The student loan crisis in America got a whole lot bigger in 2016, according to a recent study.
The Consumer Federation of America (CFA) analyzed the latest U.S. Department of Education data related to the 42.4 million Americans who owe a combined $1.3 trillion in student loans and found a 14% increase in defaults from 2015.
This is particularly troubling given the falling unemployment rate, the stock market continuing to reach record highs and the number of affordable payment options available to student loan borrowers. So why the uptick in defaults?
Why Student Loan Defaults Have Gone Up
Rohit Chopra, a senior fellow at CFA and former student loan ombudsman at the Consumer Financial Protection Bureau, attributed it to the economy being tough for young people just starting out, according to an article in the Washington Post. In other words, although the stock market is rising and the Job Market for Recent College Grads Looks Brighter, it's still very difficult to find well-paid entry level jobs that can enable a student to pay off debt.
President Trump has been critical of colleges and universities raising tuition at such a swift rate. In the 1971-72 school year, combined fees at a four-year public university were $1,832 in today’s dollars. Today, the cost is $31,231 – far above the normal rate of inflation. Meanwhile, public and private universities have expanded their payrolls by 28% between 2000 and 2012 – 50% faster than they did over the previous decade.
Others criticize colleges for graduating students with little hope of finding a job that allows them to pay down their debt in a timely fashion. In January, the Obama administration published a list of schools that have access to federal loans and that failed to show their graduates found decent jobs – students whose loan payments are more than 30% of their discretionary income and higher than 12% of their total earnings. More than 800 schools, 98% of which are for-profit, are in danger of losing that federal funding.
The average amount of debt per student loan borrower has gone up 17% since the end of 2013, largely because the cost of college continues to rise. States continue to give less money to colleges and universities, and students feel forced to borrow to get expensive graduate degrees to compete for the available jobs in the marketplace.
Tips for Paying Down Debt
If student debt is weighing you down, first consider one of the income-based repayment plans. These plans allow you to pay 10% to 15% of your monthly discretionary income to your student loans. You have to reapply each year to recalculate your payment, but for somebody struggling to make enough to pay a larger amount, these plans are an effective way of paying less in the early years when you’re just starting out.
If President Trump has his way, the payment will go up to 12.5% of discretionary income, but loans will be forgiven after 15 years. (See: Trump's Student Loan Repayment Plan: Could It Help You? and Will Students Left with Debt Benefit Under Trump?)
Next, consider starting your career in public service, working either for the government or a nonprofit organization. After 120 payments the rest of your federal loans are forgiven, but be careful; there are plenty of rules surrounding this. Click here to learn more.
Another option is seeking one of the growing number of employers that offer help with student loan payments as an employee benefit (see: New Employee Benefit: Help Paying Student Loans).
Finally, don’t refinance your federal loans to private loans without talking to experts first. You’ll lose some of the special perks and protection that come only with federal loans, including the forgiveness options in most cases. (See: Student Loan Forgiveness: How Does It Work? and Student Loan Forgiveness: What You Need to Know.)
The Bottom Line
If you’re just starting college, experts advise trying to be sure you graduate with loans equal to – or lower than – your expected first year’s salary. And don’t believe the mistaken stories that you can simply file for bankruptcy. The government will even garnish Social Security checks if you don’t make payments.