While it continues to careen to new heights, a recent Forbes article highlighted the severity of the student loan debt crisis. As of the fourth quarter of 2016, students, including former students, accumulated over 1.31 trillion dollars in outstanding balances. Rising above both auto loans and credit card debt, trailing only mortgages. There are an estimated 44.2 million borrowers owing federal student loans, with the average graduate in 2016 leaving school with a debt of approximately $37,172.
How Much Do Borrowers Owe?
Between 2011 and 2015, student loan balances increased at every age level, with the highest dollar increase attributed to those between 30 and 39, increasing balances by $408 billion dollars. The highest percentage increase was among borrowers 60 to 69, where there was an increase of 89.6%, rising total balances for senior borrowers in that age group to $31.5 billion in outstanding balances.
In addition to rising debt balances, default rates cause concern. As of the end of 2016, the average default rate on student loans reached 11.2%. Borrowers over 65 have the highest rate of default averaging 40% and 15% dying with student loan debt. Accounts experiencing one late payment, total 32.6 billion and those with three missed payments, or 90 days late, reached $31 billion at the end of 2016.
The Department of Education tracks and measures default rates by schools and those with higher rates of defaults could lose federal funds for students. Public Universities saw a slight decline in defaults to 11.3%, but the default rates rose slightly to 7% at private universities. For-profit schools have the highest rate of default, but saw a marginal decline to 15%.
Calculating the Value of a College Degree
Lifetime wage earnings still support the need for a college education. The average graduate with a bachelor’s degree will earn nearly twice as much as those with only a high school diploma. Both parents and schools tend to present the path to college as a basic necessity of adulthood. Failing to graduate offers only marginally better pay than not attending college at all. Yet, these former students have debt without the degree. Private schools can cost significantly more but tend to produce higher graduation rates, sometimes as high as 88%. The school attended, and field of study can greatly influence lifetime earnings.
With the rising cost of attendance outpacing financial aid and earnings, many families turn to student loans to fill the financial gap.
Changes to Repayment Options
Traditionally, students had ten years to pay off their loans, which proved challenging even in the times of low interest rates. To address these concerns, Congress approved extended repayment terms that allow former students to take up to 25 years to repay loans, with a promise of loan forgiveness of any remaining balance after that time.
Income-based repayment options can provide relief from large payments and rise with the student’s income. However, by extending loan repayment, students could wind up paying more than double in actual payments.
Factors Instigating the Student Loan Debt Crisis
The cost of college attendance rose steadily over the last decade without stifling enrollment numbers. In the race for the best students, colleges and universities have upgraded facilities and added features such as rock climbing walls, sophisticated activity centers and other facilities that do not necessarily enhance the quality of education but entice students to attend their school.
On the other side of the coin, states have reduced financial assistance due to tightening budgets, and free forms of financial assistance have not kept pace with rising prices. Adding to the mix stagnant wages and a slow-growing economy, and student loans are left to fill the financial gap.
Economic Consequences of Too Much Student Loan Debt
Most notably, Millennials with high student loan balances have taken longer to achieve financial independence. They are slower to purchase homes, get married and start families, resulting in slower economic growth for industries which depend on spending to spur the economic engine. The Wall Street Journal reported that nearly 40% of young adults lived at home or with other relatives at the end of 2015. Instead of spending money buying and furnishing a home or raising children, they are paying down debt and trying to save enough to live on their own. As of the first quarter of 2015, home ownership rates for those under 35 fell to 34.6%, down from 43.3% in 2005.
Students anticipating the high cost of obtaining an education steertowards higher paying majors such as degrees in technology, engineering, and financial services. That trend reduces graduates targeting public sector jobs such as teaching and social work. Gaps in these critical need areas are difficult to fill due to public funding restrictions that limit wage growth.
Another side effect of lower levels of financial independence is slower business starts, which is a key factor to economic growth. Early debt discourages entrepreneurship despite the challenging job market.
Lower savings levels. Student loans among older workers lead to a focus on debt reduction rather than retirement savings during prime working years. Americans already have critically low levels of savings, and new debt issues wider the gap further requiring many to work well into traditional retirement years to avoid poverty. The number of seniors with Social Security garnishments due to defaulted student loans continues to rise as seniors struggle to pay student loan debt.
If you are burdened with high amounts of credit card debt and are struggling to make your payments, or you’re just not seeing your balances go down, call Timberline Financial today for a free financial analysis.
Our team of highly skilled professionals will evaluate your current situation to see if you may qualify for one of our debt relief programs. You don’t have to struggle with high-interest credit card debt any longer.