Student loan is the type of consumer debt requiring a beneficiary to make necessary payments prior to the due date. Compliance with the set terms allows establishing sound credit history and improving one’s credit score. By nature, student loans come as a sound type of credit, meaning that a person with a student loan stands better chance to receive a higher FICO score; this, however, depends on a person’s ability to make payments timely (The Atlantic, 2015). Further, available options of forbearance and deferral enable a person to postpone the repayment of their loans without lowering one’s credit score. In reality, it oftentimes comes as a challenge for many students to build up a good credit score. The vicious circle is that a student needs a good credit to receive a loan, and meantime getting a loan depends on building up a good credit. Nonetheless, there are ways students can cope with this paradox; for instance, many acquire a secured credit card or address credit unions to get a loan, however, experts claim that utilization of student loans appears the easiest way to establish sound credit history (Debt.org, 2015).
Today, socio-economic costs of student loan debt are staggeringly high. Over the recent years, the outstanding student loan debt has reached unprecedented $1.2 trillion. There are more than 40 million student loan borrowers nationwide, while average balance equals to $29,000. These figures indicate that recently student debt has turned into a serious problem. Worse than that, the tendency of student loan debt accumulation has been growing over time.
Experts alarm that mounting student loan debt adversely affects institutions and overall economic stability and growth of the United States. People dependent on student debt cannot get loans for further purchases or starting their business. This means that student loans present a great concern to every taxpayer. High levels of student debt increase economic inequality and decrease the opportunities promised by higher education. On the one hand, college education promises a better positioning for a person, though, on the other hand, entering a college with debt reduces one’s chances of benefiting from various opportunities and becoming more socially mobile. This explains why student debt problem comes as a great challenge to many (LA Times, 2015).
Experts associate recent increases in student debt levels with perpetual value of higher education. This is because, most Americans consider a college degree as an essential prerequisite of further success in life; statistical figures indicate that college graduates do much better financially than high school graduates. The overwhelming majority of Americans clearly understand the value of higher education for one’s future. Overall, college graduates earn 60 percent more compared to the workers with a high school diploma. Applicants without bachelor degrees cannot benefit from various middle-skill career options. Given this trend, the value of college education has risen over the recent decades and far outstripped inflation. Overall increase in college tuition over the last three decades is mainly to the generation of inelastic demand for higher education enabling colleges to increase costs. Another essential reason is overall decrease in state funding for public education, while the subsidies of private schools are shrinking year after year (Foster, 2015).
According to the College Board, public four-year schools sharply increased tuition fees over the last 15 years from $11,635 in 2000-01 to staggering $18,943 in 2014-15; meantime, average cost in private colleges increased from $30,664 in 2000-01to the record $42,419 in 2014-2015 respectively. Both federal government and private student lenders have recently increased the amount of available student loans over 2005-2011 from $55.9 b. in 2005 to $140.2 b. in 2011. The tendency is mainly to the flourishing market for asset-backed securities that largely depends on student loans (SLABS) (Dempsey, 2015).
Even though the options of receiving student loans have expanded, especially for the beneficiaries with high credit scores who can repay the loans at lower rate, experts in the field express serious concerns. The Consumer Financial Protection Bureau (2012) in their annual report claims that many loan borrowers fail to differentiate between government and private student loans, which led to the spike of default rates on private student loans aftermath 2008 financial crisis. Today, growing rates of student debt are challenging overall economic growth in the United States since million of debtors cannot make plans for further mortgages or homeownership options. Data by the Census Bureau (2015) indicates that nationwide homeownership rate among young people under 35 has sharply fallen over the recent decade from 43.3 percent in Q1 2005 to 34.6 percent in Q1 2015. This means that student debt downgrades housing expectations for many potential borrows making them opt for the lower loans than those they would initially intended. Further, the burden of student debt decreases entrepreneurship and innovation development (usually appearing as startups or small businesses) considered as a core component of economic growth (360 Degrees of Financial Literacy, 2015).
While so far student loans have yet to reach the critical level, the majority of experts and policymakers consider the trend as worrisome while the society requires fundamental steps to ease the burden on loan bearers. The implementation of essential programs on nationwide scale will advance budgeting skills and financial literacy of borrowers. Obama proposed the option of covering the tuition in community colleges for the students showing sound academic performance. These and other aid measures will certainly lower the existing debt burden. Further expansion the Income-Based Repayment program by the Obama administration will allow many borrowers to make loan payments not exceeding 10 percent over a longer period. The Public Service Loan Forgiveness Program envisages partial loan forgiveness options for the qualifying borrowers who work full-time in public service jobs (CNBC, 2015).
