According to data released this month from the Department of Education, the looming student loan debt crisis appears to be getting closer. Over half of all Direct Loans are now behind on their repayment schedule. This isn’t a small number, as Direct Loans make up the largest percentage of federal student loans.
Increased Debt, Decreased Wages
Per Secretary Duncan’s office, the average debt amount from student loans has ballooned by 28 percent from 2007 to 2013. At the same time, according to the Bureau of Labor Statistics, people with a bachelor degree have seen their weekly earnings decrease by almost one percent. Wages for people with an advanced degree are basically flat, rising only .02 percent over the same timeframe.
At first, efforts to try and avoid having graduates fall behind on their payments seemed to work. An unfortunate side-effect of President Obama’s changes to the repayment programs was that it masked just how much was not actually being paid back. Last year, at an Education Department conference in Las Vegas (yes, that conference), it was reported that over 40 percent of student loan recipients who are in an income driven repayment plan have a monthly payment of exactly $0.
Keeping The Student Loan Programs Alive
While this is an excellent idea for those graduates who are unemployed or underemployed, it is not good for keeping the federal student loan program alive and healthy. Under the repayment plans, unpaid amounts are discharged after 20 or 25 years. This is fair to those people who have honestly tried to repay their student, but it will place a huge burden on taxpayers who will have to cover these debts while also supporting the next generation of college students.
Of course, this isn’t something that has sprung up recently. In March 2013, the Federal Open Market Committee held a meeting on the U.S. economy and the impacts it faces. Many of these committee members felt that the growing student loan debt was not just a growing problem, but that it was having a wider effect across many aspects of the economy than previously thought.
More Debt Means Fewer Opportunities
Specifically, the student loan debt crisis is pulling money away from the housing market. This slows not just housing growth, but also all of the businesses that depend on new home building, further slowing or even shrinking the economy in some areas of the U.S. Looking at it long-term, this same debt reduces the opportunities for people to open their own businesses, slowing a growing economy even more.
The Department of Education also posted more student loan data on its Federal Student Aid website. There are now a number of portfolios that detail loan type and status. Charts include information on how many loans are in good standing, deference, forbearance, those in default and more. As of the third quarter for 2014, over 2.5 million loan recipients are in default for more than $37 Billion. That’s only the loans in default; there are over $160 Billion in loans that are either in forbearance or deferment. Now there are excellent reasons for loans to be deferred or in forbearance; military service and enrollment in the Peace Corps being only two of them. The problem is that many people who are in either status are more likely to eventually default on their student loans.
New Data, New Hope
Advocates for improving the student loan process are particularly pleased to see this new information published. The small amount of loan data available to the public has been one of their major complaints about the system. It’s a pretty basic reason, the more any government program operates in the dark, the more likely it is to hide failures and resist any reform.
Fortunately there is some hope. The states are now taking the lead to reduce tuition at state schools to encourage enrollment. Other states are using free tuition to move people into higher paying jobs within their communities. Between this and new legislation being worked on by the Congress, the best chance for reform and heading off the student debt crisis may just be now.