This is great short read that was published in the Washington Post today. Written by Kate Hardiman, with a few additions of my own.
Amid headlines of record-low unemployment and a bullish economy, millennials and many older graduates are burdened with student loans lurk behind the scenes. Their vast sums of debt are not reflected in the current description of the economy, but have implications for its future.
Currently more than 8 million student borrowers are in default on their federal loans for higher education, or about one in five borrowers whose loans have come due. Moreover, the student loan balance for the nation as a whole is forecasted to reach $2 trillion by 2022.
A large portion of that money may never be repaid, experts are now suggesting. Nearly 40 percent of borrowers may default on their student loans by 2023, according to a reportpublished by the Brookings Institution.
The report’s author, Judith Scott-Clayton, writes that debt and default rates for black college students are at “crisis levels,” even for those who have obtained a Bachelor’s degree. Shockingly, black graduates with a Bachelor’s degree are more likely to default than white college dropouts.
The for-profit sector in higher education drives many of these figures; half of their student loan borrowers default within 12 years of entering the school.
Scholars have commented that our current loan default situation is similar to what happened in the mortgage market prior to the 2008 financial crisis. Both are “bubbles” in that they cannot continue at current rates without repercussion. Yet, a noticeable difference is that a house can be repossessed, whereas a degree cannot.
Though there is nothing physical the government can repossess, defaulting on student loans can kill credit scores, making house and car purchases difficult for years to come. This could only hurt the economy as it becomes harder for these individuals to buy things.
If the cost of higher education continues to rise, and its degrees continue to be valued as necessary credentials in the labor market, it is unlikely that borrowing will slow. Indeed, economists suggest federal loans themselves allow colleges to continually drive up costs. This creates a vicious cycle between borrowers, colleges, and the federal government, with only the colleges benefiting.
Policymakers suggest that the government can actually help to reduce student loan default rates. A report published by the American Enterprise Institute and the Urban Institute suggests increasing financial counseling for student borrowers with low credit scores or automatically placing borrowers into income-driven repayment plans.
There are currently several different income-based repayment plans that students can elect which can cut their payments drastically. In fact, if their income is low enough, their payment could be $0/month. They have to re-apply each year and report their current income. If their income goes up, so will their payments. But at least the payments will be affordable. Many students aren’t aware of these repayment options, and aren’t told about them until they are in default.