Student Debt Overload

Beth Akers, a fellow at the center-left Brookings Institute, conducted an interesting study on how student loan debt affects certain Americans of varying education levels, ranging from high school through post-graduate study. Her study, entitled, “How Much is Too Much? Evidence on Financial Well-Being and Student Loans,” was published by the American Enterprise Institute (AEI).

Akers found that students who finance large sums through student loans, from both federal and private lenders, “face financial hardship at only slightly higher rates than comparable households with less debt.” Yet, she found “the highest rates of financial hardship are seen among households with relatively little outstanding student loan debt.” She said, “Ninety-five percent of borrowers have less than $56,000 in outstanding debt.”

The reason why the federal government is in the student loan business is to “make education loans to students who will benefit from education but to whom the private market would not lend.” And, she added, “Regardless of the limits set on federal borrowing, there will always be borrowers who struggle financially.”

So what gives? What does this mean?

According to some of the statistics she compiled, 34% of American students took out federal student loans in the 2012-2013 year, when only a decade earlier, 24% had done so. The 10% increase over a decade was attributed to “the cost of tuition rising far more quickly than other prices in the economy at the same time society is pushing to enroll more students from low-income households.” Akers warned, “This reliance on debt is unlikely to let up in the coming year.” She worried that as the loan burden and student debt rises, there is little increase in wealth or income to offset it, which could pose major problems down the road.

Akers also discovered that out of approximately 21 million undergraduate students enrolled in 2007-2008, 35% had taken out student loans. By 2010, Akers said that 40% of adults under the age of forty had some outstanding (i.e. existing) student loan debt. An astonishing 50% of tuition expenses are funded by taking out student loans, which was a 10% increase from the previous decade. According to the public record, dependent students (those who rely on help from family and parents for tuition), can borrow up to $5,500 in loans for their first year, $6,500 their second year and $7,500 for their third year and beyond. Independent students can borrow up $9,500 for their first year, $10,500 their second year and $12,500 their third year and beyond. The lifetime borrowing limit for dependent students sits at $31,000 and for independent students, $57,000.

Graduate students can borrow up to $20,500 per year and with a maximum of $138,500 over a lifetime, as well as borrowing at a higher interest rate in the PLUS loan program. Now, all the loans and limits are set by the Ensuring Continued Access to Student Loans Act of 2008 and cannot change without more legislation, said Akers. Without any further changes in the loan program, students will continue to turn to private loans, which can be costly. In Akers’ words, “Unlike other forms of consumer credit, student loans are generally not dischargeable in bankruptcy, meaning they must be repaid in full.”

Another part of her study focused on data taken from the Survey of Consumer Finances (SCF), which is administered by the Federal Reserve Board. The survey found, “28 percent of households hold some amount of student loan debt, 36 percent of households surveyed in 2010 had outstanding debt. Among these households, the average, per-person balance is $14,902.” Students who have some college education, but have not completed their degree, have an average of $3,904 in debt. Those who have a bachelor’s degree average about $6,987 in debt and graduate student households hold about $14,725 in student debt.

Akers compared how student debt affects these students and whether they can pay their bills on time. She found, “Nearly one-third of households, regardless of their borrowing behavior, report they have made late payments on bills at least once during the last two years. Households with and without student loan debt reported making late payments at similar rates: 28 percent for households without debt and 29 percent for households with debt.”

Also, 14% of households that had student debt paid bills that were more than 60 days overdue, compared to 11% of households without student debt. Thirty-seven percent of students that have at least a high school education paid their bills late, with sixteen percent of them paying bills that were overdue by more than 60 days. Only 35% of those with some college education paid their bills late, compared to 14% of those with a bachelor’s degree and 12% of those with graduate degrees. She said, “Households with more education [are] better able to withstand financial shocks without missing bill payments.” And, Akers concluded, “The highest rates of financial distress…are seen among households with the lowest levels of educational attainment.” Also, 37% report that at least one of their student loans is in deferral, meaning they’re having financial hardship and are using the federal safety net provisions to protect them in the meantime.

Comparing the levels of education, the study found that those with a high school education earn around $25,000 per household, some college at around $33,000, $52,000 with a bachelor’s and $66,000 with a graduate degree.

She suggested that placing arbitrary caps on federal loan limits may not restrict over-borrowing by cash-strapped students, and does not solve the financial hardship problem facing aspiring college students. Perhaps, she said, a complex but more flexible payment system could resolve the student loan and debt issue.

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