Debt decade: student loans

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The question of how to pay for college has dominated the past decade. And the response for students across the country has invariably been federal and private student loans, with US school debt reaching historic levels.

Consider these student debt statistics: In 2010, education loans represented 6.3% of total US debt, or $ 760 billion. By the end of 2019, that figure had risen to 10.7%, or $ 1.5 trillion. Student loans have even exceeded the debt accumulated on credit cards and auto loans.

And note that this surge in total student debt came even as the growth in student loans for education began to slow.

Looking back and looking ahead, student loans remain a force to be reckoned with.

Main conclusions

  • Student loans dominate the debt conversation: The outstanding loans almost doubled between the first quarter of 2010 and the third quarter of 2019. And as mentioned above, they went from 6.3% of aggregate US debt to 10.7% during this period, going beyond the categories of credit cards and auto loans to follow only mortgages. as the country’s most widespread debt.
  • The growth in federal student loans to blame: The Ministry of Education’s outstanding government loan portfolio nearly doubled over the same period, from $ 750 billion in 2010 to $ 1.45 trillion in 2019.
  • Delinquency rates reach worrying highs: At the start of the last decade, late payments on student loans were less common than late payments on a mortgage, credit card, or other debt (which include consumer credit and trade in debt). detail), according to the Federal Reserve. But as we approach 2020, student debt default rates now outweigh those for other types of debt, although total defaults have at least declined from their peak.
  • Reasons to be optimistic for the coming decade: Yet even as total student debt has exploded, new federal and private borrowing has declined eight years in a row since a record $ 132 billion was loaned and received for the 2010-11 school year.

Student loans dominate the US debt debate

While mortgage debt dominated the conversation in the 2000s, federal and private student loans dominated the debate in the 2010s. They grew to account for nearly 11% of all debt held in the country.

This is partly why you hear 2020 presidential candidates make bold promises on higher education, including proposals such as mass loan discount To free college for all. The numbers can force their hand.

There are plenty of complaints. You could indicate dear colleges cram loans into financial aid offers, parents struggle to save for school Where students misunderstand the helping process.

The effects of the fastest growing category of debt are also numerous. According to our 2019 survey of young graduates, student debt has hindered their progress toward personal financial goals that boost the economy, such as saving for retirement, investing, moving, starting a business, and spending in general.

Growth in federal student loans has inflated total debt

As noted, Americans’ debt to the Department of Education has grown from about $ 750 billion to $ 1.45 trillion over the past 10 years. But at the same time, the number of borrowers only increased by 25%, from 34.3 million to 43 million.

Which give? For starters, the Department of Education is taking a more active role in student loans.

If you know student loan history, you may be aware that private lenders used to finance government guaranteed debt through the Federal Family Education Loan (FFEL) Program. Banks and other creditors would lend to students under government supervision and hold the debt on their own balance sheets, not Uncle Sam’s.

However, with the 2010 Law on the Reconciliation of Health Care and Education, the FFEL system was rejected and the Direct loan program took its place. Instead of outsourcing loans to private institutions, the Education Department began lending money directly to students without an intermediary (although still using services to manage loan repayments).

As a result, the federal loan portfolio nearly doubled, resulting in Last suggestion from Education Secretary Betsy DeVos that his department completely abandon the lending activity.

Student loan default rates have increased over the decade

Delinquency rates in most types of debt declined during the 2010s as the economy improved, moving away from the Great Recession of 2008 – but student debt did not , However. In 2010, 8.7% of federal and private student debt was 90 days or more delinquent, according to Federal Reserve data. In 2019, this rate was close to 11%.

On the positive side, the delinquency rate for education debt has declined from its peak – nearly 12% in the third quarter of 2013.

Student loan default rates have remained stable over the past seven years, in part due to Income-Based Repayment Plans (IDRs). Federal loan borrowers can use IDRs to cap their monthly payment amount at a more affordable percentage of their discretionary income.

Unfortunately, but not surprisingly, the default rates were higher for older debts. Throughout the 2010s, between 10% and 14% of borrowers in their 40s saw their debt go into delinquency.

By comparison, all other age groups started and ended the decade with single-digit delinquency rates. At the same time, however, borrowers from most age groups struggle to end their debt within 10 years to borrow it.

Student loan debt set to decline over the coming decade

The fate of student borrowers has yet to be decided. For example, a political push for historic legislation could controversial mass loan cancellation promise, or at least improve the Public service loan forgiveness program.

These overwhelmed borrowers could also take matters into their own hands by maneuvering within the framework of the Ministry of Education, perhaps by changing repayment plans or by consolidating, or even by refinancing with a private lender.

The horizon for current and future students at least seems brighter. According to College Board data, new borrowing has declined each year for eight consecutive years, from $ 132 billion in 2010-11 to $ 106 billion in 2018-19. Federal borrowing, in particular, has decreased by about $ 15 billion over the past five years.

On the other hand, the new federal loans among graduate and professional students (in the form of Grad PLUS loans) and new private loan are still on the rise. Each of these peaks reached decade highs in 2019.

However, overall student loans tend to decline, whether this is because families are more aware of the financial aid process or because more students work at university to avoid getting into debt (more). Whatever the cause, the student loan situation could have a more optimistic outlook in the 2020s.

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