With the exception of home mortgages, student loans are the most pervasive form of consumer debt. With a total of $1.6 trillion owed, the average borrower graduates with owing about $37,500.1 As the proportions of the crisis continue to grow, many wonder: how did we end up here?
A Quick History of Student Loan Debt
Decades ago, the student loan market was unregulated. The schools set tuition, and most student loans were offered through private lenders and banks with repayment guaranteed by the federal government. Individual loans were typically on the conservative side—just a few thousand dollars—to reflect universities’ more moderate tuition. As tuition began to creep up, loan sizes grew as well. Even as tuition grew rapidly beginning in the 1990’s, the loan system changed very little to accommodate.
Factors Affecting Student Loan Debt Today
At least three major factors contribute to the current state of the American student loan crisis.
Factor #1: Rising Tuition
Universities and colleges are continually increasing tuition faster than the inflation rate or minimum wage. Between 2000 and 2010, universities raised tuition by about 5% per year. That average has dropped in recent years to 2.2% from 2010 to 2020.2
According to the National Center for Education Statistics, the inflation-adjusted cost of attending a 4-year college has more than doubled in the last 35 years. The average cost in 1985 was $12,551 (adjusted for 2018 dollars); in comparison, tuition in 2018 averaged $27,357. Inflation-adjusted tuition at 2-year schools has also increased substantially, but only by about 40%.3
Factor #2: Pay Inequality
Two-thirds of America’s student loan debt, about $929 billion, is held by women.4 But women entering the workforce face an uphill battle paying down debt. A woman graduating in her early twenties can expect to make roughly 89 cents to every dollar a male counterpart makes. As women age, that number drops. By the time a woman retires in her early 60s, she’s making on average 75 cents to a man’s dollar. And if a woman decides to have a child, she’ll earn even less. Mothers make approximately 71 cents per dollar earned by their male counterparts, or $16,000 per year less than a father in the same position earning about $55,000.4
With the majority of student debt holders facing unequal pay in the workforce, this increases the difficulty of paying down student debt.
Factor #3: False Sense of Loan Forgiveness
Most people taking out student loans are young adults, around 17 or 18. And yet, they’re signing up for a multi-decade commitment. Many borrowers anticipate paying back their loans into their 40s.5
Taking on such a commitment at a young age has, unfortunately, become the norm; many take on this debt without having the experience to think realistically or long-term. Debt borrowers have likely heard of loan forgiveness programs, thinking they’re easily attainable after graduation. But there are strict rules and strong competition for such programs, and there’s no guarantee these options will still be available once a student graduates or meets the qualifications. With the assumption that loan forgiveness is on the other side, prospective students may feel falsely confident in becoming debtors in the first place.
There is also a growing idea that there will eventually be some degree of mass loan forgiveness. In anticipation of this far-from-inevitable relief, some may be taking on more debt than they can realistically pay back or delaying paying off the debt they already have.
Student Loan Debt & The Economy
Student loan debt has ripple effects on the economy. Graduates are cautious about taking on more debt (especially high-interest debt like credit cards), leaving banks earning less in revenue from interest and fees. Lacking the necessary savings for a down payment, recent graduates postpone home purchases, reducing demand and holding down values in the housing market. And with less financial security than generations before, they’re waiting longer to marry and have children.
With millions still out of work due to the COVID-19 pandemic, student loan debt can make financial survival even harder for young people. Despite the moratorium on government-owned student loans, now running through September 30, 2021, students and graduates with private student loan debt remain at the mercy of each private institution.
The student loan crisis is genuine, and many believe it will take a radical overhaul to resolve. In the meantime, consider helping your child or grandchild tackle future education expenses by starting a 529 savings plan. We encourage you to speak with your financial advisor about other options available to help your child access higher education without the family taking on life-altering debt.
Be sure to check out our most recent video, where Ken discusses unemployment fraud and credit card debt.