Here’s Why Student Loan Debt Is So High – and What It’s Doing to the Economy
The outstanding student loan debt in the U.S. is having a ripple effect on the rest of the American economy.
With the debt and housing crisis in the rearview mirror, piles of student loan debt are taking center stage and creating challenges to pay it back.
According to the Federal Reserve Bank of St. Louis, since the start of the 2008 recession, federally-owned student debt has expanded from approximately 5 percent of all household debt to today’s 30 percent. And if you look at student debt relative to national income, it has more than more than quintupled during this time.
So how did these high numbers evolve? It wasn’t from growing student enrollment or rising college tuition. Instead, an explanation might be found through the collapse of housing prices, which has forced students to take out more loans to fund their educations, according to Bloomberg.
Home Prices and Borrowing
In a research report by a trio of economists who analyzed how the effects of home price changes affected borrowing, they discovered people tended to borrow money against their houses to fund their children’s educations. On average, a household with a child in college will withdraw an additional $3,000 in home equity. When this cash flow is cut, these kids will either leave school or find other ways to fund their educations.
A major source of funding is student loans. The econ team wrote in their report, via MarketWatch: “for each dollar of home equity credit that parents do not take out, students borrow between 25 and 80 cents."
Furthermore, they found housing prices are a greater predictor of student borrowing than different economic conditions, including the current local labor market, reported Bloomberg.
People who attended college during and following the recession were especially hit hard; they borrowed more as their parents lost their capacity to fund them. They subsequently had difficulty repaying their loans as a poor job market endured for years.
The Long-Term Impact
For students carrying debt, researchers found this affects other aspects of the borrowers’ lives, including the likelihood to have either an auto loan or mortgage. For every $10,000 rise in student loans, it cuts the prospect of early adulthood homeownership by 5.7 percentage points and decreases the likelihood of carrying an auto loan by 6.5 percentage points, MarketWatch reported.
What does the future look like for students? For now, it’s grim. The researchers noted that the increasing dependence on student loans to pay for college could have a long-lasting negative economic impact.
As borrowers try to manage high student loan debt payments with other obligations, they can try to find more affordable repayment plans. One option is student loan consolidation or student loan refinancing which can potentially reduce monthly payments. When you apply for a refinance loan, you are applying for a brand new loan used to pay off your old loans. When those loans are paid off with the new loan, your loans have just been refinanced. This loan will have a new interest rate as well as a new repayment term. If you have a lower interest rate, then your monthly payments should decrease as a result, saving money over the life of the loan.
Author: Dave Rathmanner
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