There is currently over $1.5 trillion in student loan debt, but no one seems to have a solution for this compounding problem. Year over year, the amount of student loan debt increases as education costs continue to rise. Student loan debt is the leading type of consumer debt after mortgages. While everyone continues to talk about the student loan crisis, we rarely hear about solutions. To start finding a solution, we should start looking at statistics and underlying causes.
Who is taking out these student loans?
In 2014, 69% of all students who graduated from public nonprofit schools graduated with student loan debt. These borrowers also had an average debt of $28,950. While the percent of borrowers with debt only rose from 65% to 69% since 2004, the average amount of debt grew at more than twice the rate of inflation. This means that the same rate of people are borrowing, but they are borrowing a lot more than in the past. This also means that the rise in borrowing is outpacing the rise in wages, which forces borrowers to put more resources towards their loans.
Why are people defaulting on their student loans?
According to a study by the U.S. Government Accountability Office, the problem has been accelerated by shady agency practices. These practices force recent graduates to postpone their payments for three years by entering forbearance. Forbearance allows students to postpone their payments to a later date if they fulfill the criteria. This helps students avoid defaulting in the short term, but will increase their payments and make it more difficult to repay in the long run. This is due to the fact that interest continues to compound. The three-year default rate is important because the government uses it to determine funding eligibility of institutions. Consultants hired by Universities would encourage the students to apply for forbearance, to keep the this three year default rate low. This had the effect of just delaying a student from entering default, not solving the underlying issue.
Who's defaulting?
Another large factor in the rising student loan crisis, is the type of University that a person attends. A person who attends a private for-profit institution often has more debt and defaults on their loans. The default rate for people who entered for-profit institutions in 2004 is 46.5%. That number decreases to under 15% for every other type of institution. For-profit institutions seem to be leading the way in the lending problem. These institutions receive federal funding for loans, even though nearly half of all their students default on them.
While there are more issues associated with the student debt crisis, some of these statistics show it's underlying causes. The rise in the average amount borrowed without a rise in wages for college graduates has reduced their ability to pay. This has led to schools pushing for people to enter forbearance and increase their debt, while decreasing their ability to pay. This along with the increase in students who attend for-profit institutions could lead to larger problems down the road.
With all the problems related to student debt, is debt the right way to fund college. Using loans and debt is the reason that a crisis has formed in the first place. The use of interest hurts borrowers when they are at their lowest point. If they can't make payments, then their debt balloons until it is impossible to pay back. To look for solutions, there needs to be an alternative to the debt model used today.
