It’s alarming to see in the headlines that this month
federal student loan rates have doubled. But as it turns out, the federal
rate has doubled only because it’s been gradually halved during recent years;
the new 6.8% rate is the same as in 2006.
If it’s any consolation, private student loan rates tend to
be even higher and offer fewer repayment options than federal loans.
Apparently they’re riskier, too; since 2008, private lenders have increased the
share of loans that require a co-signer from 67% to more than 90% in 2011, and
last year consumers owed more than $150 billion in these loans.
In 2005 the federal rate was 7.9% with total student debt
just over $374 billion; today’s total is about $986 billion. Eight years
ago the average student debt was about $16,000 and today $25,000.
The minimum monthly payment for a 10-year loan for $15,974
at 7.9% is about $193, and for $24,803 at 3.4% it’s $244. At either
level, a graduate with no dependents or other debt, who lands suitable
employment quickly and maintains adequate emergency savings could pull off 120
consecutive, on-time payments.
But at the end of last year, nearly $25 billion was 30 or
more days delinquent. Though younger people hold the larger share of
debt, 2.2 million people over 60 owe a total of $43 billion, with 12.5% of this
amount more than 90 days delinquent. According to Equifax, $3 billion of
student loan debt was written off by U.S. banks during the first two months of
2013, up more than 36% from last year. Collection efforts include wage
garnishment and interception of tax refunds and Social Security payments.
The debt can follow you to your grave.
There is an opportunity cost to any debt, but whether for a
mortgage or for education, unsustainable debt is found in all adult age groups,
income levels and education levels, and it affects the married, single,
widowed, and divorced. Desperately grasping for any shred of hope, people
become vulnerable to fraudulent debt reduction schemes. Moreover, debt
has been clearly linked to embezzlement, family discord, lowered worker
productivity, and even suicide.
In any endeavor it makes sense to hope for the best, but to
plan for the worst. During recent decades Americans seem to have mastered
the first condition, and now we can begin work on the second. Even though
no plan can allow for every contingency, some planning is more effective than
none at all.
Unfortunately, it’s easier to qualify for a student loan
than even a credit card, and even commuting students borrow living expenses in
addition to the direct costs of education. There are students – even at
the community college level – who owe tens of thousands and still have no
degree.
Like the majority of Americans who have not endured
bankruptcy or foreclosure during recent years, there are student borrowers who
successfully pay off their loans. Some students graduate with little or
even no debt, sometimes leaving them with hundreds per month in discretionary
income. They’re free to save toward a more dependable car, a home or
retirement, they can spend it at a local restaurant or furniture store, or they
can donate to charities that they hold close to their hearts.
A 2012 study by Inceptia explored 11 possible college
student stressors, and found that only one of the top five was related to
academics, while the other four were related to personal finances. Though
easy borrowing for higher education has certainly made it more accessible to
the masses, instead of making it more affordable it has placed millions of
Americans into a lifetime of debt servitude.
Understandably there is a focus on improving graduation
rates and the push for “on-time” completion. But any new policies and practices
should not discourage students from part-time pursuit of workforce
certifications and degrees while earning a living.
- Newspaper guest column July 24, 2013 Student loans: Don't only hope for the best
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Burnett
is a personal finance instructor and consumer advocate.
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