The magnitude of student loan debt amounting to $1.5 trillion continues to be a major cause for concern as it has escalated into a complex and urgent economic and political issue.
As far back as 2005, rising student debt has shown a negative correlation with homeownership. The 2017 Federal Reserve Report on “Student Loans and Homeownership” highlighted this relationship, stating: “The homeownership rate for households headed by individuals aged 24 to 32 fell 9 percentage points (from 45 to 36 percent) between 2005 and 2014, nearly twice as large as the 5 percentage point drop in homeownership for the overall population.”
The report further states that the substantial drop in homeownership rates and its relationship with increasing student loan balances has been identified through the years by economists, policymakers, and the popular press.
To gain a deeper insight, it would be helpful to look into how student loans started, what happened in between, and why things are the way they are now – including the state of homeownership.
Student Loans – Historical Beginnings
It may come as a bit of a surprise, but the United States Government began offering student loans as far back as 1958. The process was more rigorous, and the program focused on helping support studies geared toward science, engineering, and education degrees. Also, the student loan program came into being not as an initiative of the United States Department of Education, but through the National Defense Education Act (NDEA).
The reason being that tensions during the Cold War between the former Soviet Union and the United States escalated when the former launched Sputnik, the first-ever artificial satellite launched from the Earth, in 1957. This led to a common perception that the Soviet Union was in the lead in terms of science and technology. To counter this perception, student loans came into being. In the 1960s, through the Higher Education Act of 1965 (HEA), student loan offerings expanded in support of the objective of facilitating social mobility and providing equal opportunities for those who want to acquire a college education.
The value of a college education is, of course, closely tied to the Great American Dream – which includes the idea of owning a home and raising a family in middle-class suburbia.
The Extent of Student Loan Debt
It appears that the NDEA and HEA (and its subsequent reauthorizations through the years) effectively stimulated people’s desire to attain college degrees. From 432,058 college graduates in 1950, the numbers steadily rose to 839,730 bachelor’s degree holders in 1970. At this stage, 68 percent of federal assistance to college students came in the form of grants. Until this period, the cost of a college education did not increase significantly.
However, the trend in tuition fee costs changed, starting in the late 1970s. The cost of acquiring a college education began to increase yearly – a trend which has continued to this day. In fact, the cost of higher education today has gotten so high it has already surpassed the costs associated with medical expenses and cost of living expenses.
By 2010, the total amount of student loan debt already reached $830 billion. By 2014, the total outstanding student loan debt stood at $1.3 trillion, affecting 44 million borrowers with each person having a $37,172 average outstanding loan balance. And the rest, as they say, is history. Today, as mentioned at the beginning of this article, the total student loan debt stands at $1.5 trillion.
Factors That Contributed to the Escalation of the Crisis
Obviously, a problem of this scale involves many factors, not the least of which is the yearly increase in tuition fees and higher education-related costs. The fact that higher education has been marketed as an indicator of upward social mobility and a key ingredient in the Great American Dream has turned it into a money-making commodity. Private schools and universities, as well as student loan lenders have capitalized on the high value placed on education leading to yearly increases in tuition fees.
It also does not help that student borrowing does not involve stringent requirements and is federally supported, making it initially easy to come by. Programs such as the Public Service Loan Forgiveness initiative (offered to public service graduates) also help encourage borrowing even when such programs can be changed or canceled at any time.
The number of student defaulters is also another obvious factor in the escalation of the student debt issue as about a million student loan borrowers default each year. Based on current trends, forecasters suggest that by 2023, almost 40 percent of student borrowers will have defaulted on their student loans.
After graduation, a lot of students realize that the American Dream is not so easy to achieve.
Some of the jobs they studied so hard to get might be obsolete, given the leaps technology has made. And even if some manage to get employed, they are already saddled with debt that they will have to work on repaying in the next few years. Any default on their part would mean a poor credit score, which can seriously hurt their chances of getting a mortgage. Those who get to borrow, though, usually have to deal with stricter terms and higher interest rates.
This scenario has led to more people delaying marriage (a major factor in homeownership decisions) and putting off buying a home by as much as seven years.
Profile of Student Loan Borrowers
There is no doubt that the student loan debt crisis continues to affect all borrowers; however, not all borrowers experience the effects of having a student loan in the same manner.
In studying and identifying who are the most affected by student loan debt, analysts have noted certain demographic trends, including the following:
- Women own a bigger chunk of the student loan debt.
A report by the American Association of University Women (AAUW) states that: “Women hold nearly two-thirds of the outstanding student debt in the United States — almost $929 billion as of early-2019.”
This indicates that women have a higher likelihood of seeking finance to earn a college degree, and tend to borrow more as well. While these conditions do not necessarily complicate matters, the problem begins when repayment starts.
It has been established that women earn only 80 percent of what a man is paid in the same job – a significant gender issue and an economic issue. This lower income does not only translate into slower and more difficult loan repayment, but also a deferment in saving for a bank account, vehicle ownership, housing, and retirement. In fact, in a 2018 Transamerica Center for Retirement Studies Report, it says: “Women report far lower total household retirement savings than men: $42,000 among women compared to $123,000 among men (estimated median).”
- Ethnic minorities carry a heavy burden of the student loan debt.
The Urban Institute has identified people of color, especially those coming from Hispanic and black neighborhoods, as owing more in terms of education debt as they usually have less parental wealth for financial support and higher rates of unemployment.
The findings of the National Center for Education Statistics seem to support the same in the analysis of their findings which show 86.8 percent of black students use federal loans to finance their attendance in four-year colleges, while only 59.9 percent of white students do so. The trend also shows that Hispanic and black students tend to finish schooling with more debt than white students, and that they are more likely to default on their loans.
What is ironic is that some students end up dropping out of college altogether for a variety of reasons, not the least of which is the inability to fund necessary expenses not covered by the loan, and the need to work multiple jobs and support their families. Thus, they end up compounding their problems by not only leaving school without a degree but also after acquiring debt, and not being able to find better employment for not having finished college.
The Housing and Student Loan Connection
This discussion won’t be complete without mentioning how the last global financial crisis (GFC) or economic recession has impacted everyone, even middle-class parents with houses who ended up with little to nothing when the housing market fell. The “forgotten majority” and their children, the struggling students and college graduates of today, have, in a way, “inherited” the consequences of the last GFC. They are part of the segment of the population also affected by student loan debt.
The American Economic Association reported that parents usually borrow money against their property to fund their children’s education. The drastic fall in housing prices during the last GFC affected this facility – with grave results as can be seen. The only choice left is to either drop out of school or find an alternative for college funding – enter student loans.
Economists say that for every dollar drop in home equity loans due to a reduction in house value, it equates to about 40 to 60 cents more in student debt. They also found that housing prices are a crucial factor in predicting student borrowing – even more important than macroeconomic conditions such as labor market conditions.
This is precisely why young people who attended college during and immediately after the recession had to borrow more – because of their parents’ reduced economic capacity.
Effects of Debt on Economic Behavioral Patterns and on the Housing Market
The burden of debt and the added stress from racking up interests in cases of defaults or delays in payment affect people’s economic behavioral patterns in many ways. They have decreased or nonexistent access to credit and have very few opportunities to drastically turn things around.
They may buy less of everything, including food and clothing, and opt for available lower quality alternatives. To stretch their budget, they may end up living in cheaper and generally unsafe neighborhoods. They may not even own a car or end up selling what they have, and usually do not get to own a house.
The need for cheaper rent adds substantial pressure on the government to provide affordable long-term rental infrastructure – which is already a big issue in itself. The surging demand for rentals has also driven rental costs up, further marginalizing the lower segments of society, and adding to the issue of homelessness.
More than 70% of the approximately 50 million millennials in the workforce have debts and repayments scheduled that will eat away a substantial chunk of their earnings, making it unlikely for them to purchase a home in the next few years. This means less residential construction activity geared toward home buyers and a continuing decrease in housing sales. Currently, rentals continue to rule.
Urban centers experiencing an influx of renters have also identified ways by which the surge in renters and the reduction in homeownership can affect their communities. The transient quality of rental arrangements makes for less stable neighborhoods, and generally a lower commitment to community projects, and less participation in civic and neighborhood groups.
Even rural America has not been spared from the effects of the student loan debt crisis. Within six years of incurring debt, more than half of borrowers end up leaving their rural home neighborhoods in favor of urban areas. This shows that rural areas end up losing their college-educated young people seeking employment in urban areas. The long-term effects of this have yet to be seen, and rural policymakers need to come up with ways to encourage their local college graduates to stay.
Future Outlook and Possible Solutions
The scale of the student loan debt is expected to keep growing as it continues to be observed and analyzed. And while there are currently no quick and easy solutions, certain suggestions have been made to alleviate the situation:
- Loan servicers need to be held accountable for misinforming or not providing accurate, correct information regarding loans and repayment options.
- State governments need to increase their involvement in the financing and loan repayment terms based on income.
- Consider loan rehabilitation and consolidation; balance reduction or loan cancellation.
- Make public college education 100 percent free.
- Identify ways to control or curb the cost of education.
- Teach students and borrowers financial literacy.
What is clear right now is that the student loan debt issue has long-term consequences, not only for the individual borrowers but also on the bigger economy and future generations. To resolve it, a concerted effort involving different sectors and the government is necessary.
Are you one of the people affected by the student loan crisis?
If you need assistance, have a query, or seek attorney-based loan reduction services, get in touch with us today.