Student loan debt in the United States has reached an astronomical high. How did we get here?
Beloved astrophysicist Neil deGrasse Tyson once quipped that a stack of a trillion dollars would reach the moon and back four times. So calling America’s student loan debt—currently at $1.1 trillion—astronomical is not much of a stretch. According to the Federal Reserve Bank’s Household Debt and Credit Report, 11.3 percent of that total was at least 90 days past due in the fourth quarter of 2014.
That’s only a .2 percent increase from the previous quarter—but this fraction of a percentage increase represents $31 billion. Student loan debt is second only to household debt in America today—mortgage debt stands at $8.17 trillion—and is said by Forbes to be crippling the economy as a whole.
Congratulations, graduates! Good luck not defaulting on your student loans.
Perhaps more alarming than the sheer size of student loan debt is its rapid growth. Between 2004 and 2014, the average student loan balance increased by 74 percent. During that same time period, the number of borrowers increased by 92 percent. The rising costs of college tuition and the proliferation of for-profit colleges offering alternatives to traditional four-year universities are contributing factors to those statistics.
But who exactly is the typical student loan borrower—and what about the typical delinquent borrower? A close look at the data can provide a few answers. Today, there are 43 million student loan borrowers. The largest percentage of that group (38.8 percent) owes less than $10,000. The second largest percentage (28.5 percent) owes between $10,001 and $25,000. Just 5.6 percent owe over $100,000. And seven million borrowers (about 16.3 percent) are in default (meaning their payments are now at least 270 days past due). As far as how old these borrowers are, the 20-somethings and 30-somethings are almost even, representing 32 percent and 33 percent of the student loan borrowers, respectively.
[quote position="left" is_quote="true"]Only 37 percent of student loan borrowers in 2014 were making regular payments on time.[/quote]
That makes the typical student loan borrower in the U.S. under 40 and owing less than $25,000. The median student loan balance is $14,000 while the average is $27,000.
Going back to borrowers who’ve gone into default: Among the most fascinating statistics is that people with less than $5,000 worth of student loan debt are the most likely to be in default. In the fourth quarter of 2014, that group accounted for 34 percent of all defaults. In fact, the higher the student loan debt, the lower the default rate. People with over $100,000 in student loan debt had a default rate of 18 percent.
This seems to indicate that the borrowers with less than $5,000 in debt either did not complete school and hence job prospects were not available or they did complete an educational program, but the training they received did not lead to lucrative salaries.
In 2014, the federal government sued Corinthian College, a company behind numerous for-profit educational institutions, for predatory lending practices. Additionally, Corinthian students have had $480 million worth of loans forgiven.
“Despite all of this, many former Corinthian students still find themselves saddled with enormous debts for worthless degrees—in many instances, their Everest or Corinthian credits won't transfer to other schools, and employers are rarely impressed by Corinthian-generated credentials,” said Jennifer Abel of Consumer Affairs.
The much lower default rate for those with $100,000 or more in debt is most likely due to those borrowers having graduated from top tier institutions and/or attaining graduate degrees. According to the Bureau of Labor Statistics, people 25 years or older with bachelor’s degrees or higher have the lowest unemployment rate, at 2.9 percent.
As for repayment of this tremendous $1.1 trillion total debt, only 37 percent of student loan borrowers in 2014 were making regular payments on time. The rest of the borrowers were either still in school, delinquent, or in some type of program (forbearance, deferral, etc.) that allowed them to stay out of delinquency. But they were still not paying down the debt—and likely still racking up interest.
[quote position="right" is_quote="true"]Automation is the new discipline.[/quote]
Yet there is hope for change. President Barack Obama has proposed initiatives that could help future college students ease their financial burdens. One measure President Obama has proposed is to make community college tuition-free as long as the student is enrolled at least half-time and maintains a 2.5 grade point average or better. This means that a person either has a tuition-free college degree with which to obtain a job with a sustainable salary or the ability to transfer credits to a four-year university and in essence gain a bachelor’s degree at half the cost.
President Obama has also proposed a Student Aid Bill of Rights that would, among other things, offer borrowers simplified information about all repayment options and reduce the number of questions on the Free Application for Federal Student Aid (FAFSA).
There is also hope for those currently trying to stay out of delinquent status on their student loans. Personal finance expert and best-selling author of The One Week Budget Tiffany "Budgetnista" Aliche has a few tips for student loan borrowers or really anyone with a large debt:
Split your monthly payment in half and pay bi-weekly instead of monthly. At the end of the year, you will have made an ‘extra’ payment without it feeling like a strain. Another simple tip is to submit a written request that instructs them to apply any extra payment to the principal balance, not the interest. Also, if automatic payments save you money in fees or interest, do that. Automation is the new discipline.
Illustrations by Brian Hurst