Is it Possible to Solve the Debt Crisis?

Is it Possible to Solve the Debt Crisis?

Introduction

Student debt refers to the loan that a learner takes from a financial provider. The money owed to the financial institution subsists while the student is an undergraduate or after their graduation. Also, student debt may accrue in case the learner withdraws from school altogether. In the past decade, the obligation owed by the learners to the lending institutions has almost tripled the previous figure owed ^{15 years}. In 2006, the outstanding arrears were about $500 billion. However, by 2019, this figure has shot up to around $1.5 trillion (Johnson, 2019). The interest rates on the loans seem to get higher, while most of the students remain underemployed. The current situation has been described as a debt crisis because it seems impossible for the leaners to clear the money owed to the financial lenders. Currently, about 44 million individuals have student loans that are yet to be fully paid, or they have defaulted altogether. Johnson (2019) states that the current debt is projected to rise to about $3 trillion by the end of the current decade. For policymakers and stakeholders of higher education, the biggest concern is whether the student debt can be solved. This literature review will discuss the main factors that have led to the current state, including the government’s role and the part played by the institutions of higher learning.

Literature Review

The Involvement of the Federal Government

After World War II, the USA and Russia were in a constant struggle to dominate the political, social, and economic matters of the world. In the late 1950s, the government passed the National Defense Act that was meant to provide loans to university students who undertake technical courses such as mathematics and engineering. This was supposed to ensure that the Soviet Union did not outdo America in the bid to conquer outer space. At this time, the adult population that had successfully completely tertiary level education stood at just under 5%. There was a need to create more opportunities for people in the higher education sector. Therefore, in 1964, the Senate enacted the Higher Education Act. This legislation has been considered as the genesis for the current student debt crisis (Edwards, 2016). The law was aimed to provide financial assistance to learners who had completed their high school education. Students pursuing high education could either be given a non-repayable grant or a loan that had to be paid at some interest.

The net result of available loans was a tremendous increase in the number of student enrollment in institutions of higher learning. Consequently, the higher demand led to a drastic increase in the cost of tertiary education. Reforms to the Higher Education Act allowed for students to get financial assistance from private lenders as alternatives to government funding. Edwards (2016) established that this has proved to be a significant factor in the ever-increasing student debt because private loans are primarily more expensive to pay back as compared to the loans from the federal government. As of 2018, the private loans attracted an average interest rate of about 9%, while the government loans were to be paid at fixed interest rates of either 4.45% or 7% depending on the figure awarded. However, government funding has reduced considerably, and this has left students to opt for private financers to facilitate their higher education. Considering the costs of education have been rising at higher rates than inflation, the net result has been the ballooning student debt crisis.

The government has a chance to rectify the role it has played in the current dilemma. It has been proposed that the federal government should reform the income-driven repayment plans. The IDR was developed by Congress to allow borrowers to have flexible terms on the repayment of their loans. The graduates are to make payments based on how much they earn, and they get forgiveness after the settlement of a particular sum for a specified period. However, the IDR has left some graduates in a worse state. In case the borrowers are yet to get substantial employment, the income-driven repayment plan allows them to reduce the amount of money to be repaid. This creates enormous accumulated interests that are virtually impossible to clear off. Edwards (2016) states that refinancing is an option that the government could effectively adopt to help students out of debt. This should be used to reduce the interest rates that apply to students’ loans. Also, the government has a more significant role to play on informing students of the cost of higher education. Most students make uninformed decisions when they are taking up loans. It has been established that most of the learners do not have the necessary financial literacy to comprehend matters financing. The federal government has to make them recognize which majors are worth the substantial loan amounts. Thus, the students have to train on fiscal fitness. The cost of undertaking a major at a university should be reflective of the market demands so that the job can facilitate the repayment of the borrowed money.

The Higher Education Sector

After the introduction of the Higher Education Act of 1965, a lot of people who had completed high school opted to pursue higher education. The higher demand significantly impacted the costs of education at institutions of higher learning (Kimberling, 2018). For instance, in the 1980s, a four-year program at a private university had an average cost of about $25,000. However, at the current trend, such a figure is only sufficient to cover the expenses for a single year at a private institution. This typically represents an increase of over 200% on the cost of higher education. The significant rise in tuition fees has resulted in a direct upsurge of loan intake. The loans are taken by the students so that they can be in a position to afford the requirements.

The reasons behind the increase in tuition fees have remained ever elusive with no concrete explanations. Johnson, (2019) posits that the institutions of higher education have continuously increased the sizes of their faculty staff. The specialized courses being offered by most institutions have been duplicative. This has created a situation of redundancy in the classes that are provided to the public. The bloated administration also leads to an increase in the non-teaching and non-academic staff. The net effect is an increase in the tuition fees that the students have to pay to sustain the services of the support personnel. Eventually, this has led to higher costs of higher education because the students have to foot the salaries and benefits of the faculty (Johnson, 2019). Furthermore, the value of learning public institutions of higher education has been primarily attributed to the reduced funding from the federal government. During the financial crisis of 2008, the government considerably cut down the financing of higher education. By 2018, the average spending by states on education had reduced averagely by $1450 below the amount of aid that was given before the great recession. This led to tuition increases in most of the universities and colleges. Therefore, most of the higher education obligations had to be catered for by the students and their families. Unfortunately, the recent adjustments to increase the funding have not kept up with the rising fees.

Social Factors

Kimberling (2018) argues that historically, higher education was perceived to be a prestige for the rich. This is because only those who could afford universities could attend them. At the advertent of the student loans, the people from well off families were given more priority on the basis that they could repay the loans after their education. Thus, the learners from poor backgrounds had to be content with a high school diploma until the necessary reforms were made to the Higher Education Act that created student loans more accessible. For instance, an individual’s background no longer became a factor before the credit was given. However, this has not changed the prospects of the students who are from poor backgrounds and attended nonprofit schools. It has been such learners who are mainly from the historically marginalized groups are the biggest delinquents and defaulters of the loans that they receive. Looney and Yannelis (2015) have argued that marginalized communities have to face constant biases against them at the workplace.

Also, their educational background due to attending relatively low-quality elementary and high schools and the subsequent enrollment to two-tier colleges leaves them disadvantaged in the job market. It becomes hard for them to compete against their peers who have attended the full four-year degree programs. The delayed payment of federal loans or complete failure due to such factors has inevitably led to an increase in the overall student debt. This is because the interest rates keep accumulating, and the figure to be repaid gets more significant even though the individual may be underemployed or not employed at all. Elliott & Lewis (2014) posit that such factors may make the students never to recover from having complete economic freedom. Thus, the shift from the traditional borrowers of students’ loans to the current state has been linked to the increase in student debt crisis.

Therefore, it is prudent that the students opt for nonprofit institutions instead of for-profit institutions. Mostly, they are less expensive, and this would mean less costs for the leaner. Thus, a student would not find the need to pick out a jumbo loan for their studies. The non-traditional borrowers are increasingly enrolling in private institutions instead of the community or public schools. This ha left them exposed to an unwarranted debt burden that could be avoided if there is more utilization of the community schools.

The Economic Impact of the Student Debt Burden

The student debt crisis poses a potential threat to the economy of the US. The graduates have to bear a burden that remains with them for a considerable time. At least 10% of the students who have taken up the loans end up defaulting. The remaining 90% have to significantly cut on their levels of consumption to be able to save up and pay the accrued amount. The reduced consumption limits the individuals’ ability to own houses or go on vacation (Dynarski, 2015). Also, due to the burden and the urge to repay the loans, the graduates may be forced to pick up lower-paying jobs to facilitate the repayment. The low-skill jobs mean that the leaners fail to get the full benefits of their qualifications from university or college.

Dynarski, (2015) argues that in the long run, the student debt crisis may scare off individuals from pursuing higher education programs. Since the majority of federal loan subscribers are the low-income students, they may shy away from borrowing because defaulting or delinquency remains an ever-glaring possibility (Greogory, 2017). This would have far-reaching ramifications on the US economy because the workforce would miss out on the much-needed skilled personnel. As it is, student loans are a high-risk undertaking that is not sustainable. To cushion the economy from an impending loan crisis, the government should change tact in the issuance of unsecured students’ loans.

Conclusion

The student debt crisis has arisen from what was intended to be a solution to the provision of education in the higher education sector. As things are, university and college education is getting more expensive while the students’ loans are only making things worse. The current situation can be solved if the appropriate legislation and policies are adopted by the Congress and other stakeholders in the higher education sector. The states have to critically reconsider its provision of unsecured loans that are guaranteed by the federal government.

References

Dynarski, S. M. (2015). An economist’s perspective on student loans in the United States. https://www.brookings.edu/wp-content/uploads/2016/06/economist_perspective_student_loans_dynarski.pdf

Elliott, W., & Lewis, M. (2014). The Student Loan Problem in America: It Is Not Enough to Say,“Students Will Eventually Recover. Assets and Education Initiative (AEDI). Lawrence: University of Kansas School of Social Welfare.

Gregory, J. L. (2013). The student debt crisis: a synthesized solution for the next potential bubble. NC Banking Inst., 18, 481.

Johnson, D. M. (2019, September 23). What Will It Take to Solve the Student Loan Crisis? Retrieved March 6, 2020, from https://hbr.org/2019/09/what-will-it-take-to-solve-the-student-loan-crisis

Kimberling, C. R. (2018). Federal student aid: A history and critical analysis. In The academy in crisis (pp. 69-93). Routledge.

Looney, A., & Yannelis, C. (2015). A crisis in student loans?: How changes in the characteristics

of borrowers and in the institutions they attended contributed to rising loan defaults. Brookings Papers on Economic Activity, 2015(2), 1-89.