Student Loan Levels

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Student Loan Levels in the United States Student loans have risen significantly in recent years. In this paper, we explore some of the reasons for this occurrence, the issues associated with the occurrence, and potential solutions to the problem. Rising Costs of College From what has been researched, the key reason why college tuition cost has been increasing over the past years lies within the explanation of supply and increasing demand. In other words, more students requires or leads to more money. Bestvalueschools states: Contrary to narratives featuring price gouging higher education institutions, much of the high price of higher education is a simple matter of supply and artificially inflated demand. The availability of student loans, and the expectation ever more prevalent over the last half century that most kids have a chance of attending college have provided colleges with a glut of applications.

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In earlier years, government aid after WWII helped colleges to adjust to increasing demand, building new buildings, creating programs, recruiting talent. In recent decades, however, demand has continued to rise without as much government aid to help with college growth. It appears that after WWII demand has continued to rise, and the government has decreased its assistance to college growth, which has has increased costs and loans. In addition, Bestvalueschools adds in 1970 As the economy and double-digit inflation took hold, college tuition and fees climbed rapidly to match or exceed inflation. Government programs weren’t prepared for the rise in education costs, and the federal grant programs began to shift to subsidized loan programs ( para 8). The increasing demand leads to rising costs. We will see how significantly student loans have risen in response to these rising costs. STUDENT LOAN LEVELS IN THE US 3 Increasing Debt Levels Student loan debt has risen significantly in recent years.

The federal government is by far the largest lender of student loans, responsible for 89 percent of outstanding student debt for 2017 to 2018, so we will focus our analysis on federal loan statistics (Total Federal and Nonfederal Loans Over Time, 2018). According to the Federal Student Aid Office of the U.S. Department of Education, total student loans??”both federal and private??”outstanding in 2007 stood at $516 billion. By the third quarter of 2018, there was $1,412 billion in total outstanding student loans. Assuming outstanding student loans stay at that same level for the rest of the year, that difference represents a 174 percent increase over the past twelve years and an average yearly increase of 8.57 percent (Federal student loans portfolio summary, 2018).

In comparison, the national debt has increased by an average yearly rate of roughly 7.5 percent since 2007, assuming the national debt does not grow any more this year (Historical debt outstanding, 2018). The number of federal student loan borrowers has also increased from 28.3 million in 2007 to 42.2 million at the end of the third quarter of 2018, an increase of 49.12 percent (Federal student loans portfolio summary, 2018). The fact that outstanding debt has risen faster than the number of borrowers implies that borrowers have increased their borrowings over time; that is the case. The amount of funds owed by borrowers who owe forty thousand dollars or less has actually decreased by $5.7 billion, or 1.18 percent, since the second quarter of 2017, compared to a two percent drop in the number of those who owed forty thousand dollars or less.

However, student loan debt has risen by $12.5 billion, or 3.57 percent, among those who owe between forty and eighty thousand dollars since the second quarter of 2017 (along with a 3.23 percent increase in the number of borrowers), and STUDENT LOAN LEVELS IN THE US 4 student debt has risen by $69.3 billion, or 13.69 percent, among those who owe more than eighty thousand dollars (along with a 11.43 percent increase in the number of borrowers). Debt has risen at the highest rate among borrowers who owe more than two hundred thousand dollars. That group has experienced a 21.08 percent increase in debt levels since the second quarter of 2017, and the number of borrowers in that category has increased by over 16 percent (Federal students loans portfolio by debt size, 2018). As time has passed, more people are taking out larger student loans or increasing their previous student loan balances.

How do these changes affect delinquency rates? For the following statistics, we will study a certain federal student loan portfolio, the Direct Loan Portfolio, between 2013 and the third quarter of 2018. Since 2013, this portfolio has seen a 96.06 percent increase in outstanding loans (Federal student loans portfolio summary, 2018). Outstanding loans attributed to those who are keeping up with payments has increased by 179.33 percent over the same period. Outstanding loans that are 31-90 days delinquent and 91-180 days delinquent have increased 131.55 percent and 147.62 percent, respectively. Outstanding loans that are further behind in payments have also seen significant balance increases, although the balances are increasing at a lower rate than the rate at which the portfolio as a whole is growing.

Those loans which are 181-270 days delinquent have increased 83.82 percent since 2013 and loans which are 271-360 days delinquent have increased 78.95 percent over the same period (Federal student loans by delinquency status, 2018). These are some troubling developments, although it does not appear a disaster is imminent in this portfolio. Although it is better for the 31-180 day delinquent category to grow faster than categories of loans that have been delinquent for longer, it is never good for any STUDENT LOAN LEVELS IN THE US 5 delinquency rates to rise considerably faster than the portfolio as a whole, let alone rise at any significant rate.

Also, although delinquency rates for loans that are 181-360 days delinquent are lower than the rate of growth in the portfolio, the rates are still high. It is possible that the high delinquency rates in the more recent delinquencies may indicate future transfers of loans to the 181-360 day delinquent categories, which would indicate that borrowers are becoming increasingly unable to pay back their debts. However, there are positive indicators as well. The amount of loans that are being paid back on schedule still comprise almost 86 percent of the portfolio. Loans which are over a year delinquent are transferred to a debt management and collection system, and the amount of outstanding funds is the system is currently $1 billion, or a mere .16 percent of the total portfolio (Federal student loans by delinquency status, 2018). In addition, the economy would be able to handle a worst case scenario of widespread default in student debt better than it handled the mortgage crisis because most of the loans are owed to the federal government, not private banks. Nevertheless, student loan debt is a major problem, especially given the fact that lenders are finding that many people they lend to struggle to pay back the debt. Risky Lending Why did it become so risky for lenders in the student loans markets? Studies have shown an increase in the number of students who dropout of school and never repay their loans.

It should be noted, however, that the figure of students who do not find work after graduating also include those trying to pursue higher education. Student loans are being issued at unprecedented rates as more American students are trying to obtain higher education. However, the cost of tuition at both private and public STUDENT LOAN LEVELS IN THE US 6 institutions is touching all-time highs, and interest rates on student loans are rising. Students are spending more time working instead of studying. Experts and analysts worry that the next generation of graduates could default on their loans at even higher rates than now. Federal student loan debt currently has the highest 90+ day delinquency rate of all household debt.

More than 1 in 10 borrowers is at least 90 days delinquent, while mortgages and auto-loans have a 1.1 percent and 4 percent delinquency rate, respectively. The cost of borrowing has also risen over the last two years. Undergraduates saw interest on direct subsidized and unsubsidized loans jump to 5 percent this year??”the highest rate since 2009??”while students seeking graduate and professional degrees now face a 6.6 percent interest rate, according to the U.S. Department of Education. Because loans and interest rates are rising, finding solutions to this problem is more important than ever. Potential Solutions It is easy to assume that because of the enormity of student loan debt in the US that there must be an equally enormous solution to solve the problem. Many believe that governments or employers must be responsible for bailouts or employment benefits to cover debt or payments. There are arguments to be made for those, but there is a simpler solution and it is at the individual level. Simply put, the main reason that college tuitions and debt keep rising, beyond the systemic reasons already discussed, is that students and their parents keep paying them no matter how high they go.

Therefore, making better financial decisions individually and teaching others to do the same will do more in the long term then waiting for someone else. After all, it is individuals who make decisions. While the following tips will not solve the problems as quickly as some may prefer, they can help the whole nation in the long term. STUDENT LOAN LEVELS IN THE US 7 The first and most obvious option for some is to follow scholarships. If one school offers a student a full ride and another only offers a partial scholarship the first school is the better choice all other things being equal. Scholarships are not readily available to all students, however, so other considerations must be made. One consideration for many could be to choose an instate public university rather than going out of state or to a private school. A similar and even less expensive option is a community college for two years and then transfer to a larger university, as long as the credits transfer. Another option for those who are not sure what they want to do is to take a gap year. A gap year is simply taking a year off after high school or between college years to work and gain perspective about where one wants to go in life. This can sometimes be discouraged by many in our world today who believe that college is a ticket to success in life and career.

This sentiment is well intended, but how wise is it to recommend someone undertake a six-figure investment when they don’t have a clear goal for themselves? Further, some may realize that college is not right for them. Between fiscal year 2015 and 2016 approximately 3.9 million borrowers dropped out of college (The Hechinger Report 2017).

Taking that gap year can help those that decide trade schools are a better fit avoid taking that loan only to drop out and help those who do enroll in a college save up to reduce their debt and have a clear picture of their goal. The most significant factor in making a wise educational investment, in the opinion of your authors, is choosing the right degree field. Science, technology, engineering, and mathematics (STEM) fields top the list for starting salary earnings. Liberal arts and social sciences such as philosophy, literature, and education rank near the bottom by comparison (Strauss 2017).

Young students are frequently told from the outset to follow their passions but STUDENT LOAN LEVELS IN THE US 8 are unfortunately not told to do so in a financially responsible way. Along with the cost saving alternatives of choosing less expensive schools, choosing degree fields with better employment opportunities at graduation will help students be able to make the payments they have. There are factors beyond the financial that affect the educational choices students make. We still believe that students should pursue the careers they are passionate about, attend a school they like, and enjoy their college experience. It is our hope that along the way more students will make better financial decisions in their education and stop sacrificing long-term financial freedom and earnings for the sake of a short-term college experience. There is much more to life than finances to be sure, but a greater degree financial freedom is more beneficial to chasing one’s goals than a lesser one.

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