Understanding the Student Loan Crisis
It’s been called the next big “bubble,” and with current and former U.S. college students collectively more than $1 trillion in debt, the student loan crisis will have a devastating effect on the nation’s economy should the bubble, in fact, burst.
Pundits may argue that the student loan crisis impairs economic growth due to the fact that individuals in debt can’t afford to buy homes or cars, or participate in any significant discretionary spending—but the economy itself may actually be the reason that so many students have fallen into debt. “With the economy still struggling for many, some students are using their government loans to live on, not realizing that this is not the purpose,” says Denise Beeson an instructor at Santa Rosa Junior College in Santa Rosa, California.
Beeson notes that many of her students work and attend college part time, but because Santa Rosa is primarily a tourist destination, the available jobs in hospitality are low-paying. The extra cushion from easily obtainable student loans becomes necessary as a result—even when work commitments force students to miss excessive class time or withdraw altogether. “If students do not finish the semester, they are still liable for the debt,” Beeson adds. “And, most likely, they will have problems re-entering school without additional financial aid.”
On the other hand, the issue of students stopping and re-starting their studies may be the largest contributing factor to the student loan crisis, says Alfred Poor, author of 7 Success Secrets that Every College Student Needs to Know. “The real problem is that, on average, about 40 percent of all students who start college fail to earn a four-year degree within six years,” he explains. “They end up with all the debt but none of the increased earning power. And for community colleges with open enrollment, the failure to complete a degree in a timely manner averages 70 percent—nearly three out of four students.”
According to Poor, the average starting salary for graduating college students is about $48,000 this year, compared with just $22,000 for high school grads. And that $26,000 can make all the difference in being able to repay mounting student loans. With an average individual debt load or less than $27,000—fewer than 2 percent of recent college graduates have loans totaling $100,000 or more—Poor notes that most college grads are in a financial situation similar the average U.S. adult with some level of debt.
“Put it another way,” he says, “the average student loan debt is about the same as a new car loan. It’s hardly a fiscal disaster, unless you spend your income trying to maintain a lifestyle similar to the one that your parents provided.”
Regardless of whether you agree with Poor’s position that the student loan crisis isn’t much of a crisis after all, the fact remains that more students than ever are leaving college with more debt than ever. Unfortunately, student loans may be a necessary evil, says Mark Bilotta, author of Paying for College: A 2015 Guide to Saving Time and Money. College graduates earn about $800,000 more in a lifetime, on average, than those who only attended high school. And, certainly, an inability to pay cash for a degree shouldn’t keep ambitious students from making every effort to establish a more secure financial future.
The key for managing the nation’s student debt, then, is education.
“Students and their families need to be mindful of their ability to repay student loans,” says Bilotta. Unlike a home mortgage, where a consumer would be pre-approved for a maximum amount based on ability to repay, most student loans don’t have that same safeguard.
“When considering how much to borrow, a good rule of thumb is that no more than 10 percent of after-tax income after graduation should be considered available for student loans. For example, if a high school senior were anticipating a job after college with a starting salary of $45,000, that student would, on average have about $2,800 take home per month. 10 percent of that amount, or $280, could be used for student loan repayments. At a 5 percent interest rate, that would equate to borrowing up to $26,500 to still be in good financial shape.”
Bilotta also advises students to avoid fixating on a specific school without considering the financial logic of the decision, especially when there are schools, like Bellevue University in Bellevue, Nebraska, that are making efforts to keep costs as low as possible for students. One way Bellevue saves students money (or potential loans) is through their generous credit transfer policies. All credits in every Associate’s Degree are accepted, and the university award credit for corporate and military training, DSST and CLEP tests, as well as life and work experience.
And the federal government is helping stem the loan crisis, too. Recent initiatives to make college more affordable include capping loan repayments at 10 percent of monthly income and instituting a new rating system that will identify the colleges that provide the best value for students and funnel more taxpayer dollars to those schools.
Ultimately, a college education is still the most reliable way for Americans to climb the socio-economic ladder. And the availability of student loans makes the opportunity for upward mobility accessible to all. For this reason, student loans may not be the problem in and of themselves. Rather, it is up to every student to borrow responsibly, so that they can actually enjoy their newly increased income instead of paying down a mountain of debt.