Officials at the Consumer Financial Protection Bureau declared in March that the amount of outstanding student loan debt surpassed the New York Federal Reserve’s earlier estimate of $1 trillion late last year, and experts say that number is expected to rise, leaving college grads with a hefty tab to pay off.
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FinAid reports that total student loan debt is increasing at a rate of about $2,853.88 per second and many students are struggling to keep up, with the two year default rate for federal student loans rising to 9.1% last year from 8.8% in 2011, according to the Department of Education.
While college costs continue to rise each year, the economic recession and weak job market has spawned increased demand for higher education, says Patrick Kandianis, co-founder of SimpleTuition.
“The underlying thesis is if I get a better degree I should get a better job, but that only really works if the economy really recovers to support all of those job wannabes,” he says. “People borrow up and then if the economy isn’t strong enough [for] the repayment of it all, you have this big upsurge in borrowing.”
As a result, student loan debt has now surpassed credit card and auto loan debt and is rising steadily. Here’s what experts say is contributing to the student debt problem and where it is going from here.
Tuition Costs vs Inflation
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A report by SimpleTuition finds that tuition costs historically inflate twice as quickly as the U.S. dollar, making it harder for student to afford a higher education.
The cost of college has been increasing at an average of 8% per year for the past 30 years, well in excess of the inflation rate, according to Jeremy Kisner, president of SureVest Capital Management.
“College has gotten significantly less affordable, especially over the past decade when tuition growth has continued unabated while income growth has stagnated and the job market has gotten much tougher for new grads.”
Schools Have Fewer Resources to Tap
Facing massive deficits, states are reducing their budgets and aid to state schools, leaving colleges with decreased endowments.
“In turn, universities have had to raise their tuition--there has been little incentive for top universities to cut costs as they still have far more applicants than they can accept,” says Kisner.
Kandianis explains many schools are trying to attract students from higher income families and international students who are more likely to pay the advertised sticker price in full.
“The pressures that start to fall heavily in economic times are actually [on] tier two or tier three private and state institutions that don’t have the state subsidies the way they used to,” he says. “Even state schools are looking at out of state students as attractive targets because they tend to not get any of that state discount so they’re paying for basically full pay.”
Irresponsible Borrowing Among Students
Loans can seem like free money to students still in college and many students often borrow more than they need—underestimating the time it takes to pay lenders back.
Students pursuing degrees in low-paying fields or in industries difficult to find employment often struggle the most to repay student loans and that can have a ripple effect into their adulthood.
“In most credit markets, the lender screens borrowers for their ability to repay--the federal government does not,” says Kisner. “Their underwriting guidelines are the same for all majors, all geographies and all ages.”
Michael McGervey, president and founder of McGervey Wealth Management, says he sees local community college students admitting to borrowing more than necessary.
“Some instructors ask their students on the first day of class, ‘who is here for the school money’--sadly a large percentage of the class raises their hands,” he says. “These students are taking out loans that are three times the cost of school, and utilizing the remainder to live off of, or spend.”
Default Rates on the Rise
The SimpleTuition report shows default rates increase as unemployment rises, increasing risk for lenders and resulting in higher interest rates for students.
“Defaulting on federal loans can result in seizure of tax refunds, garnishment of wages, and the taking of a portion of Social Security payments without a court order,” says Kisner. “It will also wreak havoc on your credit score, which makes borrowing for everything else (e.g. mortgage, car) more expensive, if not impossible.”
Alterative repayment plans such as Income Based Repayment are designed to prevent default, but Kandianis points out that students can shell out even more over their loan’s lifetime.
“It spins or modifies the repayment time and they actually allow the interest to accrue more rapidly because it’s not a traditional repayment plan paying it off,” he says. “The underlying debt continues to grow when people aren’t working and paying it off.”
Where We Go From Here
The experts agree that the cost of college and amount of student debt will continue to rise without a major system overhaul.
“The cost of these loans will likely also rise depending on what interest rates the government charges in the future and whether or not they come up with a new student debt relief plan,” says Kisner.
Kandianis predicts that future students will need to exercise more caution when looking at the correlation between the cost of school and projected future earnings needed to repay debt.
“The issue of over borrowing or over committing or getting value out of your education based on the school you pick I think will become more of a commonplace discussion,” he says. “Each year, more and more people will look at it more carefully, people will consider the cost of that debt, but it’s still a relatively easy path to take—it’s not that hard to get the federal loans.”