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.
Finally
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?
I am so thankful to live in Australia where we have the HECS (the Higher Education Contribution Scheme) whereby university fees can be deferred to be paid once you have a job earning over $36,000 per year. Other than that, there are no upfront fees except for textbooks. Hearing about the type of student loan you are talking about is quite horrifying.
The repayments are then administered by the Australian Taxation Office. On average, for a job earning $60,000 per year, you will be expected to pay about $3500 per year, which is paid along with your tax. Assuming that the employer takes out the correct amount in taxes each pay period, then the average person does not need to budget for this. Obviously, the more you earn, the more that will be taken out for Hecs. You can also make voluntary repayments which come with a discount.
Additionally, when it comes to getting a loan, this student debt does not influence your credit. It’s not absolutely ideal by any means, but it is considered to be a fairly safe debt in Australia. Assuming that you do a fairly normal degree, the majority of people do not need to spend their entire lives paying it off.
So glad!
As someone currently in the process of paying back a great deal of student loan debt I can say it is indeed a challenge, costs me about half of my total income, and will not be fully paid off for about a decade (even making extra payments every month). And I’m not the only one in debt because of it, my father is also. I take full responsibility for the loans that I took on while attending college, but it is frustrating not being able to get my own place and live like an adult. Though, living with my boyfriend who opted out of college, I can’t say its any better either way.
I opted into college because it was “the right thing to do” and was pushed by my teachers, counselors, and family to go even though I knew full well we didn’t have the money for it (My father was single and had been since we were young, a low earner, and was raising three high school aged children). You can say he was careless, but he insisted he didn’t want us to make the mistake that he did.
Should it really be up to the students to determine if the can afford college?
You can’t leave the choice of college up to the student because there are many factors in why you go to college. For me, it was to make my father happy and perhaps one day be able to support him, I’m sure it was that way for a few others as well. And there was the pressure to do so by my teachers. Maybe some go because of their dreams and maybe for some it was just “the next step” or “the right thing to do”.
Leaving the choice up to the parent(s) seems wrong as well, who are mostly rooting for their child(ren)’s future.
Maybe we just need more education on the topic instead of just leaving it a usually “go if you want to” decision. I learned more about loans and debt after I was out of college from people who’ve acquired debt themselves than I ever have from my teachers and my father (who never wanted to talk about money).
Zero Hedge has an article about the same thing:
http://www.businessinsider.com/the-next-shoe-drops-more-than-25-of-student-loans-are-already-delinquent-2012-3
I agree it’s a bubble alright, but how much longer can it go? We’ll see.
Those are sad numbers if that many young adults are truly unemployed.
My concern is the ultimate bubble (the treasury market) ends, all of this will end. This includes housing, govt debt and student loans.
You touched on alternatives to college in this post: trades or other types of “non-degreed” alternatives to eking out a career. Columnist/investor James Altucher wrote a pretty good article on “8 alternatives to college”; all of them viable, worthwhile options. As a society, we have put WAY too much emphasis on “getting a degree at all costs”. This has created a mentality where the degree must be pursued at the expense of all else, including even a modicum of common sense. By the way, I have a measly two-year degree – but a degree, nonetheless. I mention this because when I suggest that it’s time for young people to consider options other than college, I am met with disdain and accused of not having been to college myself. The brainwashing has been pretty pervasive, to the detriment of many soon-to-be debt bound graduates, as Altani above so aptly outlined.
I agree. Perhaps it comes from our parent’s generation where a high school diploma was a must and having an undergraduate degree meant you were on a good track. Employers are stuck on degrees as well. I’ve heard stories where some hiring managers simply throw away resumes that don’t have degreed applicants.
I agree. Perhaps it comes from our parent’s generation where a high school diploma was a must and having an undergraduate degree meant you were on a good track. Employers are stuck on degrees as well. I’ve heard stories where some hiring managers simply throw away resumes that don’t have degreed applicants.
How do we go about changing the prevailing mindset?
Of course it is—anytime you loan people more money than they can afford to borrow it is a problem. The sad part is that over 85 colleges and universities have more than 1 billion dollars in their endowment funds and still charging the kids to go to college. Which comes first, the chicken or the egg- as college costs and health care costs seem to be the two things that defy gravity during these tough economic times.
It does seem to make sense that the better educated the masses are the more productive we’ll be as a whole, right? Heck, if something like medical school were less expensive then maybe medical expenses wouldn’t be so high either?
While there are many out there that actually needed the student loans I know many who got the money simply because it was money. No one at the school really explains that you don’t need or have to. This is just another problem with not enough financial education. Instead of working or going to a cheaper school many get into debt that they are never going to get out of. Student loans cant even be included in bankruptcy.
There is serious study and thought being done on this issue in the USA, but is anyone listening? Those interested in this issue, as I am with 3 pre-college and college age kids, may find the CCAP website very helpful and thought provoking.
http://centerforcollegeaffordability.org/
If the goal is to really help the students get a college degree, we should keep the interest rate low. If we believe that helping educate our citizens and workforce is beter for the country, we need to keep the interest rate low. Particularly since education is getting more expensive.
If college gets too expensive, only the rich can go.
I see this becoming a huge problem in the next few years. It is because the worth of education is decreasing and the cost is increasing. I think there needs to be a huge educational push that students need to look at the cost of the investment in education relative to their salaries upon graduation.
Become a resident assistant, get an on-campus job, apply for scholarships, etc.
More importantly, get good grades in high school. It pays off in the long-term.
Sorry to say but it isn’t that easy and it doesn’t work for everyone.
I’m sure it’s helped many, but only helped me in the minimum.
I worked full time before I left for college and saved enough to pay for my housing. I had a part-time job the entirety of my college career. At one point I even had two jobs to make ends meet. My funds in the end were only able to cover books, necessity items for classes (which added up to a lot since I was taking about 18 credits every semester), and of course food.
I also got good grades in school, which helped me very little. Scholarships are extremely selective when it comes to grades, Though I was able to get a small grant. Most of my loans were used just to cover the cost of tuition.
I’m actually not sure that government really needs to do anything about the issue. Students are already pouring into different money saving avenues like community college, online courses and summer college during high school.
If you ask me, the biggest need for college students is to stop going to college as a way to avoid making decisions and start using college as a way to jump start a career and a responsible adult life.
Taking on a lot of debt is risky, especially when it’s student loans, and especially in this uncertain economy. I would absolutely urge those who are college bound to seriously think through the wisdom of taking on student debt. Will you be able to get a good enough job to service the debt after a graduation? Are you getting a degree that is in demand and for which jobs are readily available? These are good questions to ask before signing on the dotted line. Once you’ve got the student loans, you’re stuck with them. They typically can’t be discharged in BK.
Short SLM? I actually gave some thought to that…
I too had a student loan of about $20K, unfortunately I claimed personal bankruptcy for another matter and the student loans were paid during the 5 year payout. I got out from under unwittingly.
Student loan debt is just crazy, it’s extremely difficult to discharge it from BK as you mentioned, but of course not impossible. I’m not even sure having more programs to help student loan borrowers will help. Look at Obama’s Modification programs, it’s only a band-aid to the solution. But if anything, I guess it’s a start.
Oh she’s going to blow at some point. Join the Student Loan Resistance of America: http://www.facebook.com/#!/StudentLoanResistanceOfAmerica
Hi Glen,
Yes, I will be paying on my loan for the rest of my life or until I hit the winning lotto numbers, whichever comes first. I am going to school to become a doctor of chiropractic and plan on borrowing over $200,000. I will just look at it as a mortgage payment. I just can’t worry about not being able to pay it back or make the minimum payments. I have to continue with my goal and pay as I build my practice the best I can.
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