Could Student Loan Debt Threaten the U.S. Economy?

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A college degree can help one obtain a lot more of this over their lifetime. Credit: By Kotivalo via Wikimedia Commons

A college degree can help you obtain a lot more of this over your lifetime – but does the debt outweigh the benefits? Image by Kotivalo

A college education is worth its weight in gold.

In households across America, parents all but surgically implant the idea that a college education is essential toward improving their children’s financial futures.

They do so with good reason, as the statistics back that notion up. According to a Georgetown University study, people with Bachelor’s degrees earn nearly twice as much money over their lifetimes than students who stop after high school.

Students with advanced degrees earn nearly three times as much. Over a 40-year working career, the cumulative differential is staggering: between $1 million and $2 million.

Considering the fact that overall college costs (including room and board) at public universities averaged $22,261 for the 2012-13 school year, a four-year total investment approaching $100,000 will almost certainly pay off handsomely over time.

Paying for College: Student Loans

With the benefits of a college education clear, the question facing most Americans is how to pay for it. Savings plays a role in many cases, but with the average American family earning $43,000 and possessing less than $4,000 in liquid resources, the ability to pay the bill out of ordinary income is limited. Accordingly, about two-thirds of college attendees obtain student loans as a primary means to cover the costs of advanced schooling, a figure which has grown by 50% over the past 20 years.

The most popular method to borrow for college is directly through the U.S. government. The Department of Education offers a variety of student loan options through its Direct Loan Program, including the following:

  • Direct Subsidized and Unsubsidized Stafford Loans
  • Direct PLUS Loans for parents and graduate/professional students
  • Direct Consolidation Loans
  • Perkins Loans

Regardless of the type of student loan, repayment is typically deferred until at least six months after graduation, and can range as long as 25 years.

Student Loan Debt and Family Budgets

With savings minimal, inflation-adjusted income stagnant, college expenses skyrocketing, and a political agenda to increase the number of college graduates, it would follow that cumulative student debt in the United States is exploding.

72% of graduates possess at least $25,000 in student loan debt when they enter the work force. Furthermore, 16.5% have $50,000, 6% are saddled with $75,000 and 2.5% have $100,000 in student loan debt. As stated above, repayment programs can vary, but monthly payments for those laden with the most debt can top $1,000.

The cost/benefit ratio of a college education, although clear when measured over time, becomes decidedly more hazy in the short term: 10% of student loans that began repayment in 2009 were in default within two years. Another indicator is the percentage currently being repaid. Due mainly to high deferments, just 38% of outstanding balances are presently under repayment programs, down from 45% five years ago.

According to a study by NERA Economic Consulting, 40% of college graduates who carried student loan debt did not believe they had received any consulting as to the impact of the debt they would be carrying over as they entered the workforce. As a result, many never fully understood how long it would take to repay the debt they had incurred.

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