Student Loan Debt | How Dangerous Has It Become?

Student Loan Debt - How dangerous have they become
Picture of Nayreth Garcia

Nayreth Garcia

Content Writer At Gradehacker

As if college wasn’t hard enough, one of the main problems undergraduate students in the U.S. have to face is student loans. If you are a non-traditional student, it’s even more complicated since you have other responsibilities to take care of already. Since this is not a recent problem, in this article, we’ll tell you everything about student loans debt and how dangerous they have become.

The main reason for debt in Americans is a crisis that college students have been struggling with for years, even after they finish college.

More than six in ten (62%) college graduates from public and private nonprofit colleges in 2019 had student loan debt, and they owed an average of $28,950.

At Gradehacker, we enjoy being a guide for non-traditional students. We know firsthand that student loans are one of the many concerns our student clients have, and that’s we’ll talk about student loans and what you need to be aware of.  

The Student Loan Crisis

The U.S. is a country that’s never developed a good system when it comes to how to finance education.

In fact, this report rated the U.S. as “average” when it compared America’s educational system to those of other nations.

Even though the U.S. has made education affordable for millions of undergraduate students by subsidizing it heavily, they still make students carry high student loans for several years after they finish their education. 

While this debt isn’t used all at once by every student (i.e. those who graduated with full-ride scholarships), it’s used by enough people to form a substantial issue over time. The combined number of private and public loans is high, with nearly four million people still carrying student loans that aren’t being repaid.Recent Congressional Budget Office estimates indicate that the government will make $81 billion off federal student loans over the next decade.

Federal student loans are the most common type of debt in America. Millions of Americans are making monthly payments on their student loans used for tuition and other college costs. This is an increase of more than 50 percent since the end of 2009. The average debt per borrower was $33,400 in May 2016.

The government gives millions of dollars to schools every year. Students are so reliant on federal loans, but many drop out of college; therefore, they end up taking on these debts to afford their schooling but do not end up finishing their entire degree. 

This is not a healthy situation as the debt brought on with an end goal in mind is left unfinished and cannot see a return on the investment leveraged with debt. This is comparable to taking out a loan to buy a house, but the house is not completed. At the same time, Americans are experiencing rapid growth in the cost of higher education.

In 2019-20, full-time in-state students at public four-year colleges must cover an average of about $15,400 in tuition and fees and room and board after grant aid and tax benefits, in addition to paying for books, supplies, and other college costs.

What Causes The Student Loans Crisis?

There are three factors that have led to the student loan crisis:

  1. Private loans: Student loans are, first of all, private loans. That’s dangerous because the government does not give those loans out; they are given by individuals and financial organizations. One of the main reasons they become dangerous is that you may get too deeply into debt, which will hurt your ability to borrow in the future. Also, some of the lenders may use predatory practices to get you to take on more loans.
  1. Government subsidies: In some countries, government subsidies to students are more common. In the United States, this practice is basically gone, and many students are borrowing more because college tuition has increased many times faster than income. For that reason, the cost of college resulting in debt is higher than in almost all other wealthy countries since the U.S. pulled back funding for public universities and colleges in the wake of the Great Recession
  1. Disconnected incentives: Some financial organizations pay less attention to student loan repayment than other loans they are issuing. The U.S. Department of Education does not regularly track borrowers. Hence, over 9 million borrowers are in default on their loans, which means that they have not made regular loan payments for nearly a year.

From research in universities, we can see that the leading cause of the national student loan crisis is the fact that most colleges do not take enough responsibility for educating their students about the federal loan process. We do not see universities or colleges making any significant changes in their policies regarding federal loans. 

A study conducted by Jonathan Glater showed that some colleges take advantage of the fact that most students do not have enough knowledge about federal college loans and tend to blame those students who were not well educated about their student loans. For instance, several universities were found to have completely ignored the fact that some student loan crisis has taken place in recent years.

Are There Any Solutions For The Student Loans Crisis?

Since this is a problem that’s been happening for years, the solutions will not only require significant changes but will also take time. Senator Elizabeth Warren proposed the ‘Student Loan Fairness Act’  where students that have loan terms with the government will have the option to pay the same interest rate that the Federal Reserve charges big banks. 

The Student Loan Fairness Act would also offer borrowers the 10/10 loan repayment plan. This means that your undergraduate loan balance will never surpass your original balance, no matter the time it takes to repay since it provides a maximum capitalization of 10% of interest over the loan taken out. It also offers loan forgiveness to public sector employees after only 60 months of getting their loan. For example, if you are making $25,000 or less annually, you would not owe any payments on your undergraduate federal student loans.

On the other hand, in 2018, The Levy Institute published a research project for canceling all outstanding student debt called ‘The Macroeconomic Effects of Student Debt Cancellation.’ This would lead the federal government to assume payments on behalf of borrowers for loans held by private lenders. 

As a result, the current population’s student loan balance would be decreased to zero. Even though it’s a drastic solution to the student loan payment crisis, it’s reasonable to give it serious attention since we are talking about a big radical problem.

As a final solution, there’s Bernie Sanders’ proposal to make college free and cancel direct loans or any loan type and reduce the cost of college; here are the key points of his education costs proposal: 

This hasn’t become a reality yet, but a few states and institutions included some “free college” program variations. Some of these variations are also known as grants or scholarships that ask you for specific requirements to qualify and help you pay for some or all of your college education.

For example, one of the universities that included some of these programs is The University of Michigan. They created the High Achieving Involved Leader Scholarship, promising qualified low-income students a four-year education without paying cost of attendance

Federal Student Loans Are A Highly Alarming Problem

College students are getting their degrees to create a better life for themselves. But today, they’ve become one of the biggest borrowers in the market, fueling their financial burden on easy access to these federal student loans that have reached over 1 trillion dollars in total. And alarmingly with a huge percentage that can go up over the years.

Monthly repayments to student loans are subject to interest. After six years for graduate students, the average student loan debt interest is almost $25,000, and the average balance after ten years is $37,000. Why have student loan debt amounts been increasing for years? The finger is pointed at increasingly rising interest rates. 

Student loan payments are a significant part of a typical family budget; it prevents most students from saving for the future, obtaining a home, opening a business, or pursuing higher-level education—most students from college with debt default within three years of starting their monthly student loan payments.

We hope this article will help you learn more about college loans, and if you want to know how to manage your college finances better or how you can get financial aid, here are some of our articles that could help you: