The Student Loan Crisis

There have been many economic struggles throughout the United States history. The Great Depression in 1929 and the housing crash in 2008 are two examples of an economic crisis. Rising student loan debt is a new potential economic crisis that is becoming a concern. There are many causes for rising student loan debt. There are also many possible consequences to this problem. A solution to this problem has to be found before it becomes an economic crisis.

Rising College Cost

There are many people who go to college to receive an education in the hopes that they can earn more money. People go to school for two years to receive an Associate’s Degree, four years to receive a Bachelor’s Degree, or more years for a Master’s Degree or a Doctoral Degree. It cost money to go to school for these various degrees and the cost of going to college has increased significantly in recent years.. According to the National Center for Education Statistics (NCES), public college tuition for 2-year colleges went from $6,281 in 1984-85 to $9,586 in 2014-15 and 4-years colleges went from $8,238 in 1984-85 to $18,632 in 2014-15. It is worse for private college tuition where 2-years colleges went from $13,881 in 1984-85 to $24,317 in 2014-15 and 4-years colleges went from $18,354 in 1984-85 to $37,424 in 2014-15 (nces.ed.gov). These numbers are adjusted to 2014-15 dollars. The only school choice that has remained affordable is 2-year public college while the other choices have become unaffordable for many people.

Increased tuition costs has led to many students taking out more expensive student loans. According to Conlin (2017), outstanding federal and private student loan debt has increased from about $540 billion in 2007 to about $1.44 trillion in 2017. Trillions of dollars of student loan debt are spread out over 42.4 million Americans in 2016 (Rosen, 2017). Increased student loan debt has been caused by the rising number of people with student loans and rising tuition costs. According to Pianin (2017), “borrowers now leave school owing on average about $34,000… up 70 percent from a decade ago”. People that are 60 years or older owe about $66.7 million in student loans (consumerfinance.gov). This could be from some private loans requiring a co-signer because not all new college students have a credit score.

Economic Consequences

Student loans have effected millions of people in various ways from defaulting on student loans to having their wages garnished. According to Conlin (2017), “11 percent of the $1.325 trillion of federal student loans outstanding is severely higher than the mortgage default rate at the peak of the foreclosure crisis in 2010”. Lenders must find ways to get to get back the money given out for student loans because of this high percentage. $3 billion in wages have been garnished since 2015 from student loan lenders and debt collectors (Conlin, 2017). According to Conlin (2017), “tax refund seizures and Social Security benefit reductions totaled $2.6 billion, up from $2.2 billion in 2015”. Student loans need to be paid even if people cannot afford them, which affects their income and causes people to spend less.

Student loans are becoming a problem that may impact the economy similar to the mortgage crisis a several years ago. It is similar to the mortgage crisis because the delinquency rate for student loans are 11% and according to Jackson (2017), the rate was 11.5% during the crisis in 2010. It is concerning that the two numbers are so close because the mortgage crisis was a major factor in the Great Recession. Student loan debt is not good for the economy because people are acquiring debt they cannot afford, which means lenders are giving out large amounts of money that they are not getting back. A person’s credit is damaged when they miss a payment or do not pay their debt back because they cannot afford the payments. This is a problem because when they are making more money and can afford to pay of loans for a house or car, they cannot with their low credit.

Why College is Important

There are some people who would say that college might not be worth it with the problems student loans cause. The problem is college degrees are still important to having higher employment and income. According to the Bureau of Labor Statistics in 2016 the median earnings for a high school diploma or less was about $598 a week, $756 a week for some college or an Associate’s Degree, $1,156 a week for a Bachelor’s Degree. There is a major increase in pay for those with a Bachelor’s Degree by earning $400 more a week than the next closest education level.

It is important to note that these numbers are just the median weekly earnings so people may earn less when they first start working and more as they progress in their careers. The unemployment rate in 2016 was 6.3% for a high school diploma or less, 4% for some college or an Associate’s Degree, 2.7% for a Bachelor’s Degree (bls.gov). Having at least a Bachelor’s Degree is better but the problem is most people do not have a college degree. According to Fiedler (2015), 66.9 million out of 209.3 million people or 68% of people 25-years or older have a bachelor’s degree or higher.

Possible Solutions to Student Loans

Student loan debt has become a problem in recent years so a solution must be found before it affects the economy. One solution suggested by the former head of the Federal Deposit Insurance Corporation Sheila Bair would be to “Let students trade away a portion of future earnings for financial support now” (Clark, 2017). This could be a good solution because it would not go against their credit and their payments would be based off their income. The downside would be it would still take away from their income to buy a house, a car, or other consumer products that help the economy. Another solution could be for the government to provide debt forgiveness to those who are frequently delinquent and in default or even all the people out of school. The problem with this solution is it would not help future students when they are out of school with student loans.

A third possible solution could be to expand government funded public education from elementary and high school to college. This would give low-income students who may struggle to pay back student loans access to college. It would also give students a choice of going to college without the need for loans. A disadvantage would be increased taxes because that is how elementary and high school is funded. It may not require increased taxes if government funds are reallocated towards expanding public school. Providing more information on cheaper college paths for students before they go to college could be another possible solution. For example, going to a 2-year college for general studies classes and then going to a 4-year college for degree courses would be cheaper. All four of these solutions could relieve the problem of student loans and could be better than the current system.

References

https://www.bls.gov/emp/ep_chart_001.htm

Clark, K. (2017, Jan. 31). Student Loans Could Be the Next Mortgage Mess. Here’s a Radical Fix. Retrieved from http://time.com/money/4652567/sheila-bair-student-loans/

Conlin, M. (2017, July 25). Herded into Default, Borrowers Are Then Hounded to Repay Student Loans. Retrieved from https://www.reuters.com/investigates/special-report/usa-studentloans/

Fiedler, K. (2015, April 8) 70% of Americans Don't Have College Degree, Rick Santorum Says. Retrieved from http://www.politifact.com/truth-o-meter/statements/2015/apr/08/rick-santorum/70-americans-dont-have-college-degree-rick-santoru/

http://files.consumerfinance.gov/f/documents/201701_cfpb_OA-Student-Loan-Snapshot.pdf

Jackson, A. (2017, Jul. 27). Citi Just Drew An 'Eerily Reminiscent' Parallel Between Student Loans and the Subprime Mortgage Crisis. Retrieved from http://www.businessinsider.com/student-loan-crisis-mortgage-crisis-2017-7

https://nces.ed.gov/fastfacts/display.asp?id=76

Pianin, E. (2017, Apr. 4). 5 Alarming Facts About America's $1.3 Trillion in Student Loan Debt. Retrieved from http://www.businessinsider.com/americas-student-loan-debt-facts-2017-4

Rosen, S. (2017, June 19). Many Student Loan Borrowers Struggle with Cycle of Debt. Retrieved from http://www.chicagotribune.com/business/success/kidsandmoney/tca-many-student-loan-borrowers-trapped-in-cycle-of-debt-20170619-story.html