How Did We Create The Student Loan Epidemic?

student loan

The Student Loan Epidemic!

There’s a debt epidemic gaining momentum that is quickly (and unavoidably) taking over current and future generation’s financial lives.

Sadly, the thing that is supposed to guarantee a stable, financially secure future – getting a college degree, entering the workforce with a credible formal education – is the thing setting them up for just the opposite.

We take kids barely old enough to vote and ask them to decide the course of their future, offering what feels like nearly “free money” to get there.

student loan

The result? An absolute explosion of student loan debt — from $200B in 2004 to over $1.3T in 2015 (and growing at about $3500 per second). The debt is held by over 47 million Americans ranging in age from 18-65+, with the majority of the debt held by young adults barely out of childhood.

The chickens, in all reality, have not yet come home to roost. Of the $1.3T in outstanding loans, only about $600B of it is in repayment. The other $700B is either in deferment, forbearance, or the debtor is still in school and repayment hasn’t yet kicked in. And if you’re wondering how the $600B is performing, according to the Congressional Budget Office, not well. In 2016, 25% of these loans are predicted to default (go beyond 180 days delinquent). Currently 1 in 3 borrowers have payments listed as delinquent (beyond 30 days late).

In the words of Jim Lovell (and Tom Hanks), “Houston, we have a problem.”

How Did We Get Here?

Rampant Overborrowing

A large portion of the $1T+ explosion in debt over 11 years was a result of student loans being one of the easiest categories of loans to obtain. From 2006 until around 2011, the sub-prime mortgage market implosion had all but shutdown easy access to credit. Home equity lines of credit had dried up, there was additional scrutiny on underwriting mortgages, and credit cards pulling back on offers made student loans the path of least resistance for someone needing cash. No credit check, no income verification, no proof of employment needed — the only thing you needed was to sign up for a few classes.

Educational institutions everywhere saw students signing up for classes, obtaining their financial aid checks (i.e. student loans), and dropping out right after. The defaults on these loans skyrocketed.

Those students that were in school for the right reasons were tempted by easy access to quick cash. If you needed an “emergency student loan”, a few clicks of a mouse was all it took to get money in your account. For the uninitiated and uneducated about money, there was little to no thought given of the future repercussions of borrowing.

Tuitions Rising At Massive Levels

Over this period of time, colleges and universities were raising tuitions at levels 2-3x the rate of inflation. State and Federal funding had been cut year over year, and the most natural way to cover the decreased funding was to pass along the expense to students in the way of increased tuition.

At the campus level, expenses continued to rise with the growth of administrative staff (called administrative bloat) and the remodeling and improving of campus facilities and amenities to attract more students. New dormitories, dining centers, and lavish recreational facilities became the yardstick used to measure one school versus the other. The more that was spent, the more the tuition became. And at a basic level, students assumed the more they paid, the better the education. So, they borrowed. A lot.

A Lack of Financial Education

At the heart of the student loan debt problem is a lack of financial education. In the newly released documentary Broke, Busted & Disgusted, students are asked how much $60,000 in student loans at the going interest rate would be over a 10 year pay off period. While the actual answer is $660 a month, the answers never got above $200 a month. Most of the students interviewed just shrugged their shoulders as if they’d never considered the question.

And why should they? As illustrated above, they were children when they made the decision about where they would enroll, dutifully following the societal trend of going to college after high school, most having NEVER had a personal finance class.

And yet they’re signing up for decades of debt repayment. Debt that many reports today suggest won’t be paid back until their children are in college.
– via Financegirl

Defaults Are Higher Than Ever

Alongside the skyrocketing level of debt, unfortunately, is a high rate of default and delinquency on those loans. Why? Partially because of the issues discusses above (too much money borrowed, not enough understanding of what that debt will mean in the future) and also the two mentioned below.

Student loan delinquency now is worse than mortgage repayment was at the depths of the housing crash, according to the same dataset.

Furthermore, experts believe that the reported delinquency rate understates the true level of non-repayment. Only 37 percent of student borrowers are in repayment and up-to-date on their payments, because roughly half of them are still in school, in deferment, or in another program that lets them avoid payments.

Widespread delinquency is a major problem for borrowers and the taxpayers who back most of their loans. It’s getting worse at the same time that unemployment is falling, jobs are opening up and foreclosures and other kinds of debt problems are abating.

Here are some reasons why:

Bad student loans don’t go away

Unlike many other forms of debt, student loans are generally not dischargeable in bankruptcy.

As a result, defaulted student loans haven’t been removed from household balance sheets the way other kinds of debt have during the recession, a fact reflected by the $1.2 trillion in total U.S. student debt recorded by the New York Fed.

Over the past several years, the quality of U.S. housing-related debt has improved as bad loans have been discharged and banks have tightened lending standards for new loans. Bad student loans, on the other hand, have not been wiped off the books, and new federal loans are not underwritten but instead given to students attending eligible schools.

People don’t prioritize student debt

Part of the problem is that people do not prioritize repaying student debt, said Jason Delisle, a higher education finance expert at the centrist New America Foundation.

“There’s a psychological aspect to it. There’s a prioritization aspect to it,” Delisle said. “There’s also an incentive.”

Delisle and a colleague conducted focus groups on attitudes toward repaying student loans for a study published in March. What they found was that people were calculated and often rational in falling behind on their payments.

“The mortgage is important, the car loans are important, this is important, the school loans are not important,” one respondent said in the focus group, in a typical comment.

Unlike home loans, student loans don’t have any collateral that can be seized by lenders. And unlike credit cards, student loans don’t have interest rates that can soar in response to late payments.

Borrowers also reported feeling ripped off on their student loans, or cheated because they weren’t able to find the job they thought they would get by going back to school.

And sometimes they just preferred not to think about student loans at all, even though federal student loans offer options to cap payments as a share of income and then eventually forgive them.

“In many cases the borrower just doesn’t want to engage with the collection agency because they just don’t see any way out,” said Ribe, who suggested counseling as a way to help borrowers understand their options.
– via Washington Examiner

Are you currently repaying student loans? How does your debt level measure up with the ideas here – did you overborrow?

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