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Will Student Debt Ignite the Next Financial Crisis?

Steve Schmieder | Sep 16, 2015

Creating a better-educated workforce doesn’t come cheap. In fact, the amount of student debt currently outstanding is close to $1.2 trillion…and rising. An estimated 40 million Americans—many of whom are Millennials and their parents—make up the borrowers. It is estimated that the average member of the recently graduated class of 2015 owes more than $30,000. As such, the cost of higher education is increasingly the subject of public debate.

Complicated Economics

Much of that outstanding student debt was borrowed from the federal government through various U.S. Department of Education programs. Student loan debt is reported to be the federal government’s top financial asset. While the interest from these loans generates revenue for the country, it may be creating a drag as well.

Money that borrowers use for student loan repayment is money that isn’t being spent on cars, first homes or furniture—or being saved for retirement. A variety of surveys, including one released by Bankrate.com in early August, indicate some younger adults may be delaying marriage and the start of their own families, along with big-ticket purchases, because they feel they can’t afford to make additional financial commitments.1

So, though some may be delaying milestone events and curbing their spending, the majority of student borrowers are paying their debt. There is evidence many will catch up and engage in these seminal spending events, according to TransUnion.2 The credit bureau finds that, so far, after a several-year lag, spending tends to get back on track.

But, a growing minority of borrowers are struggling—7 million borrowers are now in default.3 And if their ranks continue to swell, and not everyone does “catch up,” there could be unintended and negative economic consequences with the potential to trigger a crisis.

The borrowers who are most likely to struggle are often those with the least amount of debt. They may never have finished their educations or found the certificates and certifications they earned didn’t lead to pay grades that facilitate repayment. It’s a situation that intensifies their financial dilemma and frustration. And, that frustration is what many on the 2016 presidential election trail are attempting to tap into.

Whether or not student loans foreshadow a crisis remains to be seen. But, if left unabated, the situation may have a serious impact for businesses across industry sectors as well. From an unmotivated workforce—having chosen career paths that offer the quickest way to repaying student debt—to an inability for younger generations to adequately save for retirement and older generations of parents and grandparents depleting their own savings plans to help out, the implications stretch well beyond family finances.

 

Nonhousing Debt BalanceMakingNews-Infographic
Student loans are the second-highest category of household debt after mortgages. The category has risen significantly over the past several years.
Source: The Federal Reserve Bank of New York’s Household Debt and Credit Report 2015-Q2.

 

Manning the Front Lines

Organizations like the National Foundation for Credit Counseling® (NFCC), a Blue Flame Thinking client, provide affordable one-on-one student loan counseling to assist people with student debt,proactively manage the burden and gain relief through the many repayment assistance, forbearance and consolidation programs available to them. And, the organization is helping the rest of us understand the nuances, facts and myths surrounding what has been dubbed the “Student Loan Crisis.” (See our article, “Blogging for Debt Relief.”)

The money the government has lent these borrowers has led to the best-educated generation of young workers…ever. The question now is will that investment pay sufficient dividends to avoid an overarching economic cost.

 

Footnotes

[1] Janna Herron, “Survey: Student loan debt forces many to put life on hold,” bankrate.com, posted Aug. 5, 2015, retrieved Sept. 1, 2015.
[2] Kelli B. Grant, “Student debt doesn’t keep new grads from mortgages: Study,” CNBC.com, posted May 13, 2015, retrieved Sept. 1, 2015.
[3] Josh Mitchell, “School-Loan Reckoning: $7 Million Are in Default,” wsj.com, posted Aug. 21, 2015, retrieved Sept. 1, 2015.

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