May 15, 2013 -- So student debt is at an all-time high, which has subsequently worked out for the Department of Education, in that it's raking in an estimated $50.6 billion in profit for fiscal year 2013. That's up from $24 billion in 2012.
So just how big is $50 billion?
Consider that Apple Inc. recorded a profit of less than $42 billion in fiscal year 2012. As the Huffington Post noted, JPMorgan Chase, Bank of America, Citigroup and Wells Fargo reported a combined profit of $51.9 billion last year, just slightly more that what the Obama administration is set to earn. Basically, it's a lot of freakin' money.
It's also impacting a lot of freakin' people. There are 37 million student loan borrowers in the United States with outstanding loans at an average of $24,000 per person. At least 15 percent of those borrowers can't even make a payment on time because they just don't have the money. So, how did we end up in this fine mess?
Here are a few reasons:
1. Lawmakers Who Don't Act: Officials at agencies from the Federal Reserve to to the Treasury Department have warned that student borrowing could have long-term impacts on things like homeownership and retirement savings. But that's what happens when a swathe of a country's population is paying off a lot of debt instead of investing what they're making into a home or a 401K. President Barack Obama has urged Congress to address this by, for example, tying interest rates to the government's borrowing costs, which means they would vary based on the market. Right now, Congress is the only entity that can change interest rates, regardless of how the economy is performing.
The problem is that, broadly, Lawmakers have had trouble coming to any agreement on how to address student loan issues, which has left student borrowers with an uncertain future.
2. High Interest Rates: The spread between the government's funding costs and the interest rates borrowers pay has never been higher, noted the Huffington Post. Some low-income students qualify for loans with 3.4 percent interest rates, but most are required to pay 6.8 percent interest, which is lining the administration's coffers with profit. And while lawmakers have introduced various attempts to keep those rates from rising, few of their proposals would help current borrowers. In fact, if they don't act now, interest rates on some student loans that currently sit at 3.4 percent are set to revert back to 6.8 percent in July. Congress voted last year to keep interest rates on Stafford Loans and some other student loans at the lower 3.4 percent interest rate but they only agreed to do that temporarily since lawmakers couldn't agree on how to address the issue in the long run. That's why the rates are set to double again in July unless they can work out a solution.
3. Lack of Understanding: The student loan system is a complicated, often overwhelming, system. That alone, can often lead to less than informed decisions. Take for example, that just 700,000 borrowers enrolled in the administration's Income-Based Repayment program, which helps some people reduce their monthly payments based on what they earn. But the administration estimates the program could help reduce payments for more than double that number, up to 1.6 million borrowers. The problem: Many don't know the option exists or don't know how to apply.
So how do we get out of this mess?
The process is going to be slow and tedious. The economy is still struggling to rebound and many employers simply aren't hiring new workers. That's a bit of a catch-22 because more people are choosing to take out loans to pay for college degrees with the hope it will increase their job prospects at the exact time that companies are tightening their belts.
But there are some encouraging signs.
Unemployment has slowly ticked down. And even if Congress doesn't help the situation, the Consumer Financial Protection Bureau has advocated making it easier for borrowers to refinance or modify loan agreements. There are also scholarship opportunities and resources for students to consult so they understand what they are getting into before they take out loans. It's more work, but it may well be worth it.
But ultimately it is going to come down to each borrower taking the time to consider whether they think their loans will be worth it in the end? Student debt is not necessarily a bad thing, and the return on the investment can be great. It's smart though, to know what you're getting into before you take the dive.
So, it is probably worthwhile to take out $20,000 in loans to pay for a computer science or engineering degree, for example. Those fields are hiring and pay is generally higher than average. An anthropology degree, on the other hand, may not be worth $50,000 in loans. That might be a hard truth for some would-be anthropology majors, but it's better to know before you're saddled with surmounting debt that contributes to a figure like $50.6 billion.