President Joe Biden (Photo by Drew Angerer/Getty Images)
The student loan crisis is worse than you think.
Here’s what you need to know.
Student Loans
A new report from the Bipartisan Policy Center, a Washington, D.C. think tank, shows why student loan debt has ballooned 144% since 2007. Today, according to the latest student loan debt statistics, there are 45 million student loan borrowers who collectively owe $1.7 trillion of student loans. Without reform, student loan borrowers and their families will continue to be saddled with student loan debt and the federal government will be financially liable if student loan borrowers default on their student loans.
Here’s why the student loan crisis is worse than you think, what it means for your student loans, and what can be done about it.
Student loans: 4 drivers of student loan debt
According to the report, there have been 4 key drivers of student loan debt growth:
1. Increased access to student loans
Increased access to student loans is a double-edged sword. Easy access to federal student loans means more people can attend college and live the American Dream. At the same time, colleges and universities have increased tuition because they know everyone will pay increased costs to get access to higher education. Simply put, consumers are less price-sensitive to tuition hikes if there is available money to pay for school. That said, the federal government doesn’t underwrite student loans like a private lender does. This means that regardless of underlying credit profile, every student loan borrower gets the same interest rate. So, borrowers with higher credit may “overpay” for their student loans, while borrowers with lower credit may “underpay” for their student loans. This can lead to undesirable outcomes for both the borrower and federal government if the borrower defaults on their student loans — and the interest rate wasn’t properly priced for the risk of default. Federal student loans aren’t capped by an ability to repay student loans. (Here’s how to get student loan forgiveness even if you don’t work in public service).
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2. Less state support for higher education
State support for higher education has declined. With many states facing budget cuts and a decreasing tax revenue, states have been unable to offset increasing tuition, room and board at many state colleges and universities. There has also been a “relative declining value” of Pell Grants. As a result, students have relied more heavily on federal student loans and private loans to fund their education. (Here’s how to get student loan forgiveness).
3. PLUS Loans are too easy to get
Parent PLUS Loans and Graduate PLUS Loans are too easy to get, according to the authors. Parent PLUS Loans, which a parent can borrow to pay the cost of a child’s school, are only capped by the cost of the school. Again, PLUS Loans aren’t based on an ability to repay the student loans. Parent PLUS Loans, which parents often borrow as they approach retirement age, have the highest interest rate among federal student loans, which can make them prohibitively expensive to repay. (3 ways to get a lower student loan payment).
4. Not all colleges and universities should have access to student loans
Poor quality colleges and universities, such as certain under-performing for-profit universities, still have access to federal student loans. This may be despite not delivering a high-quality education to students. If student loan borrowers at these schools cannot repay student loans, the federal government bears the financial cost. The authors call for more institutional accountability. (Here’s who qualifies for student loan forgiveness right now).
What this means for your student loans
It’s helpful to understand what has caused student loans to skyrocket over the past 20 years. What does this mean for your student loans? First, if you’re a student or parent considering student loans, make sure you understand the total borrowing costs (including compounding interest) and weight it against your ability to repay. Sometimes, this isn’t easy, as it’s hard to predict future earnings. (How to apply for limited student loan forgiveness). However, make sure to understand monthly payments. Second, make sure the school you are attending will deliver the high-quality education you expect. You don’t want to borrow student loans to learn that your school is an underperformer. Therefore, research your school and conduct due diligence such as employment statistics, graduation rates and other information so you can make an informed decisions. Third, don’t borrow more than you need. You may find a comparable degree or program at a less expensive school that offers a better financial aid package. Don’t choose a school based on ranking; consider financial aid and your total student loan borrowing too.
Biden helping borrowers with student loans
President Joe Biden recognizes the threats of growing student loan debt. As president, Biden has cancelled $11.5 billion of student loans. This week, U.S. Secretary of Education Miguel Cardona announced that $2 billion of student loans will be cancelled within weeks. Biden understands the key drivers of student loan debt growth, including, according to the report, that the rise in tuition has outpaced the rise in access to financial aid. To address this, Biden has pushed for a historic expansion of Pell Grants. The Education Department also is holding student loan servicers and for-profit schools more accountable for outcomes. As the authors note, there is unfettered access to federal student loans, which can result in increased defaults. At the same time, additional student loan borrowing is encouraged, while some student loan repayment plans reward higher-income earners with large student loan balances, which can create a regressive system. Biden is focused on simplifying student loan repayment, cancelling $4.5 billion of student loans for public servants, and increasing targeted student loan cancellation in the near-term for more student loan borrowers.
If you have student loans, know that temporary student loan relief is ending January 31, 2022. Regular student loan payments for federal loans start the next day. This means you also need to evaluate your student loans today and create a clear strategy for student loan repayment. Here are some popular options to pay off student loans:
