The Price of Education: An Ongoing Problem of Student Loans

Currently Americans owe more than 1.2 trillion dollars for student loan payments. This represents the major problem for both their household finances and the American economy. The period after they roll out from college is the time when young people need money the most. This problem forces young Americans to postpone starting a family, taking a mortgage, or even buying a car. It positions them further away from the ‘American Dream’ their parents want them to pursue.


Class of 2015 is officially the most indebted class ever with an average debt sum of $35,000, which is more than twice the amount student loan borrowers owed two decades earlier. Recently we also saw young people going on debt strikes, after rolling out from troubled Corinthian Colleges Inc. This college closed almost all of its campuses last year and can’t be included in any resume; some of its students owe more than $100,000 for federal and private loans. .


High Delinquency of Student Debt


In addition to this trillion-big figure, there are   at least 31.5% of debtors who are  one month back with their payments.  In this is research, made by St Louis Federal Reserve  in September 2013,  it presents a much higher figure than the one determined by the Federal Reserve Bank of New York (11.5% of student loan debtors that are at least 90 days late). Both of these delinquency figures are the highest comparing to all other kinds of non-mortgage household loans (for example delinquency rate for auto loans is around 8.5%).


There are plenty of reasons for this trend. One of them is the fact that discharging student debt with bankruptcy statement is much harder. In addition to this student loan, debtors are usually not familiar with the fact that they can choose between several repayment options before they start repaying the loan. Instead of choosing the payment plan that’s most suitable for their financial situation, most debtors become automatically enrolled to the Standard Repayment Plan, that’s very often the worst option for debtors with low incomes.


High expectation of students, and their parents, when it comes to studying are another reason that keeps delinquency rates this high. They usually view these loans as an investment that will enable students to graduate, find a good job, and position themselves well in  society. They often choose their career path by relying solely on their preferences, without checking some of the most important criteria like job availability, potential income, ways to get necessary work, experience etc.



High interest Rates of Student Loans


Another thing that makes student loans hard to repay are the high interest rates they come with. Student Debt interest rates are not determined by the market, but by Congress, which sets rates for all federal loans that make around 85% of the whole student debt sum. Current rates for subsidized or unsubsidized loans that undergraduates can take is 4.29%. While the interest rates for graduate loans go from 5.84% for direct unsubsidized loans to 6.84% for direct PLUS loans. These rates are much higher than interest rates on mortgages, for example, and most of the rates for graduate students are also higher than the ones for auto-loans (4.33%).


There are also private student loans that come with significantly higher interest. These loans are usually taken by students who can’t qualify for the federal loan. It’s hard to calculate the average private student loan interest rate, because there are a lot loans  offered  by banks, credit unions, state alternative loan programs, etc. The later usually offers the best interest rates (around 6% on average). Unlike commercial banks, state alternative loan programs usually offer fixed rates and are the best option for students who can’t qualify for federal loan. Many students also decide to take student loans from commercial banks or credit unions. These organizations often have very misleading commercials in which they state, for example, that their interest rate goes from 4 to 12%. With these offers, very few borrowers (the ones with perfect credit score) qualify for the lowest rates, and even if they do, private loans usually come with variable rates. Most borrowers end up with  9% or more interest rates, and this makes an industry average for private student loans estimated to be between 9 and 12%.


Bottom Line


It’s hard to blame anybody for this growing problem our society copes with. Most people blame universities and their high tuition fees, but students and their parents also have their part of the blame.  Most students are usually uninformed about different kinds of repayment plans student loans come with, and often uninformed about advantages and disadvantages of college degrees future students are enrolling for. There’s also the U.S. Congress that determines the interest rates for federal loans that are usually not in line with the market economy, and the need for educated personnel in various industries. Only way this problem can be solved is by combined action of all three parties, educational institutions, students and The United States Congress. When it comes to students, it is highly advisable for them to make their student loan payments regularly, since the high interest of these loans and the difficult discharge process makes this loan a financial death trap if not repaid on time.


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