$1 Trillion+ in the Red: What Can Debt-drowned College Students Teach MFIs?

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Date

Oct 20, 2011

Oct 20, 2011

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> Posted by Sergio Guzmán
In the midst of the greatest economic downturn since the 1930s, the national student debt in the United States now exceeds US$1 trillion. Reportedly, it is now surpasses the national credit card debt! This is a matter of concern, not only because students are borrowing at an unsustainable rate, but because of the consequences that this might have for the economy and society itself. Young people are sometimes going to great lengths to make ends meet and pay their debts, as one Huffington Post article notes. Working on the Smart Campaign, this really rings the over-indebtedness bell. Does anyone else agree?
College education in the US is growing more costly, sometimes reaching $42,000 per year as is the case for Sarah Lawrence College, which is pointed to as the most expensive of the 25 most expensive private universities. As the article explains, the average 2011 college graduate leaves the university $27,000 in debt! That is significant if you take into account that these students have not yet begun earning income and the unemployment rate for persons under 25 is a whopping 54%.
A few key facts found on Dino Grandoni‘s post “Americans Now Owe More Than $1 Trillion in Student Loans” on The Atlantic Wire:

  • “Last year marks the first year American students took out more than $100 billion in loans to pay for school, averaging $4,963 per student in 2010.”
  • “Students are borrowing twice as much as they were a decade ago, adjusted for inflation, so that that $1 trillion student loan bill is double what it was five years ago.”
  • “The default rate on student loans  — which, unlike almost every other type of loan, survive even after bankruptcy — jumped from 6.7 percent in 2007 to 8.8 percent in 2009. Default rates were highest at for-profit schools.”

Providers must be aware of suitability and affordability of products. The sub-prime housing crash of 2007 left many lessons, among them that bubbles will burst. It is important for us to remember that this lesson applies not only to complex structured finance in the US, but also to any financial services provider. Are there any lessons for the microfinance industry in this case? As microfinance providers diversify their product offering (credit types, savings, insurance, remittances, payments) what are some of the key aspects they should consider?
Image credit: Kit
Have you read?
Consequences of Over-indebtedness: Lessons from India
Microlenders ‘Need Systems’ to Handle Client Problems
‘We Need to Keep Learning About Over-indebtedness’ – Beth Rhyne on CGAP Microfinance Blog

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