I found an interesting article yesterday on Forbes that claimed that the real problem behind the burgeoning student loan crisis is not the trillions of dollars in outstanding loan debt.
Instead, the article claims, the problem is that many people are not paying their loans even though they can afford to.
Why? Because they’re convinced that all student loan debt will soon be wiped away by a government plan to come and rescue them.
The Numbers Behind the Student Loan Problem
While the article writer did acknowledge that there is a percentage of people with legitimate problems when it came to student loan repayment (namely those who didn’t finish school and have no degree but still need to earn enough to cover student loan payments along with other expenses) the numbers he shared showed that there might be some truth to his theory.
Recent studies show that Americans owe approximately $1.4 trillion in student loan debt. The average 2016 class graduate had $37.172 in student loans – yikes!!
But what about default rates compared to loan balances?
“The rate of borrowers who are in default or more than 90 days past due is approaching 40% and total student loan debt is around $1.4 trillion, making it sound like this is a problem of out-of-control ballooning debt. However, the average student loan balance for students in default is only $16,381 according to a recent report by Demos, virtually identical to the $15,654 balance for people paying on their student loans.”
“Why should these people pay their student loans if there is a probability that all student loans will be wiped away in the near future?” he quips.
For cynics of the education system, such as Mr. Groovy, the author’s theory makes complete sense. It’s tough to feel compelled to pay your student loans when you feel like the rest of the country will be getting off scot-free soon enough.
Why waste the money you earn on paying off your loans when you can be spending it on the average new car payment of $502 a month?
What do you think: does the Forbes’ author’s article and theory hold water?
What’s the Answer?
And if it does, what is the solution?
A cynic might say (and the author of this article did) that the solution is to not allow student loan forgiveness. After all, it’s funny how people buck up and take responsibility for their debts when they know that if they don’t it will indeed affect them in the future.
Loan defaulters are usually not allowed to buy homes or do other grown-up things until they have made good on their student loan payments.
While this type of reprimand might not be a big deal when you’re 21, it might really start to hurt when you’re 31 and your spouse and kids need a place to live.
I Promote Debt Free (or as debt free as possible) College
A better way to avoid people defaulting on student loans is to encourage them to not take them out. Here are a few ways we can do that.
1. Help Them Decide Whether or Not College is Really Their Best Option
I hate to burst your bubble, but college is NOT for everyone, and we need to stop forcing every kid to go to college. There are some kids who are meant to be (and would love to be) plumbers, electricians and auto mechanics.
Let them live their dreams and stop forcing them into careers where they will be miserable and have tens of thousands in college debt to boot.
2. Encourage Them to Save Money Before They Go
I know this is a novel and often crazy idea, but it is possible for working teens to save their money instead of blowing it on continual trips to the mall and their favorite fast food restaurant or clothing store.
I realize self-discipline is hard, but paying off student loans for decades on end will be more difficult, I promise.
3. Work Hard and Earn Scholarships and Grants When Available
Yep, there are legit ways to get free money for college besides hoping that the government will come and rescue you by wiping away student loan debt and making it the problem of the American taxpayer.
Scholarships and grants abound: just talk to your student counselor about it and make a plan. This website is one place to look.
Looking for more options for debt free college? Check out this article on How to Avoid Student Loan Debt While Earning Your Degree.
It won’t be as easy to go to college debt free as it will to apply for student loans – this I can promise you. But by minimizing the money you spend in college – both on schooling and on miscellaneous spending – and by planning ahead, a life without burdening student loans is possible.
Although my girls are a long way from university my wife and I have already discussed that we will only pay for half of their education. We could pay more, and we may decide to pay more, but we believe that they should have some “skin in the game” so to speak.
Our plan is to discuss the idea of working during high school to save in advance, getting scholarships/grants to help offset their half (which means working on their grades), working during university to help offset some costs (regular jobs or co-ops), or not going to university at all but doing something else that they might be better suited to (we have a few family members in the trades who are doing quite well).
Owen, LOVE your plan, it’s quite similar to ours. I think it really is so important that the kids have some skin in the game, as you mentioned. I know a few kids who got a free ride to college via their parents or a full scholarship and totally blew it.
And why not? They’ve bailed out other industries.
But, I doubt it will happen as there is too much money at stake here and profiteers: gov’t, banks, etc.
Yeah, really. 🙂 I hope you’re right, Aaron. People need to get smarter about not just falling for the “I can get a loan” bait.
Karla and I were just saying that if we won the Powerball (though we always forget to play) then part of the generous giving we’d plan would be some sort of scholarship program. Student loans are sinking way too many young people. And of course a lot of people – kids who would legitimately benefit from college – don’t even go because they can’t afford it or even qualify for the loans. The system is a mess. I’d love to help fix it… just don’t know how. (Unless we win the lottery, then we can hopefully help!)
LOL. Love it!! We talk about doing a scholarship program too. But more than that, I think we need to educate kids (and parents) about doing things differently.
I know a lot of people think that a government bailout would help them, but really, government bailouts help banks not people. Just look at the most recent financial crisis, billions went to aid bank solvency, but the Fed did little to help homeowners who got in over their heads. Either way, most of the loans are guaranteed by government backed agencies rather than banks, so a non-payment crisis would destabilize government rather than banks, and the federal government already has about $19 trillion in debt, so a few hundred billion in non-payment isn’t a huge deal (from the government’s perspective).
Anyways, the moral of my story is this: pay your bills, and don’t go into debt for college.
Amen, Hannah!! I agree with you. We need to stand up for ourselves and educate ourselves. As Ronald Reagan once said, “The 9 scariest words in the world are ‘I’m from the government and I’m here to help.'”.
I actually like the idea of loan forgiveness…for public service. The rules to get it are pretty tight though…10 years of qualifying service for a government or qualifying non-profit, 120 straight made-on-time payments, etc. I realize that’s not at all what the article was talking about, but I think it’s an important consideration (and even this appears to be getting pulled back). That said, I don’t think just forgiving everyone’s student loans “just because they’re expensive” is a good or fair idea.
But I also think that banks and universities need to rethink student loans in general. These are debts kids take on when they are barely able to sign legal contracts, and some of them are for 6 figures. It’s not like banks can repossess degrees either like they can with cars or houses. Those factors both probably contribute to the defaults,
I also think that the banks need to not make the process of paying back the loans so ridiculous. When you hear of people trying to pay extra on the loans and having payments pushed back instead of balances reduced, it also explains why people get snarly about payback. Some of these lenders and servicers have predatory practices that need to be corrected, and maybe those lenders need to be held responsible when they’ve victimized the borrowers through pulling that crap.
The best way to stave off major defaults is not to make these high dollar loans to clueless kids in the first place…and hold the schools at least partially responsible if the kids don’t pay to make sure the schools do their part to control costs and make potential borrowers more conscious of their obligations. And reducing obligations (and potential obligations) is probably the best plan for students.
Forgiveness would be an option IF the government had any money. Wtih nearly $20 trillion in national debt, we just can’t afford it. The other ideas you mentioned like making paying extra on loans easier and not making high dollar loans to clueless kids, that is a terrific start.
I like your thought that not everyone needs to go to college. Amen to that. Let’s do a better job offering technical training and apprenticeships.
Also, it’s my understanding that student loans are not forgivable in bankruptcy, so it sounds like that’s not going to be a solution that works for those in arrears (besides all the other problems with bankruptcy).
Yeah, they’re not forgivable now but many are pushing for the govt to take over and make college a part of free education and just wipe the student loans out. Like our govt can afford that.
That is an interesting question. As a college professor I have not heard a lot of my students defaulting on purpose, but it would be an interesting question. IF they are defaulting on purpose I would be really disappointed in them. While I think student loan debt is a burden they did take out the debt and our responsible for it. Unless they are doing something for forgiveness they are obligated to pay it and even with forgiveness they have to give something back. You can’t get something for nothing.
Thanks for weighing in, Jason. Yeah, I’m not sure where the author of the Forbes article got his facts or if he’s just speaking out of his……. ya know.
But I can see how it would be hard to justify paying back the loans if you think the govt is going to wipe away all student debt in favor of government funded education. 🙁
“There are some kids who are meant to be (and would love to be) plumbers, electricians and auto mechanics.” I know a man who has his PhD, and his son is a plumber. Guess who is earning a higher income? The son. And his dad is so proud of him. If only more “intellectual” parents had his attitude!
That does not surprise me at all. The trades are a really good option for many people. Not everyone is meant to be an engineer, and too many parents are pushing their kids away from so-called blue-collar jobs.
I read an article of a young lady who during the summer between college semesters, applied to every single scholarship she could find. She would win them based on good applications and essays, but also by sheer numbers when sometimes others didn’t apply. She graduated debt free!
I couldn’t dig up the article – but there is free money for others to grab 😀
Love it!! It can be done. Thanks, Chris!
Very interesting post, Laurie! It is interesting to see that people who can afford make payments are intentionally not paying.
There are two simple rules one could follow – (1) never lend money that you can’t forget (2) never borrow something that you can’t repay. These two rules would keep us out of money trouble most of the time.
Great rules, Michael!! Love it – thanks for sharing!
Gotta be honest: I don’t buy the Forbes article’s premise. The forgiveness programs that are currently in place require a set number of on-time payments, so defaulting doesn’t help you under the current system. And I don’t know of any proposals that would change that. Even Bernie Sanders was saying he wanted future enrollees to go to college for free, not that he was going to erase all debt (at least as far as I could tell).
The idea that people are voluntarily defaulting because they think some politician is going to swoop in and save them seems highly unlikely. Even if Bernie wanted to forgive all debt, he got womped by Hillary in the primary and she got beat by Trump in the general. Republicans control both houses of Congress and the White House. No progressive, left-wing policies are going to be coming any time soon.
Plus, the only evidence he provides is that the balances of the payers and the balances of the defaulters is similar. That doesn’t tell us anything about their situation. It seems more likely to me that people that are defaulting are probably people that have lower incomes, larger families to support, and/or higher cost-of-living home bases.
(None of this is to detract from your debt-free college points. I am with you on all of those. :-))
Always appreciate your perspective, Matt. Yeah, I don’t necessarily agree with the guy either, but I find it interesting to read their thoughts. Of course, all of those problems would be solved if people just avoided student loan debt in the first place. 🙂
The Public Service Loan Forgiveness (PSLF) program is crazy and a person with literally over $100,000 in student loans can have their remaining balance forgiven after 10 years.
To me, college costs are so high (1) a college degree is the new high school diploma so “everybody” is getting one these days which is (2) causing college to raise tuition rates because of high demand and relatively flat supply and (3) colleges, including my alma mater, are building giant athletic and student life facilities that cost a lot of money to design, build, and upkeep.
I agree with your suggestions about saving for college. Thankfully, we have 16 years left to prepare before our oldest is college age.
Great comment, Josh!!! I agree wholeheartedly. People need to wise up to these facts and stop drinking the koolaid! Shame on the education system for promoting the lie. It reminds me of when I worked for a large national bank that had convinced its employees (who were then trained to convince their customers) that borrowing money to live your dream life is a wonderful “opportunity”. One which was followed by the 2008 housing crash, I might add.
The rate of increase in tuition just can’t be sustainable. At least that’s what I tell myself because I have very young kids so we have a ways to go. Like the housing crash…I think the student loan bubble may burst too and universities will be forced to reduce their the ridiculously high tuition rates. Both my wife and I went to state universities…which are still relatively affordable, though still expensive. We both worked during school and my wife also was a resident assistant so she had free housing. That’s what we would encourage our kids to do as well.
Hey, Laurie, Very interesting post really. It is interesting to see that people who can afford make payments are intentionally not paying and I especially like the idea of loan forgiveness, for public service. Bookmarked this article of your will share this article with my near once for sure. Best wishes and Regards.
Yeah, that’s what some of the experts are saying/thinking. Whether or not that’s really the case I don’t know, but it does tend to be human nature to get away with what one can get away with. thanks for the comment!
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