American Student Loan Debt Increasing to Catastrophic Proportions
In recent decades, the idea became prevalent that a college degree was the only way to guarantee a good job, financial security and the ability to participate in all of the aspects of the American dream, including home ownership. During the same period, skyrocketing tuition costs made it extremely difficult for students to pay for a college education through summer jobs or part-time work during the school year. Parents were often unable to save enough to pay for college for their children. For many, the alternative was to take out student loans. However, recent studies and official reports indicate that American student loan debt is a far bigger issue than most people realize, and the problem has the potential to reach catastrophic proportions.
Will the Student Loan Debt Could Prove Catastrophic for the American Economy
As of February 2017, the total federal debt was quickly approaching $20 trillion. Outstanding student loans totaling $1.3 trillion account for approximately 45 percent of the financial assets of the federal government, according to ZeroHedge.com. However, a memo released by the Department of Education revealed that over half of the borrowers at 1,000 different institutions have either defaulted on their loans or failed to repay even $1 of their loans since 2009.
Some analysts are drawing parallels between the current student loan issue and the mortgage crisis that devastated the economy in 2008. The acting student loan ombudsman for the Consumer Financial Protection Bureau has stated that the student loan repayment problems are “eerily reminiscent” of the mortgage crisis. However, student loan debt is only about 10 percent of the mortgage debt that triggered the crisis of 2008, and with 95 percent of the student loans supported by the government, the private sector is shielded from the direct economic fallout that it suffered from the subprime mortgages. Therefore, a repeat of the economic collapse that occurred in 2008 is unlikely. However, the repercussions of the student loan debt crisis pose other dangers that can impact the economy.
Student Loan Debt Impacts Consumer Spending
Simply stated, making payments on student loans reduces the amount of disposable income that can be spent. Several studies have shown that young borrowers with student debt are less likely to buy a home than those of a similar age who do not have student loans to repay. The same trend has been observed for the purchase of new automobiles.
In 2016, U.S. News reported that the average graduate that year owed more than $37,000 in student debt. This is more than twice what the student loan balance averaged in 2005. Between 2008 and 2014, the average balance increased by 84 percent. This means that students are graduating already obligated to make payments that are the equivalent of a mortgage payment on a modest home.
Complicating matters is the fact that a college degree no longer guarantees a job that will provide a return on the financial investment. The Economic Policy Institute compared the outlook for 2014 graduates to 2007 graduates. The study found that the unemployment rate for recent college graduates increased by 3 percent between 2007 and 2014; during the same period, the underemployment rate increased from 9.6 percent to 16.8 percent. The study also found that the inflation-adjusted wages of young college graduates declined 7.7 percent between 2007 and 2014.
Taken together, the information indicates that recent graduates leave college with higher debt levels than graduates in the past, but at the same time, they are earning less money. This combination can only reduce the amount of their consumer spending, which is the driving force behind economic growth and entrepreneurial activity.
An Increasing Number of Seniors Are Entering Retirement with Student Loan Debt
When the issue of student loan debt arises, many people assume that only people under the age of 30 are struggling to make their payments. A report published in January 2017 by the Consumer Financial Protection Bureau dispels this perception.
• The number of people with student loan debt who are at least 60 years of age has quadrupled in the last decade.
• Older borrowers owed approximately $66.7 billion in student loans as of 2015.
• The majority took out the loans to pay for their grandchildren’s or children’s education.
• Some older borrowers still owe for the loans to make a mid-life career change or improve their chances of a promotion.
• The average balance owed for student loans by borrowers over the age of 60 increased from $12,100 in 2005 to $23,500 in 2015.
• Approximately 63 percent of the older borrowers carried a mortgage and more than two-thirds of them had credit card debts.
• Approximately 57 percent of the individuals who are co-signers on private student loans are at least 55 years old; 27 percent are at least 62 years of age.
• Almost 40 percent of borrowers over the age of 65 have defaulted on their student loans.
• In 2005, 8,700 borrowers had their Social Security benefits offset to repay student loans; in 2015, the number increased to 40,000. Since Social Security benefits are the only source of retirement income for 69 percent of those over the age of 65, many borrowers may face financial hardship due to the offsets.
• Older consumers with student loans often struggle to afford dental care, prescriptions and doctors’ visits. For example, in 2014, 39 percent of those over the age of 60 who owed student loans reported skipping necessary health care due to their financial situation.
Like millennials, baby boomers who are saddled with student loans cannot afford to spend as much on products and services that are not true necessities. Unlike millennials, however, baby boomers are faced with incomes that will remain relatively stagnant or even decline.
Is There a Solution to the Student Loan Debt Problem?
Various experts have offered suggestions on how to deal with the issue of student loans, but few suggestions appear to be viable and beneficial. Denying student loans for specific courses of study in fields that are already overpopulated seems to contradict American values. Offering to forgive student loans in exchange for a set number of years of service at a non-profit or government agency only encourages dependence on growth in government rather than growth in the free market.
Perhaps the best way to counteract the student loan problem is to stop stigmatizing those who have not earned a degree. Carpenters, electricians, welders and other trade workers are in demand; the skills can be learned through apprenticeships and potential earnings are excellent. Furthermore, many successful entrepreneurs, including Steve Jobs, Bill Gates, Richard Branson and Mark Zuckerberg, did not follow the traditional educational path. Perhaps the best solution is to encourage every individual to follow his or her passion and blaze new trails instead of going into debt to pursue someone else’s dream.