Last updated April 21, 2018.
We’ve all heard about student loan debt in the news. Lots of us have student loan debt ourselves. We hear a lot about how millennials won’t be able to buy their own homes or save for retirement. If so many are struggling to pay, what’s happening in the student loan market?
What’s going on with student loans?
Everyone is now only too familiar with the housing market crisis of 2007-08 and the severe repercussions that followed. Lenders gave out mortgage loans with low introductory rates that would later adjust to higher rates. In many cases, the borrowers simply could not afford the debt once the low rates disappeared. When countless borrowers began to default on their home mortgages, the real estate bubble burst.
Similarly, for years now, both public and private lenders have been extending credit to students needing funding for college with little screening for creditworthiness, only to see many of those borrowers end up in a position where they cannot afford the repayment plan. There is more than one reason for this epidemic of default. First, as state and federal budgets cut the amount of funding to higher education institutes, tuition has increased, offering little alternative to students but to seek out tuition assistance. As of 2013, 59% of students graduating from a traditional four-year college carried student loan debt. The amount of those loans rose an average of 16% from 2008. Conversely, state funding was up only 1% in 2013 and approximately 3.7% in 2014.
Another consideration in the student debt problem is the societal expectation that everyone needs a college degree, at a minimum, in order to earn a decent wage. The inherent problem with this belief is the reality that a college degree does not in and of itself guarantee that you will earn more than someone with only a high school degree. In fact, a large part of the problem plaguing the student debt industry is that the borrowers emerge from their respective institutes of higher learning only to find that they have theoretical knowledge but lack real world practical experience in their fields of choice.
While the unemployment rate for 20- to 24-year-olds with college degrees is down from 10% in 2010 to 7%, it is still much higher than the overall national rate of 5.4%. Add to that the fact that by 2012, the student loan market reported the highest consumer delinquency rate, even beating out home mortgage or credit card debt, and you have the early signs of potential disaster.
Real-Life Effects of Student Loan Debt
With over 40 million people owing a total of more than $1.2 trillion in student loans, the problem is pervasive. It is not only a matter having the burden of carrying a significant amount of debt for a what could be the better part of your adult life, it is also about how that debt will affect other aspects of your life. Borrowers who fail to meet their debt obligation will register negative marks on their credit history in addition to a potentially disproportionate debt to income ratio. This in turn could present major obstacles for those trying to obtain financing for major purchases such as homes and automobiles.
A somewhat new development is the emerging group of seniors strapped with student loan debt as they enter retirement. For those with federal student loans that they have either failed to satisfy completely or have previously defaulted on, they will quite likely find their social security or tax returns garnished to cover the outstanding amounts. And as student debt is almost always considered “non-dischargeable” in bankruptcy, there are really no permanent alternatives for eliminating the debt for those individuals overwhelmed by their student loans.
What Happens When Borrowers Default
The federal student loan debt makes up almost half of the federally owned financial assets. Therefore, the number of borrowers in default directly correlates to a greater financial loss for the government. When the federal government does not get its money, it becomes less stable and the tax payers suffer. The tax payers are the ones already in default on the student loans they could not afford in the first place. Everyone is affected, some more than others.
Just as graduates emerge from their colleges and universities, they are faced with the very real premise that there are fewer jobs, there are lower wages, and the government owns their debt. Therefore likelihood that the government will initiate a plan to fix or alleviate the debt problem when it owns the debt is slim to none.
Is there a solution to the student loan debt crisis?
If the status quo continues, more people will borrow, more people will default, and the market will reach a tipping point. An early sign of the ensuing crisis is the closing of schools and programs, such as the shutdown of Sweet Briar College, a 114-year-old women’s college in Virginia. Developments such as this result from a lack of federal and state funding and a necessity on the part of the school to hike tuition costs. Accordingly, more students must resort to borrowing to meet the growing costs. But in cases such as Sweet Briar’s, there simply was not enough money to keep going.
Experts have proposed various solutions and remedies for the student debt issue. The government, by and through Congress, could alleviate the root of this problem by setting a cap on amounts available for student loans from private lenders, as it has capped federally subsidized loans. If they are protected by a cap that would prevent excessive borrowing and potential delinquency, then the borrowers would have a better chance at managing their debt and staying current.
Additionally, in many cases, young people do not clearly understand how their loan will work or what other rates or options are out there. Counseling prospective borrowers on what is available may also aid in preventing negative outcomes down the road. Moreover, a higher level of scrutiny of students seeking funding would give a more accurate picture of their creditworthiness. In some instances, simply because a student is majoring in engineering or math, the lender deems him or her an excellent candidate for a loan close to $100,000. But a husband and wife with two incomes would face an enormously more rigorous and thorough analysis as potential borrowers for a mortgage on a home for the same amount. If lenders treated all loans with equal scrutiny and provided the same levels of statutory protection as given to home buyers, then borrowers of student loans would go into their debt with a better chance at managing it.
If more student loans remain current, that much more of the federal government’s assets remain sound. Consequently, a government with solid assets should be able to reinvest in its colleges and universities. More money for higher education means lower tuition and less need for student loan funding.
Struggling with student debt? We Can Help
While student loan debt is almost never dischargeable in bankruptcy, there are ways to consolidate and reorganize the debt to make payments more manageable. If you’re struggling with other types of debt, bankruptcy can help wipe those out so you only have to worry about your student loans. Contact one of our experienced local attorneys today for a free consultation to learn about your options for managing your debt.