Understanding the Economic Impact of Rising Student Loan Debt
Recent news highlighted the staggering rise in student loan debt balances and captured the attention of political candidates, economists, and college graduates. Parents and students continue to recognize the value a college degree brings in terms of increased job prospects and higher wages. Many high schools direct all students toward a college education.Yet, withthe price of university studies outpacing inflation, and financial assistance increasingly offering loans to make up the difference, students are stuck paying more out of pocket for that coveted degree.
How Big is The Problem?
2015 college graduates finished school with an average of $34,000 in student loan debt,bringing the total outstanding balances to 1.2 trillion dollars. There are over 40 million former students with existing student loans, with the over 60 age bracket growing the fastest. Considering both recent and previous college graduates, $29,000 is the average outstanding balance.
Schools care about the rate of student defaults because it can impact their ability to qualify for federal financial aid.Current default rates in 2016 fell slightly for students attending public universities to 11.3 percent. Private college students increased their default rates to 7%, while for-profit universities saw a decline to 15%. Income-based repayment options and extending loan terms to 25 years give students more options and lower student loan default rates, overall.
In an attempt to limit students’ aggregate balances from expanding too rapidly, the Department of Education puts caps on borrowing. For example, first-year students can borrow a maximum of $5,500 in unsubsidized loans. That number expands to $7,500 for third and fourth-year students. There is a maximum aggregate borrowing limit for unsubsidized loans of $31,000 for an undergraduate degree. When students reach these limits, they must use personal funds, private loans, or additional free money to fund any remaining gap in educational costs.
Other major issues include students who do not graduate and thosetaking longer to complete a degree. Traditionally it took four years to earn a Bachelor’s degree. Today a student taking six years to complete the same mandatory classes still graduate “on time.” Funding additional years of schooling can add significantly to loan balances. Students who leave school before degree completion have loan balances to repay without the benefit of a better job the college degree would bring.
To address some of the concerns over large monthly payments after leaving school, students now can take up to 25 years to pay back the loan, lowering monthly costs. The downside of extending payments by 2.5 times, is the larger overall bill due to accumulated interest. Deferments, forbearances, and other payment delays also add to the cost of repayment.
What are The Causes of the Student Loan Debt Crisis?
There are many factors causing the rising debt load for college graduates. At the forefront are the rising cost of college attendance greatly outpacing inflation, stagnant wages, lower levels of state funding, additional years required for many bachelor degrees, and decreasing grants and scholarships as a percentage of the cost to attend school.
The recession from 2007 to 2009, sent many students back to school for additional degrees when they were unable to find jobs, using borrowing as a primary way to fund additional educational needs. The recovery has not lead to higher wages, and many families have not seen income increases in many years, while tuition rates rise each year.
States, dramatically reduced funding to higher educational institutions during the same time period. The recovery has not lead to increases in state funding, leaving families and students to pay higher out of pocket costs to cover the increasing price tag. Those without college funds saved in certain accounts,such as a 529, often must borrow larger amounts to remain in school.
Another challenge is that college course offerings limit schedules for prerequisite and mandatory classes each semester, forcing many students to add additional years of school to complete degree requirements. Changing majors, double majoring, or adding minors can also add to the time it takes to finish school.
Lastly, free aid is not keeping up with rising college costs. Grants and scholarships, fill some of the gaps between the higher price of an education and out of pocket costs for families. Grants such as the Pell Grant, targeted to help low to moderate income families, has not closed the gap on the rising costs of college.
Long Term Economic Consequences
The long-term results of large student loan balances include delays in milestones, reduction in entrepreneurial businesses, and a slower road to financial independence.
Milestone Delays:Millennials trying to reduce student loan debt are putting off major decisions such as marriage, starting a family, and buying a home. These delays create billions of dollars in reduced economic growth. With many continuing to rely on parents to help well into their 20’s and early 30’s,they are moving back home or adding additional roommates to lower costs.
Fewer business startups: When graduates take on early debt, they seek more stable employment in the form of hourly wages or salaries. Business startups are an important economic engine that suffers when college graduates have too much debt immediately out of school.
The slow road to financial independence: High debt payments compared to income reduce financial independence. While a college degree can provide graduates with significant economic advantages in the form of a lifetime of higher wages, too much debt can defer personal economic growth. When the student loan payments chip away at the economic advantages of attending college, students might begin to seek alternative routes to improve employment. They might also find they never catch up economically to those who can finish without the burden of student loan debt.