As if the student loan problem wasn’t already approaching crisis levels, it may get a lot worse.
In 2010 more than $100 billion worth of student loan debt was taken out, making the total amount that Americans owe for education now more than $1 trillion.
The average graduate leaves school with $25,250 in student loan debt and faces decades of payments.
Although the recent student loan reform may ease the burden by making it possible to lower the payments based on the borrower’s level of income, some students face loan payments that are higher than they would pay on a modest size home mortgage.
Statistics like these make us think of the recent mortgage meltdown and although the term “bubble” has become overused in the financial media, an increasing amount of analysts are bringing light to a problem that appears to be growing rapidly.
Students cannot discharge student loan debt in bankruptcy court, in most cases, making this overwhelming debt load something that could cripple their financial goals for a large portion of their adult lives. Pending legislation may make that problem even worse for current and future students.
Another Coming Problem
For households that have a student heading to college next year, they will likely complete a FASFA form.
The Free Application for Federal Student Aid is the first step in qualifying for one of two main types of loans: The subsidized and unsubsidized Stafford loan. The subsidized loan is used for low income households and not only has a lower interest rate of 3.4% but the government pays the interest on the loan until the student graduates.
The unsubsidized Stafford has an interest rate of 6.8% but doesn’t provide any help for the interest that builds up while the person is still attending classes. This loan is not a needs based loan like the subsidized version.
Starting with the new student loan season in July, the interest rate for the subsidized Stafford loan is set to double to 6.8%, making it equal to the unsubsidized Stafford loan.
President Obama has proposed extending the 3.4% interest rate for an additional year saving more than 7 million borrowers $1,000 in interest payment, but even a year is only a small fix.
For students that borrow the maximum of $23,000, they would pay an additional $5,000 over 10 years.
Democratic strategists have used this issue to paint a picture of the Republicans as anti-education citing this issue as well as their elimination of subsidized Stafford loans for graduate students. Republicans counter that with the ballooning national debt and uncontrolled spending, the budget has to be balanced and some of those decisions will be unpopular.
What’s a Student to Do?
What is the answer for today’s students? So they need to re-think the schools they are attending; perhaps attend a local university for undergraduate school? Do they need to work harder to find scholarships and grants? Would they be better avoiding a college degree altogether and maybe work on developing a trade that could better keep them employed?
It’s not an easy fix, that’s for sure.
But students do need to realize how expensive college has become and that it’s not geting any cheaper. You really have to have a good idea of what you want to do with your degree and understand how you are going to pay for it once you graduate.
With the rising amount of student loan debt in the U.S., and currently very few ways to discharge the debt, current students and recent graduates are facing decades of loan payments which, according to analysts, could set the country up for another crisis similar to the housing crisis that occurred in 2008 and 2009.
What do you think is the best way to deal with the student loan debt bubble?