Abstract
Debt crisis is a general term for accumulated and massive money that is owed relative to income/revenue. Student’s debt crisis is a growing concern in America. The objective of this paper is to understand the situation of student debt crisis in America, its effects and ways to contain the situation. The paper suggests that student’s debt crisis is largely caused by uninformed students, the “default activity” mentality” and the federal aid. The federal aid is influencing colleges to charge even more, and they are the most benefitted out of this arrangement. The situation can be contained by educating the students on pros and cons of debt, linking repayment to student’s paying capabilities, active government support and other such initiatives.
Keywords: Debt Crisis, Student Loan, Debt, America, Federal Aid
Introduction
Debt means a sum of money that owed. Debt crisis is a general term for accumulated and massive money that is owed relative to income/revenue. Student’s debt crisis is a growing concern in America. Students are finding it increasingly difficult to self-fund their education because of rising costs of college. The objective of this paper is to understand the situation of student debt crisis in America, its effects and ways to contain the situation. The paper is divided into six sections. The first section describes the current situation of the debt crisis. The second section discusses its effects. The third section debates who profits and who loses in this scheme of things. The fourth section suggests ways to eliminate the crisis and contain the situation. The fifth section of the paper envisages the role played by government involvement in this situation. The sixth section concludes the paper.
Debt empowers students, who can’t afford education, to go ahead and pursue their dreams. It empowers a person from the lowest economic strata to study in the top educational institute based on his merit. It opens up a gamut of opportunities for students, which can be leveraged based on their capabilities and not affordability. It helps build an economy that is more unified than divided by class. Having said that, the higher financial risk associated with debt cannot be ignored. In America, there has been an alarming rise in student loans in the last decade. There are a few important facts about this crisis that needs to be discussed first.
The number of student-loan borrowers increased by 89% from 2004 to 2014 (Verschoor, 2015). It is a significant rise and is a cause of concern because these loans are not secured by physical collateral. Student loans now top the rank in non-collateralized lending (Verschoor, 2015). It is second in consumer loans, next to only home mortgages (Grant & Anglin, 2013). The cost of education in private and public colleges has gone up considerably in the last 10 years.
The veracity of the crisis can be understood by examining the extent of the student loans in America’s financial market, its repayment track and available job opportunities for students. The extent of student loan can be explained in terms of the number of students availing this loan and the total outstanding student loan. The total student loan outstanding stands at $1.2 trillion with 43.3 million borrowers owing an average of $27,000 each (Verschoor, 2015). These figures are whopping and alarming, that too when clubbed with the analysis on repayment track. Only 37% of the student loan borrowers are paying regularly, and volume of unpaid loan has also risen in the last decade (Verschoor, 2015). About 20% of student loans are already in default (Oxford Analytica, 2015). The repayment track has been found better for the affluent borrowers as compared to the poor borrowers. So, the section of the population that was supposed to get empowered through these loans are the worst effected from its consequences. Students, sometimes, are not aware of their loan repayment structures and the extent of loan they can manage.
In a study conducted by Mckinney et al (2015), it was found that financial structures and support systems are not adequate in community colleges. These factors further aggravate the situation. In terms of job market, American economy is struggling to provide good career prospects for college graduate (Grant & Anglin, 2013). Unemployment rates have been high in the United States, especially for the younger population in the age group of 20-24 years (Grant & Anglin, 2013).
The rising cost of education is influencing young aspirants to avail loan to take care of their college fees, which is increasing their vulnerability to financial risk. This coupled with weak employment market is leading to non-repayments and causing the crisis situation.
Effect of Student Loan Debt
The effect of student loans has been both positive and negative. Debt empowers people to own things that are otherwise unaffordable. Good education is one such asset. Loan for education has been a tool for students to afford good quality higher education, which otherwise they may not be able to afford. So, such loans have served as instruments to leverage career prospects and improve quality of living in long run.
But, the negative effects of the student loans are being felt strongly today, for individuals and economy as a whole. There are three negative effects of student loans on individual students. First, it increases financial risk for them for their lifetime. Young graduates and professionals have aspirations to indulge in materialistic pleasures after they get a good job. But, student loan burden prevents them from splurging in any luxuries or fancies of life. The loan repayments take away whatever savings they make after meeting their expenses. The capability to accumulate wealth for retirement also reduces. These young professionals are sometimes unable to come out of their parent’s nest and make their own one. Second, loan may reduce the student’s willingness to actively participate in learning. The negative effect of loan has been observed in public college students who have taken student loan and their college attendance has suffered (Zhang, 2013). It has also impacted student’s choice of career and degree programs.
The debt crisis has negative effects on the economy as whole. Once student graduate and earn a job, they continue to feel the debt burden and do not splurge in materialistic pleasures. This reduces consumerism in the nation and demand for goods and services decreases. The loan burden will also reduce national saving as a significant portion of income will go towards loan servicing. Both these factors would put America in a vulnerable position in terms of its long-term economic growth.
Who Profits and Who Loses
There is a huge gap in student’s investment and the economic return they get on it (London, 2013). Some of the prominent reasons for this gap are information asymmetry (lack of adequate information for students) and availability of federal assistance.
Aspiring youth take loan and enroll for higher education courses with a dream to get a decent job that can give boost to their career and help pay off the loan burden. Especially for the middle-class families, college degree has become like a “default activity” (London, 2013). They are bought up in a way that they feel higher education is absolutely necessary for achieving their career goals. They feel it is the only mode of economic empowerment for them. While this works for a few students, it is nothing more than an illusion for others. Because of this illusion, they tend to ignore the risks involved with the loans they take and fall prey to debt burden.
Financial aid from government is available. But, its role in assisting student’s financially is debatable. Tuition fees are designed in such a way that the more aid one has, the more aid one has to have (London, 2013). This is because colleges are structuring their fees structure based on the federal aid, not on their costs. So, the federal assistance was partly responsible for rising tuition fees. In fact, it also motivated students to take up higher education. But, now that government is moving from grant-based assistance to a loan-based assistance, students are feeling a pinch of both the high college fees and debt burden of loans. This system has not only resulted in greater student loans in the system, but also greater number of unpaid loans in the system (Hillman, 2014). So, whatever the situation is, the colleges offering higher education are the ones that will benefit. It is always a win-win situation for them. On the other hand, debt provides opportunity to students to study further. But, very few benefit out of it. For the majority of the student, it proves to be a bane in disguise.
Ways to Eliminate the Crisis
Given the veracity of the debt crisis, adequate and timely measures need to be taken to improve the situation. The government’s move from grant-based finance to repayment-based loan structure is logical, but the former cannot ignore the crisis situation developing in the country because of these loans. There are various ways to eliminate and contain this crisis situation. Extending benefits of federal loan to private loan like income based repayment and extended loan term will benefit the students who are exposed to private loan who ideally charge an interest of 3-4 times over the federal loan. The paper suggests four ways to eliminate this crisis.
Interest Rate benefits
Interest payment forms a substantial part of the loan repayment of a borrower. It further adds to the already existing loan burden of students. The federal government can take initiatives to support students by lowering their financial burden. Lowering interest on loans by way of financing or by providing benefits to banks/institutes providing lower interest rates will help sail through such crisis. Refinancing of student loan should be allowed just like car loan or house loan to take advantage of prevailing lower interest rates.
Repayment Program
Income based repayment program will help students pursue professions like teaching, national services and other passion related jobs with low income. Although such a program is available, the enrollment is minimal. Further, government funding for students opting for such a profession will also help minimize the burden. Putting a cap on loan amount, especially from a private lender (Mark Cuban), will also force the colleges to lower the fees and reduce overall debt. Such cap is present in federal funded loans, but need to enforce in private loans as well.
Offering repayment options based on the income flow of the borrower will help ease the repayment burden (Hoyt, 2015). The staggered repayment plans help borrowers to pay less for initial loan period (when they would be earning less) and more at the end of the tenure (when the repayment will hurt less due to rise in income).
Scholarships
The motto of education should be not to deny education for want of money. To facilitate that, scholarships to be provided based on one’s income and economic background. The federal Pell Grant is one such scholarship to help people with lower household income. The Pell grant should increase year on year and should match the rate of growth f tuition fees to help mitigate this problem of crisis. Scholarships for others need not be full waiver of tuition fees, but a part so that students after graduating will not have the burden and equation of repayment being more than income.
Other initiatives
Starting of tuition free schools, mainly funded by federal government or funding the state run educational institutes by federal government tough various funds and grants will hugely reduce the number of students defaulting on repayment as it would have greatly reduced their cost of education. Government can also take initiative in providing open source text books and making available books/research material online. This would reduce the cost of educational material that students have to bear. Allowing bankruptcy law to cover student loan, similar to the current law covering companies with financial trouble to wipe out debt and start afresh. This might help genuine students defaulting due to lower income earning potential having paid tuition fees.
The servicemen’s readjustment act of 1944, popularly known as GI bill provides various benefits to veterans returning from World War II. One such benefit was to provide for tuition and living expense for the veterans to take up higher education, attend university and vocational education. This greatly benefited the veterans as evident by no of enrollment in GI bill program. It also benefited the country by having skilled and educated manpower for long term economic growth of the nation.
Government Involvement
Government by increasing the quantum of federal loan and by easing the loan eligibility criteria, in a way offers cheap loan to students to get admission in high priced colleges. These high priced courses and colleges not necessarily guarantee equally high income jobs for graduates. Also government is treating symptomatically instead of addressing the root cause, since the subsidizing part is on lowering interest cost rather than resolving the core issue of lowering tuition fees. With easy accessibility of loan (private and federal) for students, the colleges do not face difficulty in filling up seats and thus do not bother on controlling costs or lowering tuition fees to attract students.
Education should be treated like an investment and like all investments, it carries risks. By making capital easily available for such investment, Government is in a kind helping more number of people invest in education without any collateral or without monitoring the cost of investment (tuition fees) and return on investment (marginal increase in income after such education to pay off loans). This enters a vicious cycle, wherein the cost of loan goes up with increasing default and it significantly increases the interest component for students who are repaying (to cover the cost of defaulters).
Conclusion
References
Grant, Jennifer & Anglin, Lindsay (2013). Student Loan Debt the Next Bubble? American Bankruptcy Institute Journal, 32 (11), 44-45, 88-89
Hillman, Nicholas, W. (2013). College on Credit: A Multilevel Analysis of Student Loan Default. The Review of Higher Education, 37 (2), 169-195
Hoyt, Allison Anne (2015). A+ Debt Management Strategies for Federal Student Loan Borrowers. Journal of Financial Service Professionals, 69 (6), 52-63
London, Herbert I. (2013). Is College Worth It? A Former United States Secretary of Education and a Liberal Arts Graduate Expose the Broken Promise of Higher Education. Acad. Quest., 26, 360-365
Mckinney, L., Mukherjee, M., Wade J., Shefman, P. & Breed, R. (2015). Community College Student’s Assessments of the Costs and Benefits of Borrowing to Finance Higher Education. Community College Review, 43 (4), 329-354
Oxford Analytica Daily Brief Service (2015). United States: Student Debts May Trigger Crisis. Retrieved from http://ezproxy.stmartin.edu/login?
Verschoor, Curtis C. (2015). The Student Debt Crisis. Strategic Finance, 97 (3), 17-18
Zhang, Lei (2013). Effects of College Educational Debt on Graduate School Attendance and Early Career and Lifestyle Choices. Education Economics, 21 (2), 154-175
