If you’re based in the United States, you’ve likely heard about how student loan debt is problematic and has been for years. The growing volume of student debt that has become more and more the norm is so high, its effects can be overwhelming. But how bad is it? Is it just a matter of students needing to hunker down (a little longer) and pay their dues (a little more)?
To give you a sense, between 2004 and 2014, there was a 74 percent increase in student loan balances, according to the Federal Reserve Bank of New York. Delinquency rates for student loans are higher than those of home mortgages, car loans, or credit cards. And a 2015 survey of borrowers by the nonprofit American Student Assistance (ASA) found that one in five respondents postponed marriage due to the hardship of student debt, and for the same reason over half of respondents delayed purchasing a home.
If you’re currently saddled with student loan debt, you might be agreeing that your massive loans affect your life, maybe even in more ways than you realize. If you don’t have student loan debt, you might be thinking that education is an investment, and this is the price that one has to pay to get its unique returns.
From where I sit, I think the student loan system is broken, and it’s hampering not only the financial health and lives of those with student loans, but the economy writ large. And I don’t think it has to be this way. This is a crisis that’s uniquely American.
In the United States, there are roughly 54 million millennials (one is typically considered a millennial if they were born during the time frame of the early 1980’s to the mid 1990’s or early 2000’s) in the workforce, and about 70 percent of them have student loan debt. Between 2004 and 2014, the number of student loan borrowers increased by 92 percent, and, as already mentioned, the average student loan balance increased by 74 percent. As of 2013, roughly 40 percent of American households headed by someone younger than 40 years old had student loan debt, with this debt volume averaging nearly $30,000. While the cost of a four-year college education in the United States, when adjusted for inflation, is two and a half times higher than it was in the 1978-79 school year, across this same time period, the inflation-adjusted median family income increased by only 20 percent.
In nominal terms, the volume of student loan debt in the United States is $1.3 trillion, more than twice the total in 2008, and more than the current volume of car loan or credit card debt. The delinquency rate on student loans is higher than that of any other form of borrowing in the country, at roughly 10 percent. Of course such defaults can negatively affect future borrowing. And, to make matters worse, students increasingly take out student loans and do not graduate from school.
We at CFI have recently shared research on the concept of financial health. Financial health is a relatively new term in the financial inclusion community, and it assesses how well one’s daily financial systems enable a person or household to build resilience to shocks and pursue opportunities and dreams. In collaboration with the Center for Financial Services Innovation (CFSI) and Dalberg’s Design Impact Group (DIG), we carried out a year-long study into how to adapt CFSI’s U.S.-based financial health framework to a developing country context. The study found that the concept of financial health can effectively be applied in many contexts, but specific contextual factors need to be accounted for.
We also applied this financial health research to a United States setting, which brings us back to the subject of student debt. We created a financial health assessment and disseminated it to Accion’s staff. One of the big findings was that among Accion staff in their twenties, student loans are by far the dominant form of debt. Many of these individuals indicated that their student loan debt is a big and difficult issue for them to manage. Conversely, relatively few staff reported the same difficulties regarding their mortgages, and very few non-U.S. Accion staff reported holding student debt.
Beyond the negative effects of student loan debt on the borrower, evidence is mounting on the negative effects for the larger economy. Take the housing market in the United States, where homeownership is at a 50-year low. A survey from the National Association of Realtors and the ASA found that 71 percent of student loan borrowers who didn’t own a home indicated that their student loans were the main prohibitive factor. More than half of these non-homeowner borrowers estimated that student loans would push their purchasing a home back by at least five years. In 2013, one in five student loan borrowers paid 14 percent or more of their income on their student loan payments. This debt, especially if coupled with auto loans or credit card debt, leaves less room for both borrowers and lenders to qualify for or feel comfortable with the additional obligation of a mortgage.
A study by Fannie Mae found that, in general, college-educated Americans are 27 percent more likely to own a home than those who are high school-educated; however, those with student loan debt who fail to graduate are 37 percent less likely to own a home than those who simply graduated from high school.
Citing the Harvard Joint Center, Jon Gorey of The Boston Globe outlines how first-time buyers cause a chain reaction in the economy, affecting the broader housing market as well as related industries like home appliances. When there are fewer first-time home buyers, it makes it more difficult for homeowners to trade-up.
So, what’s the solution?
There are many angles of attack that could help, starting with wages. A recent piece by The New York Times cites the potential for wage growth from: increasing collective bargaining power among white-collar and service-sector workers; making salaried workers more eligible for overtime pay; ending discriminatory pay practices; and making it tougher for U.S. companies to outsource overseas.
Perhaps the most obvious approach, as suggested by the average tuition figure cited above, would be lowering the cost of education. We saw encouraging steps taken in this direction just two weeks ago by the State of Michigan. The University of Michigan announced its “Go Blue Guarantee” program which provides qualifying students from families in Michigan with incomes below $65,000 a year with free tuition for up to four years. The program begins next January and reportedly will not result in the reduction of any need-based aid for students from families earning more than $65,000. In its news release the University noted “tremendous credit also goes to our generous donors whose philanthropic commitment to financial aid underlies the financing of the ‘Go Blue Guarantee.'”
Lastly, bolstering student loan borrowers’ money management skills is essential. Student borrowers are young and often inexperienced when they take on their debt commitments.
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