Student loan debt crisis. What is it?

Date: 01-12-2022

Research has indicated that earning a post-high school degree is one of the most important rungs in the economic ladder. Many career fields require post-secondary education and having a four-year college degree is considered important for long-term earnings as well as mobility. The good news is that an ever-increasing number of high school students plan to apply to colleges.

However, over the last 30 years, average college tuition and fees have more than doubled after adjusting for inflation. Over the same period income equality has increased as well. After factoring in inflation, the average wages for the top quintile have increased by nearly 80% and for the lowest quintile by nearly 25%. Demographics also impacts family income.  We see that college costs are rising faster than family incomes. Unfortunately, the people most impacted by the increases in college costs can least afford it. As a result, there are more students with an unmet financial need. Hence, the number of student loan borrowers have also increased.

Since 2000, the number of student loan borrowers has more than doubled to reach over 40 million and the volume of total outstanding federal student loan debt is approaching nearly 2 trillion US dollars. Student loan debt is the largest source of non-mortgage debt. The default rate on recent student loan cohorts has been climbing as well. This combination of growing student debt and default rate has turned into a huge financial crisis.

Graduation rate varies widely between colleges. We have some colleges where greater than 90% of students graduate more or less on time and at the same time there are programs where less than a third of the students graduate on time. Also, once in college, an individual student’s chances of graduation vary widely. Students who frequently change college majors end up with increased costs and delays in graduation and in many cases drop out.

Earnings potential of students after graduation also varies widely. Factors such as program of study, occupation, age, location and demographics all play a role. More education does not always translate to higher earnings. Median earnings for individuals with a bachelor’s degree in fields such as engineering or architecture can be substantially more than the median earnings for individuals with a Master’s degree in many other fields. All these factors have further impacted the ability of student loan borrowers to service their student loan debt and has further contributed to the student loan debt crisis.

So, while research suggests that college graduates are able to earn much higher than their high school dropouts, a good investment in finishing college depends on the costs and earnings of college graduates compared to their high school dropouts. If students get the college and program decision wrong, their health as well as financial well-being is impacted and many student borrowers get trapped in the student loan debt cycle.