Student Loan UpdateSubmitted by Headwater Investment Consulting on May 25th, 2016
By Kevin Chambers
In April, we wrote an update on the status of household debt in America. Once again, student loans dominated the data. The outstanding balance has continued to increase, pushing past $1.2 trillion. Student loan debt is the fastest growing debt segment in America. In the last 10 years, this segment has tripled, causing concern and prompting commentators to discuss the possibility of a “student debt crisis” (Swidey, 2016).
However, the Federal Reserve Bank of Cleveland just released a very interesting report that puts the current student debt situation in a different light. The report argues that while most of the focus is on debt balances, more attention should be paid to student loan payments. They found that the average person with student debt pays $351 a month. However, the average is skewed upward by a minority that have high payments. The median is $203. Only 25% have a payment of over $400 (Elvery, 2016).
The average 20- to 30-year-old with at least some college education makes $2,350 a month, $750 more than those with only a high school education. Even using the average, the increased earnings associated with getting an education is double the loan payment. This is an indication that even by taking on the student debt burden, getting some sort of postsecondary education is a worthwhile investment (Elvery, 2016).
As student loan balances have increased, it may be possible to draw some similarities between the growth of mortgage debt before the 2008 crisis. The author points out some important differences. Student loans can be adjusted to correspond to income levels. Borrowers can apply to pay a fixed amount based on their income, then after a set number of years, usually 25, the debt is forgiven. Student loan payments can also be suspended without penalty, such as during periods of unemployment or if the borrower wants to return to school. The biggest downside for student loans, however, is their inability to be discharged through bankruptcy.
Although total student balances are increasing to unprecedented levels, most people have fairly reasonable payments every month. This fact is more evidence that it still a good financial decision to acquire further schooling after high school. There are still some risk factors. Some graduates have a high monthly payment, and any payment is high if the person is unemployed. Borrowers who are most delinquent often have less than $9,000 in loans, indicating they did not finish school (Mitchell, 2016).
When looking at all the information, there is little indication that we need to jump to crisis mode just yet. Nevertheless, the rate of increasing college tuition is unsustainable. Many social and political problems are created with increased tuition and student loans. As prospective students look to attend college, it is increasingly important to look at it from a financial perspective.
Elvery, J. (2016). s There a Student Loan Crisis? Not in Payments. Cleveland: Federal Reserve Bank of Cleveland.
Mitchell, J. (2016, May 24). How Much are Young Americans Paying a Month on Student Debt? Less than You Think. The Wall Street Journal.
Swidey, N. (2016, May 18). The college debt crisis is even worse than you think. The Boston Globe.