In the United States, getting a student loan is the norm when it comes to paying for a college education. As of the latest count, there are now 45 million Americans aged 18 years old and above who owe over $1.6 trillion in total federal and private student loans (Friedman, 2020). Student loan debt overtook other forms of consumer debts, surpassing credit card debt in 2010, and auto loan debt in 2011. It reached the trillion mark in 2012 and is projected to go up to $2.0 trillion in late 2023 or early 2024 (Kantrowitz, 2019).
A student who has successfully obtained his/her degree in 2018 does not only have to deal with the difficulty of finding work but also the burden of paying a student loan that averages $29,200 (TICAS, 2019). For the rest of federal loan borrowers, the average debt that they need to repay is $35,397 (Hornsby, 2020). With such a financial burden even before they are able to accumulate wealth, it is hard to refute that rising student debt is a crisis that is significantly changing how Americans ultimately make decisions about money and life.
Given the anxiety and the pressure that many students and parents face with student loans, we believe it is important to take a look at some possible scenarios that borrowers can face in the future when it comes to managing their student debt. We will discuss borrowing, repayments, and student loan forgiveness. Also, we point out some of the crushing effects this trillion-dollar debt can have on one’s finances and mental health.
Though the current total student loan debt in the trillions can be unsettling, and many more students might take out loans in succeeding years, there is a sign that the amount being borrowed is on a downward trend. This can be attributed to more state spending and more grants and aid injected into the higher education system (TICAS, 2019).
In 2018-2019, the total amount of aid that undergraduate and graduate students received from all grants, loans, tax credits, and work-study was $246 billion. From 2008-09 to 2018-19, total grant aid rose by 56% to $135.6 billion. Institutional grants had the biggest increase from 78% to $64.7 billion. The total amount that parents and students borrowed to pay for postsecondary education in 2018-19 was $106.2 billion. This was the eighth straight year that annual borrowing declined (College Board, 2019).
However, even after receiving financial aid from grants and scholarships, a student may still need to shoulder almost $11,000 based on the most recent data from 2015-2016 (College Board, 2019). In addition, a likely outcome of the overall increased reliance on student loans to finance tertiary education—aggravated by the previous and on-going economic recessions—is the considerable struggle to repay these debt obligations (Mezza & Sommer, 2016).
Source: College Board
When the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed on March 27, 2020, it brought down the interest rates on federal student loans to historic lows—below 3% for undergraduate loans this fall. The new rate will be implemented starting July 1, 2020, to June 30, 2021. This means students who take out a loan for the upcoming school year 2020-2021 will benefit the most from these lowest rates in over a decade (Mulhere, 2020). The current rates stand at 2.75% for undergraduate student loans, 4.30% for graduate students with unsubsidized direct loans, and 5.30% for graduate students and parents who take out PLUS loans (Mulhere, 2020).
Coibion et al. (2020) have observed one of the biggest declines in debt payments, which include, in large part, student loans. This outcome underscores the likelihood of a torrent of defaults in the coming months, suggesting a snail-paced economic recovery and probably justifying the recent rise in loan provisions by top American financial institutions.
Interest rates for private loans will also most likely remain low as they follow the 3-month London Interbank Offered Rate, or “LIBOR,” when setting their rates. The LIBOR is based on the federal funds rate; thus, rates will most probably remain close to zero possibly until 2022 (Rivera and Mulhere, 2020).
With 74% of jobs that pay a minimum of $35,000 requiring a bachelor’s degree or higher (Carnevale et al., 2018), it’s no wonder why Americans are following the Bachelor of Arts pathway to good jobs. However, any college student–or parent of a college student–knows that a degree comes with a hefty price.
For the academic year 2019-2020, the yearly price of tuition, fees, room, and board was approximately $30,500, while the average total price for a four-year degree was $122,000 (Bustamante, 2019). This is just assuming that the student graduates on time. Statistics, however, tell a different story. Only 41% of first-time, full-time college students finish their degree in four years, and 59% earn their BA in six years (NCES, 2019).
The growing demand for higher education means we can expect a continued rise in tuition and fees and other related expenses to get a college degree. For many families, footing the bill by using their savings or investments will simply not suffice. Thus, many will still rely on student loans.
Closer scrutiny of who makes up the trillion-dollar student loan reveals that the majority are undergraduates. About 75% go to two- or four-year colleges and make up approximately half of all outstanding debt. The rest, 25%, are graduate students (Looney et al., 2020).
Democratic presidential candidates Bernie Sanders and Elizabeth Warren had proposals on sweeping federal student loan forgiveness (Nova, 2020). Although these plans can help many families and give them a chance for a new start, they are also very costly. Taxpayers who didn’t accumulate debt, did not go to college, or who paid off their debts already will also shoulder the burden of debt cancellation (Solon, 2020).
Furthermore, cancelling the current student loan debt will not prevent future debt from coming. As long as the cost of higher education continues to soar, students will rely on loans to finance their education; thus, new debt will be incurred and the problem will appear again.
Source: BrookingsDesigned by
The chances of all federal student loans getting canceled might be small but there is a way for some individuals to receive forgiveness if they apply for Public Service Loan Forgiveness (PSLF). This program discharges a borrower’s remaining debt after they have paid 10 years’ worth of payments while working for the government or a non-profit.
Keep in mind, though, that when applying for the PSLF, you have to meet the eligibility requirements–and they can be quite strict. Aside from the aforementioned requirements, you must also have the correct type of loan, be working full time for a qualifying employer, and pay using the income-based repayment scheme (Helhoski, 2020). The processing time of a PSLF application is on a case-by-case basis. Factors such as when you submitted your documents or whether you have gaps in your employment or payment history can all influence processing time (Federal Student Aid, 2020).
As of May 2020, there have been 202, 094 applications submitted for PSLF, 3,697 of those were approved, and the total value of loans discharged stands at $163, 876, 367 (Federal Student Aid, 2020). This represents a 1.8% approval rate, which is low but can still improve once more people become aware of what they can do to qualify for the program.
Crippling student debt is not exclusive to the young population. In fact, people aged 60-69 years old have as much debt as people in their 30s, averaging $35,637 in 2018 for the former and $36,406 for the latter (Knueven, 2019).
Senior student debt increased to a drastic 1,256% from $6.3 billion to $85.4 billion in only 13 years (Song, 2019). According to The Consumer Financial Protection Bureau (CFPB), 73% of seniors co-signed loans for other people, usually their child or grandchild, while 27% obtained loans for their spouse or themselves (CFPB, 2017).
There are issues particular to older borrowers when it comes to repaying their student loan debt that younger borrowers might not experience. For example, 9% of seniors delayed seeking healthcare services, while 31% had to either stop saving for retirement or use their nest eggs due to student loan debt (AARP, 2018).
Moreover, since most student loan debt cannot be discharged in bankruptcy, some seniors suddenly found lenders garnishing part of their Social Security benefits or a portion of their tax refunds (CFPB, 2017). In 2018, nearly 40% of senior borrowers were in default (Nova, 2018). With still so much debt to repay and not enough resources to utilize, more seniors might find it harder to achieve a comfortable retirement.
Employer student loan contributions are a type of employee benefit where the employer pays a fixed amount every month on behalf of an employee in order to assist them in paying back their student loan debt. These programs are still in their infancy but the share of employers offering the benefit has increased to 8% in 2019 from only 4% in 2018 (Miller, 2019). In the past, the focus was on providing healthcare benefits, but with the introduction of the Employer Participation in Repayment Act (H.R. 1043) in February 2019, which would allow employers to give tax-free student loan assistance up to $5,250 annually per employee (Congress.gov, 2019), we hope to see this benefit become mainstream in the future.
Adoption is faster among small and medium-sized organizations who are also using the perk as a competitive edge. With 80% of workers saying that they would like to work for a company that provides student loan repayment benefits (Fried, 2017), employers eager to recruit and retain top-level talent in a tight labor market should look into offering this financial benefit.
Borrowers who do not make payments for more than 270 days on federal student loans automatically enter default. Based on data released by the Education Department, the cohort default rate from 2015 to 2016 decreased for public, private, and proprietary institutions. This decline has continued for six consecutive years (US Department of Education, 2019).
Though the data might be encouraging, there are also speculations that it does not represent the real struggles of students when it comes to repaying their debt. Pundits have argued that many colleges manage their default rates by pushing students to go into forbearance (GAO, 2018).
Source: US Department of EducationDesigned by
Among institutions, for-profit colleges had the highest default rate at 15.2% compared to 9.6% and 6.6 % at public and private colleges, respectively (U.S. Department of Education, 2019). For-profit institutions have been publicly criticized for their predatory behavior, charging exorbitant fees and falsely promising high job placement rates, which lead students to take on more loans than what they can actually afford.
We might soon see more accountability from for-profit colleges with the reauthorization of the Higher Education Act. One of its pillars is for Congress to “require colleges and universities to share a portion of the financial risk associated with student loans, in consideration of the actual loan repayment rate.” (Inside Higher Ed, n.d.). This provision could compel institutions to not only think twice about increasing tuition but also improve the quality of their courses.
Source: US Department of EducationDesigned by
With these trends and predictions, we can imagine how the student loan debt crisis can have adverse effects on the lives of many Americans. And amidst these social and economic indicators, the fact remains that the total amount of outstanding student loan debt is currently the second-biggest source of consumer debts (next to home mortgages) and has grown more than three times over the past 10 years (Hillman, 2015).
From a financial perspective, huge student debt can hamper people’s life milestones. They will have less financial resources to place a downpayment on a home, invest in a business, build wealth and save for retirement, or get married and take care of their family. High loan repayments can also negatively impact a person’s credit and job prospects.
One’s mental health and well-being are also affected. A UCLA study has shown a correlation between student debt and lower levels of psychological wellbeing for 25- to 31-year-olds (Walsemann et. al., 2015). Meanwhile, the national research study on the state of student loan borrowers in 2018, “Buried in Debt,” revealed that more than 85% of respondents agree that student loan debt was a major source of stress, and one in three reported, “such debt is the biggest stress in their lives.” (Hembree, 2018).
Amid all the challenges, big changes could be on their way for many families struggling with student loan debt. Pending legislation such as H.R. 1043 and the Higher Education Act Reauthorization, no doubt, will aim to rewrite the rules that govern student loan repayment and refinancing. New income-based repayment plans laid out in the FUTURE Act, can also help borrowers access more affordable repayment options (Streeter, 2019). It is unclear yet how these new proposals will actually play out once implemented; however, we can be sure that as long as discontent with the current system remains, discussions on how to address the issues will also drag on.