Outside of mortgages, student loan debt is the largest form of consumer debt - sitting at $1.4 trillion from borrowers across the United States. The average per borrower is $37,172, as of 2017.1 While the severity of the student loan debt crisis is undeniable, the real issue is - how did we get here in the first place?
A Quick History of Student Loan Debt
Decades ago, the student loan market was left fairly unregulated. Tuition was set by the schools and the majority of student loans were offered through private lenders and banks, but guaranteed by the federal government. Individual loans tended to stay on the conservative side, just a few thousand dollars typically, to reflect modest tuition prices of private and public universities. Slowly at first, tuition began to creep up. In return, loan sizes began to grow. Then, between the late 90’s and today, tuition costs hiked up exponentially. In return, so did loan sizes. The loan system, however, has changed very little to accommodate.
Factors Affecting Student Loan Debt Today
When taking a look at student loan debt affecting Americans today, there are three major factors contributing to the crisis.
Factor #1: Rising Tuition Prices
Between 2000 and 2010, universities raised tuition costs approximately five percent per year. That average has dropped in recent years to 2.2 percent from 2010 to 2020.2
Simply put, universities and colleges are continually hiking up the cost of tuition. Tack on room and board, health coverage, mandatory student activity fees and more, and most families face thousands more on top of tuition.
In fact, the cost to attend college has doubled in the past 40 years. According to the National Center for Education Statistics, the average cost to attend university (including tuition, fees and room and board) was $11,138 (adjusted for 2018 dollars). In comparison, tuition in 2018 averaged $23,835.3
Factor #2: Pay Inequality
More women are accruing student loan debt than men - two-thirds of America’s student loan debt is held by women, equaling $929 billion.4
The problem is, once women hit the workforce, they’re facing an uphill battle paying down debt. Assuming a woman graduates in her early twenties, she will make approximately 89 cents to every dollar a male counterpart makes. As women age, that number drops. By the time a woman retires in her early 60s, she’s making on average 75 cents to the male dollar. And if a woman decides to have a child, she’s earning even less - approximately 71 cents, or $16,000 less than a father in the same position.4
With the majority of student debt holders facing unequal pay in the workforce, the ability to pay that debt down continues to be a problem.
Factor #3: False Sense of Loan Forgiveness
The majority of people taking out student loans are young, around 17 or 18. And yet, they’re signing up for a multi-decade commitment. While some federal student loan plans are meant to be paid back in 10 years or less, many borrowers find themselves expecting to still be paying back loans into their 40s.5
Taking on such a commitment at a young age has become the norm, but many take on this debt without thinking realistically or long-term. It’s likely debt borrowers have heard of loan forgiveness programs, thinking they’re easily attainable after graduation. The problem is, there’s large competition for such programs, and there’s no guarantee these options will still be available once a student graduates. With the assumption that loan forgiveness is on the other side, it may feel easier to sign the papers in the first place.
Student Loan Debt & The Economy
Student loan debt has a ripple effect on the economy - graduates are leary to take on more debt (especially high-interest debt like credit cards), leaving the banks earning less in revenue from interest and fees. Students don’t have the necessary savings to purchase a home, meaning the housing market sees less demand. And with less financial security than generations before, they’re waiting longer to start having families.
In early 2020, America faced COVID-19 and experienced record unemployment numbers. With millions out of work and the start of our next recession, student loan debt is a hurdle that can make financial survival even harder for young people. While a moratorium was placed on federal student loans through the CARES Act, those with private loans have been left at the mercy of each individual institution.
The student loan crisis is very real, and it’s going to take a major systems overhaul to resolve. In the meantime, you can help your child or grandchild tackle future education expenses by starting a 529 savings plan. Or, speak with your financial advisor about other options available to you.
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Alex Collins is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS). OSJ: 333 N Indian Hill Blvd., Claremont, CA 91711 Ph: 909-399-1100. Securities products and advisory services offered through PAS, member FINRA, SIPC. Financial Representative of The Guardian Life Insurance Company of America® (Guardian), New York, NY. PAS is a wholly-owned subsidiary of Guardian. Quantified Financial Partners is not an affiliate or subsidiary of PAS or Guardian. This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice. Guardian, its subsidiaries, agents, and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. Material is for educational purposes only. By providing this content we are not undertaking to provide any recommendations or investment advice regarding any specific account type, service, investment strategy or product to any specific individual or situation. Please contact a financial professional for guidance and information that is specific to your individual situation. All investments contain risk and may lose value. AR license #7264699 CA License #OH24806 #2020-107768 Exp 08/2022