A $1.6 tonnes Burden
By Jayati Mody
Imagine you’re skydiving with a friend. Both of you reach the same altitude by the same airplane but you jump with a faulty parachute which opens up minutes before you hit the ground. You might crash, you might live to see another day, nobody knows. Your friend opens his parachute on time and smoothly sails to safety. That’s what a student loan is. An intricately woven web to capture students’ dreams and make them gasp for breath while they struggle to break free. The United States of America, the greatest nation of the world, is not so great when it comes to higher education. More than 40 million Americans have student loans, owing an average of $37k per borrower or a total of $1.6T, per stats from the Department of Education [1]. Round up a group of five Americans in a restaurant, office or the US Senate’s office. 1 in 5 would still have $100,000+ to pay off in student loans. If it’s a person of colour, double, even triple that figure.
History of Student Loans
The student loan trap stems from the history of the US. In 1958, post-Cold War, Congress passed the National Defense Education Act [2], which offered students scholarships and loans to go to college. Then, during the Reagan Era and the Tax Revolt of the 1980s, state budgets came under threat. Thereafter began the era of slashing financial aid [3] and booming fees. The Great Depression of 2008 further fueled the fire, with education-hungry individuals on the rise, whom private colleges welcomed with open arms, extracting large chunks from their wallets. A fire that hasn’t extinguished and state funding that hasn’t returned to pre-2008 levels even today [4].
Financial and Social Consequences
“The student loan replacement system is complex, outdated and undermines borrowers’ efforts to repay their loans,” says Sarah Sattelmeyer, director of the student borrower success project at the non-profit Pew Charitable Trusts. Taking on a student loan pushes most people into a trap that they find difficult to get out of. A quarter of borrowers default on their student loans 12 years after getting out of college. Failure to repay a student loan entails serious financial consequences for borrowers. Their credit scores take a toll. Legal roadblocks such as wage garnishment, withholding of federal benefits and tax returns may also follow. Current trends do not paint a rosy picture for the future, with aggregate student loan debt expected to reach $2 trillion by 2024 and $3 trillion by 2038. This rings a knell for the US economy in general and its citizens in particular. The devastating effects of student debt go beyond financial repercussions. They affect people’s ability to get a job, rent a house, set up a business and even decisions involving marriage [5].
US’s Structural Issue
Student debt is a problem in countries worldwide, but particularly in the US owing to the administration’s laxity towards this issue. The country’s laws with regards to repayment of debt and bankruptcy add to the crisis. Although, current politicians have expressed interest in this subject. In his first official acts as President [6], Democrat Joe Biden proposed $10,000 in debt forgiveness for every American with federal student loans. Research has shown that even student loans don’t affect everyone equally. President Obama paid his student loan from Harvard Law only 8 years before holding office. For a person of colour [7], a college degree is more expensive compared to a white individual. This stems from the fact that they borrow more while they’re in college and earn less later. This systematically reduces their wealth, creating a vicious cycle where blacks have lesser resources to go to college. They also are more likely to experience growth in what they owe after leaving school and are more likely to default on their loans, even when they have college degrees.
Recommendations
When it comes to the notorious student loan, the faster you pay the loans off, the cheaper they are going to be in the long run. The student loan crisis is one crippling the nation, but it can be averted. Money coaches and pages across the US, such as Elle Woods, Ellevest and Athena Bank, regularly share tips and insights on how one can work around student debt. One major recommendation, common to all, is to get into the habit of regularly reevaluating how you pay your student loans. If you need help, ask. But don’t pay for it. Scams are abundant, but free resources such as the Department of Education website and groups like TISLA are equally abundant. All you need is some research and mentorship. Policy makers suggest turning the screws on what schools charge and regulating for-profit colleges more rigorously. The government should make all federal loans interest-free and lower costs for the first two years of college. Automatically enrolling borrowers in income-based repayment plans [8] would also protect them against loan default. This would be a good start to keep many students on track and out of a downward spiral.
College should be a stepping stone for success, not an immovable boulder standing in one’s path. Young people have so many ambitions and dreams. It’s the duty of society and the government to make things easier, both for existing and future borrowers. The last thing we want is for students to think twice before enrolling in university, simply because of student loans. It’s a horror story that we don’t want our future generations to read.