It’s no secret that student loan debt is on the rise, and at this point many are using the term, “student loan debt crisis” to refer to the stratospheric levels of debt that have been amassed in recent years. Current estimates put the national student debt total in the United States at over 1.3 trillion dollars. With this much debt load on the population, there are sure to be many important side effects that will affect both those who hold the debt and those who interact with them in various capacities.
In this article, we’ll explore some of those “side effects” of the student loan debt crisis.
- Families can sometimes inherit student loan debt even after a student passes away.
Yes, you read that right. Whether or not a family can inherit the debt of a deceased student or graduate will depend both on whether the debt was public – that is, federally funded – or private – corporately funded. Federal student loan debt is not able to be passed onto a family member after the loan bearer is deceased. This is due to federal regulations that have been passed to protect family members from inheriting federal student loan debt. However, this protection does not currently extend to the families of those who hold private student loan debt.
If the student used a private student loan, often a parent or other family member will have been required to co-sign for the loan. Private lenders will not usually forgive student loans in the event of the death of the loan recipient, and will in fact even accelerate payment (require payment of the outstanding balance in full immediately) in the event of the loan holders death. This makes private student loans especially dangerous for families. - Students or graduates who hold student loan debt frequently delay starting families or making major purchases.
In the years since 2002, the average debt-to-income ratio of a graduate who holds outstanding student loan debt has increased from .43 to .49. While this upward trend may not seem like much, this has resulted in many college graduates failing to qualify for first time home buyer mortgages, and in turn contributed to declining rates of home ownership among millennials.
The truth is that millennials don’t have lower aspirations than previous generations. They simply cannot afford to finance a car or take out a mortgage given their crushing levels of student loan debt and statistically lower levels of income and buying power.
Dr. G. Mustafa Mohatrahem, chief economist for General Motors cited student loan debt as one of the primary factors in why millennials have not been buying new cars in the same numbers as previous generations. A report published by the One Wisconsin Institute showed that the impact of crushing student loan debt resulted in a loss of $6 billion in potential annual profit for the automotive industry overall. - Interest rates can only climb over time.
Thanks to some recent Congressional rulings, student loan debt can only go up over time. For a short time, Congress allowed the interest rates of undergraduate student loans to double from 3.4 percent to 6.8 percent. However, shortly thereafter, Congress passed a new deal allowing them to simply rise over time. This means that at the same time as students and graduates are suffering from record high levels of student loan debt and struggling to repay them more than ever, the loan issuers are making more money off of those students than ever. This leads us to the next point. Who makes all that money? - Government profits from student loans are at an all time high.
Imagine if the Federal Government of the United States were a private corporation. If they were, they would immediately be the highest profiting corporation on planet earth. The U.S. Congressional Budget office reports that in the year 2013 alone, the federal government profited more than $50 billion dollars off of student loans being repaid by the very struggling students and graduates we discussed above. Once we understand that the federal government also decides the interest rates on those outstanding debts, we can understand the problem here. There is simply no motive for them to decrease interest rates or pass reform bills to solve the student debt crisis. In fact, the profit motive serves to virtually ensure a lack of reform. - Student loan debt balances are going up, as the income available to repay them goes down.
In the years since 1999, student debt has gone up by more than 5 times (500%). However, during this same time period, salaries for young people have not increased. In fact, salaries for young people have decreased by 10 percent in the same timeframe. When we consider this fact in light of the issues discussed in the previous points above, we begin to understand why millennials are not buying homes, cars, or starting families at the same rates previous generations had been.
With these facts in mind, it becomes clear that we must approach student loan debt with the utmost caution. It is important that anyone who is considering taking out student loan debt seek qualified independent and unbiased financial advice from advisors they can trust.
It is also important to take out only the amount of student loan debt that is necessary to graduate, no more, and no less. Taking out too much debt could result in a longer repayment timeframe and more interest paid. Taking out too little could result in a financial withdrawal from college which could hamper your education or delay graduation. Both situations are undesirable, so do your research, seek good financial advice, and make the best decision for your specific educational and financial needs.
Do you have any other tips to share about student loans? Feel free to share them in the comments below. We’d love to hear from you.