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Digging Deeper Into Student Loan Debt

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As student loan debt rises at an alarming rate in the United States, some analysts fear that this trend could cause another economic crisis. From 2005 to 2012, student loan debt grew from $364 billion to $904 billion -- an increase of 13.9 percent annually. In a recent Federal Reserve Bank of Kansas City working paper, Kelly Edmiston, Lara Brooks, and Steven Shepelwich concluded that:

High debt levels, coupled with high default rates, present a number of challenges for individual student loan borrowers, but do not necessarily pose a substantial burden on society at large.

High aggregate student loan debt may have only a minimal impact on the U.S. federal government and its taxpayers, but individual debt can be a major problem for borrowers. Too often, high school graduates do not know how financial aid works, how much aid they really need, or even that they have to repay student loans. With more financial education at this critical juncture, a young college student will maximize scholarships and minimize loans. This knowledge can also be empowering -- motivating a student to finish a degree program on time.It is also important to dig deeper into "the student loan problem." There are two key considerations that should mitigate some of our concerns about aggregate U.S. student loan debt.
  • Although the average student loan is approximately $26,000, the median loan is about $13,000. There is a substantial difference between the mean and the median because some borrowers amassed student loan bills, skewing the student loan mean to twice the median. $13,000 is certainly nothing to sneeze at, but for individuals that pay their loans back over ten years, the monthly loan payment is lower than the typical car payment.
  • A deeper analysis of student loan debt suggests that most of the increase in aggregate debt has resulted from an increase in the number of borrowers. When the economy is in bad shape, more people make the decision to pursue a college degree. Over the past five years in particular, many post-secondary institutions have seen a marked rise in enrollments.

Don't get me wrong, high student loan debt is worrisome. A high individual debt burden restricts one's discretionary purchasing power. If I need to budget $190/month for student loan payments, I have less ability to consume more generally. This is a problem because it limits economic growth. While student loan debt may not trigger an economic crisis, it is a serious problem for many borrowers. If you are a recent graduate in a poor economy, it is extremely difficult to pay back that loan if you cannot find a job that pays well. Seventeen percent of individuals with student loan debt are delinquent on their payments. This is a higher delinquency rate than most other forms of debt. Moreover, bankruptcy does not free the borrower from student loan debt.

But student loans play an important role in the United States. College is expensive, and most students cannot finance their education without loans. Student loan debt is used to make an investment in human capital. Since this investment may seem intangible to young people, they may start to wonder: is college worth it?

The answer is yes, for two reasons:
  • As of January 2013, the unemployment rate was 8.1 percent for high school graduates with no college, but only 3.7 percent for college graduates.

Teenagers need help understanding financial aid. High school counselors and parents play critical roles in facilitating these important conversations. Once they start college, it is really important that students complete a degree. On average, only 60 percent of students enrolling in a post-secondary institution complete their degree program within six years. Not surprisingly, the delinquency rate on student loans is much higher for the 40 percent that start -- but do not finish -- college.

Although student loan debt may not be a collective crisis, it can certainly be a crisis for the individual borrower. It is crucial that teenagers think long and hard about the degree they plan to pursue, the work prospects for people with that degree, and their future ability to repay student loans.