Interest rates on student loans are set to go up. Everyone seems outraged. How could they do this to our youth? Real easy my friend! No one in their right mind would run a business like this except the Federal Government. Depending upon what date you use, there is roughly between $902 billion and $1 trillion dollars in outstanding student loan debt in the United States today. The average student loan debt is around $25,000 dollars.
So what is the problem? More than half of the student loans are in deferral or are delinquent. The delinquency rate for federal student loans was 12.31% as of March 2012 while it was 5.33% for private loans. The balances on these deferred loans have grown from $228 billion in 2007 to $388 billion in 2012 – an increase of 70%. Think about it for just a minute. If you walked into a local Pay Day loan office and asked for a unsecured loan of say $1,000.00. What do you think you would be expected to pay? If you guessed between 36% and 48% you would be very close. Why, because these firms write off a high percentage of their unsecured loans every day. Even your MasterCard or VISA, will charge you close to 25% for an unsecured credit card loan.
Student loans are the highest risk loans! No questions asked. Think about loaning money to a student that you are not sure will pass all their courses and stay in school; may or may not graduate with their desired degree; may or may not have a marketable degree that will earn them enough money to pay the loan back; and finally you are not sure when they will become employed after graduation.
There are approximately 37 million student loan borrowers with outstanding student loans today. Nearly 42% of these borrowers are between the ages 30 and 50 years of age. Naturally, students who drop out of college before earning a degree are the ones who struggle with student loans the most. Nearly 20 million Americans attend some sort of a college. Close to 12 million or 60% borrow annually to help cover costs. Couple this with an economy that is not growing fast enough to absorb these job entrants and you have the makings of a disaster where more and more student loans go into deferral or default.
Could we reach a point where the Federal Government would stop making student loans? Yes, it is possible especially considering the default rate that experts are certain will reach 22% in the next 12 months. Is this fair? Not at all, but the student loan program may become unsustainable relatively soon. “The situation is simply unsustainable” said a Dr. Andrew Jennings. “When wage growth is slow and jobs are not as plentiful as they once were, it is impossible for individuals to continue to taking out larger student loans without greatly increasing the risk of default.”
I think the rise in interest rates may be the first in many steps to slow the process of student loan growth. As more and more students graduate with student loan debt, the result is that fewer and fewer of these students will have all the funds necessary to purchase a car, rent an apartment, and begin life on their own. What started out as a truly noble initiative has backfired and created a monster of a problem.