The recent decade of the struggling economy has put students and graduates in a tight spot when it comes to their student loan debt. Federal student loan debt in America has seen steady and continuous growth since the economic collapse of the late 2000’s. It’s also the only consumer debt to see this kind of cumulative growth, even as interest rates have begun to rise. With the improving economy, wages on the rise, and low unemployment under the Trump administration, those carrying large amounts of student loan debt may finally get the break they need in getting things under control. However, has the damage already been done?
Financial experts worry that the continued borrowing and steady rise in tuition rates equate to an ever-widening default crisis in the making. Over the last decade, student loans have grown at nearly 150%. This is nearly three times the rate of auto loans. Mortgage loans and credit card debt have actually started to decline. To sum it up, student loan debt is the second largest segment of debt, totaling a staggering $1.5 trillion according to the New York Federal Reserve. Moreover, this number shows no sign of slowing down.
Because many students and professionals are pursuing advanced degrees, student loan debt continues to climb. What also continue to climb are tuition rates at both public and private universities, along with the interest rates on student loans. With professionals having to work while they go to school, financial analysts worry that the default rate on student loans could rise sharply and cause a financial crisis that could affect the growth and well-being of the overall economy.
Student Loan Delinquency Is a Worry
To add to the concern, student loan debt now carries 90 days+ delinquency rates that are the highest of all household debt sectors according to a Forbes article. What that means is that 1 in 10 debt holders are breaching the 90-day delinquent mark. Compare this to mortgages that have a little over a 1% delinquency rate and auto loans that have around a 4% delinquency rate. Since the financial crisis of the late 2000’s, household debt, in general, has seen a decrease in delinquencies. Student loan delinquencies, however, are near the peak that was seen on the heels of the Great Recession.
This new, high delinquency rate rivals the escalation of delinquencies after the financial crisis hit the country beginning in 2007. Private and public colleges, in concert with the federal government, pushed student loans to students who were having trouble finding decent paying jobs. What resulted was a significant transfer of federal dollars down to the state institutions, while students racked up significant debt at high interest rates. Additionally, many students graduated with degrees that were essentially useless, and this put students in a position of being unable to pay back the high-interest rate loans they acquired. Meanwhile, for-profit public and private universities and colleges fattened their coffers, expanded their facilities, and raised pay for their administrators, all at the expense of America’s young people. Graduating students holding student loan debt in 2011 were mostly from for-profit universities and colleges, and they accounted for nearly 70% of all defaults. The academic year of 2011-2012 saw delinquencies take a meteoric rise to almost 12%.
The delinquency rate today remains nearly as high as it was in 2012. Many who borrowed on student loans never finished their degree, making it nearly impossible for them to pay back their loans. Many delinquencies are among those who borrowed smaller amounts of student loan money. Those who borrowed larger amounts to earn a degree in a high paying field, such as a medical degree or a law degree, are less likely to be delinquent and are able to see a reasonable return on their investment.
Interest Rates on Private Student Loans Continue to Rise
Over the last couple of years, interest rates on student loans have risen significantly. Rates on loans for those seeking undergraduate degrees have topped 5%, while rates for loans for advanced and professional degrees have risen to almost 7%. These numbers are according to the Department of Education. Many times, students will take deferments on their loans, which could put them in a difficult situation after they graduate. Although they aren’t required to make payments while still in school, the interest on the borrowed money continues to accrue and add to the balance of the loan. This can add a significant amount of money over time.
With interest rates rising and the Fed showing no sign of slowing down the rate increases, students graduating with student loans could have a lot more debt than they expected. This could raise the risk of default for these borrowers. This volatile rate situation isn’t just a danger to the financial well-being of these young people, but it could also be a drag on the broader economy. Those with delinquent student loans will see an adverse effect on their credit scores, and this could hold back these borrowers from moving on with their adult lives and making big-ticket purchases on items such as homes and cars. We’re seeing a higher percentage of young people in their late 20s and early 30s still living at home with their parents. This could eventually hold back growth and put a drag on the economy.
The Student Loan Crisis Could Affect the Entire Economy
As the student loan crisis deepens, we could see an entire generation bearing the burden of these students’ loans. This could cause the demand for consumer goods to decline, as well as the demand for homes, condominiums, and other housing. That could eventually trickle down to even smaller expenditures such as home furnishings and non-essential services such as cable and internet services. While these may seem insignificant, they could add up to a sizeable dent in economic growth for the country.
While the student loan crisis is a serious economic event, it doesn’t compare to the economic meltdown that occurred 10 years ago due to the subprime collapse. This is an entirely different situation from scores of borrowers defaulting on their mortgages and falling into foreclosure. That collapse created an inherent, systemic risk to the financially stability of the economy.
While it may not threaten the country’s economic stability, it’s still a source of worry amongst our young people and students. In fact, six out of every 10 of those in debt report unease and uncertainty about their student loan debt situation, and about how they’ll eventually resolve it. Students should explore a variety of repayment plans to find their best path out of debt.
What can we expect in the future when it comes to our student loan crisis here in America? We can expect a number of changes in the next year, according to Forbes. Let’s look at a few of these.
Forgiveness of Student Loans
The current administration has given no guarantees that student loan forgiveness will continue. Forgiving student loans may be good for borrowers, but remember, the federal government writes off these loans at the expense of the taxpayer.
Those currently participating in income-based repayment programs or in the Public Service Loan Forgiveness program will likely be unaffected, but the future of student loan forgiveness programs is unclear. Borrowers should weigh their options and try to find the fastest and most efficient way to get their student loan debt paid off.
Repayment of Student Loans
President Trump has proposed the combining of the two existing income-driven repayment plans. These plans are the Pay As You Earn plan (PAYE) and a revised program of a similar name, REPAYE. This was proposed in an effort to make one single plan that would be less confusing for borrowers who have student loans. These repayment plans only apply to federal student loans; if you have a private student loan, you should explore your options for getting your loans paid off as quickly as possible.
Fixed Rate Loans vs. Variable Rate Loans
Student loans and refinanced loans offer the choice of taking a fixed interest rate or a variable interest rate. Depending on the market conditions, a variable rate may be the way to go if it’s forecasted that interest rates are going to drop in the future. However, with the current economic conditions, interest rates have been on the rise. In fact, the Federal Reserve has stated that it’ll raise interest rates a total of four times this year. If you’re going to take out a student loan or refinance your current student loan or loans, you’d probably be wise to take a fixed rate loan. Otherwise, it’s likely that you’ll see your payments increase with every rate increase that occurs.
Increased Role of Private Sector and Banks
Our current administration is looking to bring the private sector, namely banks, into the student loan lending process. President Trump believes that students would be better served by the private sector in the way of opportunity, costs, and the administration of student loans.
If Trump has his way, we’ll see more banks and other private lending institutions coming into the student loan arena. This should yield lower interest rates, a more streamlined application process, and better customer service.
Lowering of Tuition Costs
Tuition has been steadily rising for the last decade. This is because the federal government has made it easy for students to borrow the money they need to pay these high tuition costs. Trump believes that colleges and universities have a responsibility to try to lower the cost of tuition, especially those with large endowments. In fact, he has stated that universities and colleges that don’t work to lower the cost of tuition to their students may face a loss of their tax-exempt status.
Because colleges and universities reap the benefits of high tuition costs and control the cost of tuition but, conversely, bear no responsibility or risk for the defaults of federal student loans, this situation is unfairly out of balance. Trump believes the implementation of this proposal will help bring down the cost of tuition and decrease the amount of money students need to borrow.
New Student Loan Legislation
Recently, there have been several bills proposed to Congress concerning the student loan debt crisis, in hopes of improving the situation. Because Americans owe a staggering $1.5 trillion in student loan debt, there’s a risk that the limitations this level of debt places on consumers will negatively affect the overall economy.
Financial analysts are concerned that those burdened with high student debt won’t be able to buy homes, cars, and other big-ticket items that contribute to a growing economy.
These proposed bills will address several different areas of the student loan process, including employer repayment participation, bankruptcy fairness laws, and tuition reduction legislation.
New Rates for Government Student Loans
Federal Law determines the interest rates government for student loans. This is done annually in July, so the rates won’t change again until after next June 30. The good news is that all federal student loans are fixed interest rates loans, so there’ll be no rate increases until the next annual reset. Of course, if you have a private student loan, your rate is subject to increase any time the Federal Reserve raises interest rates. For those holding private student loans, they have a variety of options for dealing with that debt, including debt settlement.
The student loan crisis in America is one that will be felt for the majority of the lives of this generation. Those facing down six-figure loan balances have many years of payments ahead of them. The current administration seems committed to making some key changes that can help our youth and young professionals climb out of the deep hole of debt that’s been created. The hope is that we can see our way out of this student loan crisis before it negatively affects the broader economy. Through better lending practices, pressure on universities and colleges to rein in tuition costs, and an administration focused on fair lending, we may be able to get this crisis under control.