As the costs of higher education continue to skyrocket across the
USA and Europe, the student loan debt bubble in America is reaching unprecedented heights as
more and more young adults are not able to repay their loans.
A new analysis from the Consumer Financial Protection Bureau
in America found that only half of the more than $1 trillion in student loan debt
is being repaid. Specifically, only 42 percent of direct student loans
are in repayment while 60 percent of Federal Family Education Loans
are in repayment.
The CFPB also found that 13-14
percent of borrowers are defaulting on their loan, which will have
secondary effects of making things like buying a home or a car that
much more difficult. Experts have said this could create an entire
generation of students who can’t achieve the American dream.
An
additional 18 percent of former students are either in deferment,
putting off paying the loan, or in forbearance because they don’t make
enough money to be able to pay the loan and make payments on the rest of
their bills.
The CFPB said there are several ways to
reduce payments including a plan called Pay As You Earn where payments
are equal to 10 percent of your income above the poverty line and after
20 years any remaining balance is forgiven.
The main
issue with the government-backed student loans, however, is that these
loans have created an education bubble. Both Stafford loans and
private bank loans are given to essentially anyone who applies, and
this has inflated the cost of education overall. On an individual level,
even if a person was to declare bankruptcy later in life, his or her
student loans will still stick.
Therefore, banks can
make risky loans to students because they know that the government
will still back those loans. In addition, with the ease of loan
dispersal, students feel less of an incentive to choose degrees that
will allow them to easily pay back their student loans and may instead
choose programs with less job security.
Unlike
30-50 years ago, it’s nearly impossible for students today to graduate
on time without the assistance of student loans or military grants.
While scholarships can be a viable answer for some
students—particularly those who are eligible for need-based financial
aid—the majority of students can’t rely on scholarships and grants
alone. So not only are loans necessary to achieve academic goals, but
the costs of those goals are increasing as a result of government-backed
loans. Like during the housing market crisis, prices are rapidly
inflating, but people who aren’t particularly good loan candidates are
still getting them because banks know that if borrowers default, then
the government will bail them out.
Pursuing higher
education is a valuable endeavor and can definitely result in a higher
quality of life in the long run. For many, loans are the only way to
afford an education. But the ease of receiving government loans is a
double-edged sword that both expedites the process for people with
solid career prospects and encourages risky behavior by making it
easier for students to get degrees that won’t necessarily be valuable
in the job market. While the increase in student loan rates is a
hardship for most, what may be an even greater hardship is the
difficulty of making ends meet later in life, when crippling student
loan debt prevents individuals from getting what they want from their
careers.
The Dutch government should take note of the above, given the very negative results achieved with the program in the US.
For more: EU-Digest