfulfilling. Starting a family and having children is put on hold as well. Students and graduates would rather wait until they are in a favorable financial position first. Due to large loan repayments taking a plunge and investing in a home or vehicle is out of the question. Over 50% of students said their debt affected this decision.

They cannot plan for their future. Retirement plans are not a priority. Emergency funds and saving accounts are barren. These decisions have placed them in an even further vulnerable position. Graduates report that they are dissatisfied with their current financial situation despite earning substantial incomes this, however, does not reflect when accumulating wealth and assets. 

Loans tend to limit students - their opportunities, passion, and ambition. It impacts which career field they enter. Instead of entering an industry they enjoy, they’d rather choose according to the income they'll earn. It may even defer them from establishing their own business or pressure them into obtaining a degree under the notion that it grants them expansive options in life.

“College is a part of the American Dream. It shouldn’t be part of a financial nightmare for families.” -Barbara Mikuski

Policymakers must address these issues before this crisis explodes. Students deserve better support, education, and opportunities.  The student loan system must be re-examined to achieve real change. Students should be educated about alternatives before possibly plummeting into financial debt. More affordable options have the potential to foster a new generation of adults who are debt-free!

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Resources:

How student debt became $1.6 trillion crisis: https://www.cnbc.com/2020/06/12/how-student-debt-became-a-1point6-trillion-crisis.html

U.S. student debt has increased by more than 100% over the past 10 years: https://www.cnbc.com/2020/12/22/us-student-debt-has-increased-by-more-than-100percent-over-past-10-years.html

Student Loan Debt Reaches Record High as Most Repayment Is Paused: https://www.experian.com/blogs/ask-experian/state-of-student-loan-debt/

See 10 Years of Average Total Student Loan Debt: https://www.usnews.com/education/best-colleges/paying-for-college/articles/see-how-student-loan-borrowing-has-risen-in-10-years

America’s student debt crisis explained: https://www.weforum.org/agenda/2019/09/us-student-debt-crisis-explained-america-education/

Addressing the $1.5 Trillion in Federal Student Loan Debt: https://www.newamerica.org/millennials/reports/emerging-millennial-wealth-gap/addressing-the-15-trillion-in-federal-student-loan-debt/

Student Loan Debt Crisis Breakdown: https://www.thebalance.com/student-loan-debt-crisis-breakdown-4171739

The Student Loan Crisis Is More Complicated Than a Number: https://elective.collegeboard.org/student-loan-crisis-more-complicated-number

How did the student loan crisis start? Former U.S. education official explains: https://www.cashay.com/student-loan-crisis-start-192008901.html

Is Student Loan Debt The Next Financial Crisis? https://www.investopedia.com/financial-edge/0212/is-student-loan-debt-the-next-financial-crisis.aspx

A Crisis in Student Loans? How Changes in the Characteristics of Borrowers and in the Institutions They Attended Contributed to Rising Loan Defaults: https://www.brookings.edu/wp-content/uploads/2015/09/looneytextfall15bpea.pdf

The Student Debt Crisis: Could It Slow the U.S. Economy? https://knowledge.wharton.upenn.edu/article/student-loan-debt-crisis/

How Student Debt Affects Personal Choices Of Young People: https://www.npr.org/2016/06/08/481206896/how-student-debt-affects-personal-choices-of-young-people

LIFE DELAYED: The Impact of Student Debt on the Daily Lives of Young Americans: https://www.canisius.edu/sites/default/files/*/life_delayed_12-2015_1.pdf

The Effect of Student Debt on Career Choices: https://dlib.bc.edu/islandora/object/bc-ir:102348/datastream/PDF/view

The impact of student loan debt on older adults and their retirement: https://lib.dr.iastate.edu/cgi/viewcontent.cgi?article=1240&context=creativecomponents

HOW DOES STUDENT DEBT AFFECT EARLY-CAREER RETIREMENT SAVING? https://crr.bc.edu/wp-content/uploads/2016/09/wp_2016-9_rev.pdf