The student loan debt in the United States is being compared to the bond market and this presents new and unforeseen risks for investors. Student loans are not usually secured and the delinquency rates have been recorded to be higher than those of mortgages or auto loans. There are also loose underwriting standards when disbursing the loans and also, there is no option to use bankruptcy to charge off student loans that are non-performing. At the end of the day, there is a substantial amount of student loans that is defaulted and the United States Treasury shoulders this risk.
Despite the fact of increasing number of defaulters and that this does not in any way pose any systemic financial risks, the loans negatively impact the households in terms of the rates of home ownership.
The amount of student loans that are secured using assets such as loans is around $190 billion while about $150 billion of those is linked to loans that the repayment has been guaranteed by the government. As for the remaining student loan debt, they are not in ABS format that is provided by the government to students. They constitute the Federal Direct Lending program.
The U.S. economy has clearly been burdened by the student loans. As of February 2017, the Federal Reserve Bank of New York issued a statement that claimed that the student loans have been on the rise for 18 consecutive years. The amount borrowed for higher education has also doubled in less than eight years.
Times are changing rapidly and the cost of living is going up by the minute. In 1980 for instance, the tuition fee for public universities was $2,119 and it has risen by334% to $9,410 in 2017. Private college tuition, on the other hand, has catapulted by 241% from $9,500 to $32,410 over the same time period. Other basic needs like food and electricity have also risen in price by 150% while gasoline prices have shot by 200%.
A college education is still important if one wants to get high paying jobs. Statistics also show that college graduates earn $1.3 million more than high school graduates in their total working lives. When dealing with student loans, therefore, it is important to be aware of the total amount borrowed, the terms of repayment as well as how the loan repayment plan is managed because they will greatly impact one’s budget, credit score and future ability to take an auto loan or house mortgage.
Demystifying Student Loan Misconceptions
Students often ask for information on the student loans available for them from their peers. In the process, half-truths and outright misconceptions are passed along. The first misconception is that it is a good loan. Students often say that if one takes a loan and uses it to pay for a college diploma, then after being employed, the total amount of the loan will not be more than their first year’s salary. Students also assume that the loans will be automatically renewed until they graduate. This is however not the case because loans are given per academic year and so if a student feels the need to borrow again; they have to apply for renewal. Another misconception is that private and federal loans are the same. The truth is far from it. They differ in terms of interest rates, local modification and forgiveness programs. Students also assert that they can always declare bankruptcy to solve their student loans business. This is however not the case unless in very rare and isolated cases where bankruptcy can be used as forgiveness for federal and private loans.
Getting the right and correct information on student loans is therefore important before making the decision to apply for college financial aid. Information is available on FAFSA –Free Application For Student Aid. There is a form that one has to fill and this helps the United States Department of Education to determine those that are eligible and help students meet their financial needs and loan forgiveness consolidation. The information on FAFSA is also used by some states to award grants and loans to the students.
Students and parents are encouraged to inquire on in-state and out-of-state tuition fees, the cost of public vs. private college, the difference between when one will be attending college from home and when the student is going away and also the different interest rates for the different loans available. The important thing is to fill out the FAFSA form early because most of the information needed to coincide with those in the tax filings.