Is Student Loan Debt the Next Financial Crisis?

There's no doubt that we're all still a little sensitive when it comes to the economy. Although it's been more than a decade since the start of the Great Recession, the world still hasn't let down its guard. The new warning making its way through the financial media is the rising student loan burden. Some believe that this could bring down the economy in much the same way as the 2008 and 2009 mortgage crises, but is that true?

After a nearly three-year payment pause of federal student loans due to the COVID-19 Emergency Relief and Federal Student Aid (CARES) Act, more people are asking what the future holds for a staggering student debt load.

Key Takeaways

  • Federal student loan debt has reached $1.6 trillion as of 2022.
  • It is possible for student loan debt to be discharged by declaring bankruptcy, but this could be more difficult to accomplish.
  • In 2022, the Biden-Harris administration announced debt forgiveness of up to $10,000 for qualified student loan borrower and up to $20,000 for qualified for Pell grant recipients.

Background

For generations, young people have heard that the only path to success is through a college education. College remains the accepted path for 61.8% of high school graduates, according to the Bureau of Labor Statistics.

For most students today, student loans are the way to pay the expenses of higher education. The average student loan debt for a college student in 2010 was $25,250. In 2022, that total has risen to $37,787. Federal student loan debt has reached historic proportions, topping $1.6 trillion in 2022.

Some believe that the problem will continue to get worse. Over the past 50 years, the rate of college tuition inflation has ranged from about 6 to 9% annually, sometimes twice the normal rate of inflation. With college becoming more financially out of reach and the economy largely failing to put college graduates to work, experts believe that more and more people will be unable to pay these loans.

Bankruptcy

Contrary to common belief, student loans can be discharged through bankruptcy proceedings, but it can be more difficult, according to the Consumer Financial Protection Bureau. Federally-issued student loans must prove to be an undue hardship for the borrower and, in some cases, may require an additional lawsuit known as an adversary proceeding to move forward. Some private loans may be discharged directly.

While the knowledge that bankruptcy is an option, it should be the last resort. For many borrowers, student loans have inhibited them from moving forward in other areas of life—starting businesses, getting married, buying a home, and having children have all been listed as life events that are frequently delayed due to debt load.

Student Debt Relief

The burden of student loan debt isn't going unnoticed by the federal government. In 2022, the Biden-Harris administration announced their Student Loan Debt Relief plan, which is intended to forgive up to $10,000 per federal direct student loan borrower under a certain income level and up to $20,000 for those that had qualified for Pell grants. However, the action has been met with legal challenges and remains in limbo.

Before the sweeping relief, targeted debt forgiveness had already taken effect for students who attended predatory or fraudulent schools. Students that attended several technical or vocational schools, such as ITT Technical Institute, may be eligible for federal loan forgiveness.

On a broader scale, the Public Service Loan Forgiveness (PSLF) program allows those that work in public service positions to receive debt forgiveness after 120 qualifying payments while working in a nonprofit or government job. Income-based repayment programs also aim to lessen the monthly financial burden for low-income borrowers.

Is student loan debt getting worse?

Student loan debt has been consistently outpacing the growth of personal income, with the volume of student loan debt having increased from $750 billion to $1.6 trillion from 2010 to 2022.

Can I ask for my student loans to be forgiven?

For federal student loans, it's entirely possible for some or all of your student loan debt to be forgiven. However, different programs have certain eligibility requirements must be met in order for you to qualify for student loan forgiveness.

Do student loans affect your credit score?

Student loans do affect your credit score. Because they are considered a type of installment loan, they are part of your credit report. If you make your student loan payments on time, it can help your credit score, while paying late or skipping a payment will have the opposite effect.

The Bottom Line

There's no doubt that the student loan system is in desperate need of reform, but comparing it to the mortgage crisis may be inaccurate. Although the total amount of outstanding student loans now stands at about $1.6 trillion, that number is small compared to the roughly $11.67 trillion in outstanding mortgage debt.. Programs aimed at lowering the debt burden may help alleviate the pressure on borrowers, but significant reform is needed to avert future debt rising even more.

Article Sources
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  1. Bureau of Labor Statistics. "61.8 Percent of Recent High School Graduates Enrolled in College in October 2021."

  2. Education Data Initiative. "Average Student Loan Debt For a Bachelor's Degree."

  3. Finaid. "Tuition Inflation."

  4. Consumer Financial Protection Bureau. "Busting Myths About Bankruptcy and Private Student Loans."

  5. The White House. "Fact Sheet: President Biden Announces Student Loan Relief for Borrowers Who Need It Most."

  6. U.S. Department of Education. "Education Department Approves $3.9 Billion Group Discharge for 208,000 Borrowers Who Attended ITT Technical Institute."

  7. The Center for American Progress. "Canceling at Least $10,000 of Student Loan Debt Will Help Lower the Cost of Living."

  8. Federal Student Aid. "Student Loan Forgiveness (and Other Ways the Government Can Help You Repay Your Loans)."

  9. Citizens. "How Do Student Loans Affect Your Credit Score?"

  10. Federal Reserve Bank of New York. "Total Household Debt Reaches $16.51 trillion in Q3 2022; Mortgage and Auto Loan Originations Decline."

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