The quick increase in student loan debt in the United States in recent years, including during the Great Recession when every other kind of debt shrank, is a subject of much debate among researchers, politicians, and the media. A solution is needed desperately. At more than $1.2 trillion, student loan debt is now the second largest of outstanding household debt after mortgage debt. Forty million people in the U.S. have one outstanding loan, and each owes an average of almost $30,000, which can take 20 or more years to pay off. One in 10 graduates accumulate debt of more than $40,000, Forbes reports. And because it cannot be discharged as credit card debt or other liabilities can be, it represents an extreme financial burden for borrowers, especially considering how weak the job market has been since the financial crises.
For young people in particular, massive student loan debt is a central obstacle in their financial landscape. In the latest Allstate/National Journal Heartland Monitor poll, most respondents who categorized themselves as no longer “starting out” said student loans were the hardest financial challenge the faced in their youth. It confirmed that student loan debt is the top financial concern of millennials. And for holders of student loan debt, this burden is a major factor in setting the course of their lives. It forces them to stay at stable but not career-furthering jobs, it prevents them from saving and buying a house, and it affects when they choose to get married and have children.
Given that student loan debt impacts such a large share of the adult American population, that student loan debt is spawning socio-economic changes in the U.S., and that student loan debt impacts the economic health of the entire country, change is coming. Here are three things that will influence student loan debt debate in America in the future.
1. The Possibility of Free Tuition
Free college tuition will not help the 40 million Americans with student loan debt. But if implemented, such an innovation would completely realign the debate over the value of a college education, meaning once higher education is seen as a necessity of modern life, lawmakers may rethink the burden of student loan debt.
Presidential candidate Bernie Sanders has proposed to eliminate undergraduate tuition and fees at public colleges and universities. Remember, Obama also floated a plan in January to make two years of community college free, at a cost of $80 billion over ten years. His reasoning? “Nearly a century ago, a movement that made high school widely available helped lead to rapid growth in the education and skills training of Americans, driving decades of economic growth and prosperity. America thrived in the 20th century in large part because we had the most educated workforce in the world,” argued a White House fact sheet.
“Today, total tuition at public colleges and universities amounts to about $70 billion per year. Under the College for All Act, the federal government would cover 67% of this cost, while the states would be responsible for the remaining 33% of the cost,” reads Sanders’s plan. His College for All Act would be “fully paid for” by imposing a Robin Hood tax on Wall Street, or a package of fees on investment houses, hedge funds, and other speculators. “It has been estimated that this provision could raise hundreds of billions a year which could be used not only to make tuition free at public colleges and universities in this country, it could also be used to create millions of jobs and rebuild the middle class of this country,” he noted.
Of course the idea of spending more money on education is, at best, controversial. After all, the U.S. government — including federal, state, and local — will spend $922.6 billion on education this year. But despite these arguments against free college tuition, they still reveal that the American education system needs reform. Even expanding the size of the federal Pell Grant — which now covers less than a third of the cost of attending a four-year public college, when in the 1980s it covered about half — would help. More than 8 million low-income Americans depend on the Pell Grant to attend college, but it maxes out at $5,775 for the upcoming academic year.
2. Interest Rates
Both financial industry experts and the media have tried to predict when the Federal Reserve will increase interest rates, which have been held artificially low in order to boost economic growth by making it cheaper to borrow. Even as the U.S. economy has replaced all the jobs lost during the recession and the headline unemployment rate has returned to pre-recession levels, the federal funds rate, or the benchmark that individual banks use for many types of loans, remains near zero. The Fed has not lifted rates since 2006 — before “The Big Bang Theory” was even on television.
On June 17, the central bank decided to keep the benchmark federal funds rate at zero.
An increase in the federal funds rate will not impact those borrowers whose loans have already been disbursed. But for those taking out loans, federal interest rates will be rising. No longer do federal loans come with fixed rates set by Congress. Now they will be tied to the price of the U.S. Treasury 10-year note, meaning that when Treasury note rates fluctuate, federal student loan rates will also change. T-bills, as they are commonly called, could have higher rates based on the Fed’s actions
If there is any signal that American higher education is too expensive, it is the fact that student loan delinquencies have increased from 6% a decade ago to more than 11% at the end of 2014. The Federal Reserve Bank of New York estimated that 17% of all student loan borrowers are in default or delinquency. For those who cannot afford their payments, a logical solution would seem to be filing for bankruptcy. However, in 2005, the U.S. bankruptcy code was amended so that all private loans made for so-called qualified education expenses could no longer be discharged by filing for bankruptcy. This move had an interesting side effect. According to a 2014 study by the University of Connecticut School of Law and the Consumer Financial Protection Board researchers, it caused lenders to slightly expand credit to less creditworthy borrowers and resulted in a small increase in the cost of private loans for four-year undergraduate college degrees.
Experts believe the time has come to change the law. “We need to treat private student loans like any other type of consumer debt,” Lauren Asher, president of The Institute for College Access & Success, a nonprofit policy and research organization, told CNBC. “It’s easier to discharge gambling debt in bankruptcy than private student loan debt.”
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