Is the College Debt Bubble Getting Worse?

Debt

College is big business, as millions of students decide to pursue a post-secondary education every year. There are many benefits to investing in higher education, but the skyrocketing cost of a degree and a weak economy have many people defaulting on student loans.

A new report shows that around one in seven borrowers defaulted on their federal student loans. According to the U.S. Department of Education, the national two-year cohort default rate increased from 9.1 percent to 10 percent in fiscal year 2011 compared to the previous year. Making matters worse, the three-year default rate jumped from 13.4 percent to 14.7 percent. Those are the highest default rates in about 15 years, and they don’t even include people who are delaying payments through forbearance or deferment.

“The growing number of students who have defaulted on their federal student loans is troubling,” U.S. Secretary of Education Arne Duncan said in a press release. “The Department will continue to work with institutions and borrowers to ensure that student debt is affordable. We remain committed to building a shared partnership with states, local governments, institutions, and students — as well as the business, labor, and philanthropic leaders — to improve college affordability for millions of students and families.”

A college degree was once considered to be a guaranteed path to the American Dream. However, rising debt loads have many graduates living a financial nightmare, and the side effects are impacting other areas of the economy. Due to monthly loan payments, about 47 percent of student borrowers have delayed buying a house, according to a recent survey by Young Invincibles, an organization that represents the interests of young adults.

The same percentage of borrowers also put off buying a car, while 35 percent said they postponed starting a family. Twenty-three percent of respondents stated that they put off starting a business, and 15 percent said they tried to receive a mortgage but were denied. Even more concerning, 76 percent said they saved less for the future, which will undoubtedly cause additional problems down the road.

With lenders handing out loans like candy and the price of attending college skyrocketing, students are more likely than ever to use debt to pay for school. The median amount of private debt held by respondents was between $25,000 and $35,000. Adding insult to injury, almost of all the borrowers in the survey held federal debt, as well. Between federal and private student loans, there is more than $1 trillion in college debt outstanding.

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Using debt to obtain a degree can be beneficial if done properly, but a weak job market is hindering the process. As the chart above shows, 40 percent of respondents earned less than $25,000 per year, and 75 percent said their annual income was below $50,000.

In order to cope with monthly debt payments, many borrowers are making noteworthy sacrifices, but others are going deeper into debt. According to the survey, 26 percent of borrowers took on a second or third job in order to afford payments, while almost 46 percent cut out “non-essential” payments like cable or Internet services.

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