Monthly Archives: May 2014

Student Debt: the Impending Crisis

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May 22, 2014

“Bogged down by college debt; in retrospect, was it worth it?”

Students Debt: the Statistics

The total students’ debt, as of 2014, sits at about 1 trillion dollars ($1,000,000,000,000)! That is correct. To emphasize the graveness of the situation, let’s talk figures:

  • Two third of the students who will graduate from American Universities and Colleges will have some amount of debt to bear.
  • The median student loan debt is about $13,000.
  • College educated graduates who have debt have a net worth of $8700, compared with college educated with no debt that have a net worth of $64,700!! That means that they have a net worth of seven times more!
  • Student debt graduates have additional loans; 16% loans on vehicles and 21% loans on credit cards than graduates with no students’ debt.
  • Debt-to-income ratios have increased for young adults with debts.
  • While the cost of higher education increases, so does the cost of borrowing.

The Impact on Students

What we’ve derived from the above statistics is that the amount of students’ debt is escalating. In the past year, as it passed the 1 trillion dollar mark, it has officially become the second highest form of consumer debt, coming second only to mortgage debt.

What is even more astounding is that while the students’ borrowed for education, it was observed that vehicle and credit card loans have also taken a hike. So, basically, the young Americans are continually drowning themselves it the burden of loans.

The result? Perpetually increasing loans are hampering the growth of these graduates because they cannot find their financial footing.

The difference between graduates who took students’ loan and who didn’t take is absolutely striking. Not only did they owe less debt in terms of vehicle and credit card loans, but they also had relatively high net wealth.

Impact on parents: the Great Delay

Unfortunately, this increase in cost and debt of student loan has coincided with the Great Recession. This means that while students pour out of colleges to start working and pay off their loans, they are held back due to unavailability of jobs.

As a result, in order to make ends meet, they stay at home. And this right here is what we call the Great Delay. The normal age when students move out, buy a house, a car is being delayed further and further as the cost of debt is increasing.

This continuity in the Great Delay may actually contribute to crippling our economy.

The Impact on the Economy of Uncle Sam

So while Uncle Sam is generously providing students with loans, the economy is taking quite a hit. How so? At the moment, the student loans constitute approximately 6% of the national debt. You might not think that it’s a big figure, but its impact on the national debt could be staggering. It could cause the economic growth to slow down, ultimately causing the interest rates to rise.

An interesting point is that the student loans are being financed indirectly by the US tax payers. If students default on their loans, it is the tax payers who take the brunt, who ironically, are ultimately the student debtors.

So is this a lose-lose situation?

What is the solution to this impending crisis?

In the wake of the Great Delay and Recession, law makers are influencing the education sectors to revise their policies by making cost of education more transparent, and educating kids as to what to expect when they graduate.

The question, however, still remains… is that a solution that will rescue the economy? Or should more aggressive methods be applied?