Student Debt – A Burden Too Heavy?
August 1, 2016
Student debt is a frequent news topic and when speaking to friends and clients, I have found that there are many differing views and beliefs about the current system. With nearly 70% of bachelor’s degree recipients leaving school with some student debt, it is time to have a wider discussion of our student lending system.
Firstly, the scale of student debt in the US is vast. As of this January, the total amount of student debt outstanding in the US was approximately $1.2 trillion, coming second only to mortgage debt. On an individual level, 12.5% of Americans hold student debt suggesting that the average balance outstanding for a loan holder is approximately $30,000. That is quite a burden for anyone, let alone a young graduate just entering the professional workforce.
Defaults and repayments are large issues within the system as well. The $30,000 figure quoted above is only $5,000 less than the average loan balance of the 2015 graduating class. This small difference suggests that either the program has grown exponentially, or people are not paying back their loans. Already the default rate for federal student loans which entered repayment in 2012 is 11.8%. Even worse, the predicted lifetime default rate for student loans originated in 2015 is much higher with one significant category, “Stafford loans,” estimated to result eventually in a staggering 22.2% default rate. These high defaults will have an impact on the creditworthiness of millions of Americans for years to come.
In addition to the large number of defaults, the terms for the forgiveness of loans have become very tough. There are currently very few ways to obtain relief from student debt repayments in times of financial hardship. Most student loans are bankruptcy remote, and those that can be discharged must go through a court hearing in which one must prove “undue hardship.” The process is even more strenuous in many states, with New Jersey having by far the strictest, as well as the largest program in the country. Here there is no income-based repayment policy, and the burden of repayment lies solely on borrowers and co-signers. Even the death or murder of the borrower will not necessarily mean that a loan will be forgiven, leaving family members and co-signers with the balance.
For many of us, student loans have never been and will not be a direct problem. However, we may all be impacted indirectly as the repercussions seep into the wider economy. Consumption could be reduced as graduates with large student loans are inhibited from taking more debt for housing or other purposes. Moreover, potential entrepreneurs laden with student debt may pause before venturing out to form their own start-ups. Such drags on the economy are not good news at a time of slow growth.
Some commentators blame students for accumulating too much debt in pursuit of degrees with little relevance to the workplace. This point may have some merit, but whatever your view, the reality is that we all have an interest in finding solutions to the developing student loan crisis.
Carey BlakleyÂ
