Why Student Loan Debt Is Such a Problem – And How to Fix It
Americans currently have an estimated $1.2 trillion in total student loan debt. What’s more alarming is that over 40% of those with outstanding student loans are falling behind in their payments, or aren’t making them at all. Everyone agrees that this is a problem. But what’s the cause? And how do we fix it?
The Problem with More Time
One of the main reasons why student loan debt is running rampant is because of problems with the economy. You’re expected to begin repayment six months after you graduate. But many people struggle finding employment after graduation.
Six months after leaving college, the best case scenario for a lot of people is that they’re in an entry-level job in their field, which pays barely enough to cover basic living expenses. Others may instead take a menial job paying minimum wage while they look for employment in their field—while still others may find themselves in unpaid internships, or simply unemployed.
In order to keep from defaulting during this time, a lot of people will defer their loans for a short time, or apply for smaller, more manageable payments. But then, when they finally do find a higher paying job, they find themselves with a significant amount of catching up to do, and they still struggle to make payments.
Some people have proposed that the way to reduce this struggle is simply to give people more time to pay off their student debt. But more time isn’t the issue. Many borrowers have been paying off their student loans for 20 years or more. For those who choose to go back to school later in life, student loan debt could cut into their retirement income. They have plenty of time. But during that time, interest continues to accrue, and the total amount owed continues to go up, so that for some, no matter how long they have, they’ll still never reach the finish line.
Pricing Loans by Major
One proposed method of fixing the broken student loan system is this: rather than having a uniform interest rate for everyone, price loans based on each student’s major, and the risk it poses to repayment.
Certain degrees are more conducive to repaying your loans on time than others. So for instance, if you majored in engineering or economics, the chances are higher that you’ll find a good, well-paying job right after graduation and be able to start making payments quickly, than if you majored in, say, philosophy or art history.
Therefore, the thinking is, loan companies should give a lower interest rate to those majors with a higher probability of finding work quickly, since they’re a lower risk as far as repayment. While this makes a certain amount of economic sense, it would likely do little to fix the overall student debt problem, as those with philosophy and art history degrees would still be struggling, and those with engineering and economics degrees weren’t the ones having trouble in the first place.
Others have proposed repayment plans based on income. Rather than a set amount each month, you pay a certain percentage of each paycheck to your loan company, whether you make $10,000 a year or $100,000. Then, after a certain amount of time, if it’s still not paid off, the loan would be forgiven.
Given how much it’s been talked about recently in the media, and by our leaders, it’s likely that the next few years will see some sort of student loan reform. What, exactly, that entails or how well it works remains to be seen. In the meantime, it can help to consolidate your student loans to lock in a lower interest rate, and to talk to your lender about other ways of reducing the burden on you. The sooner you can get yourself out of debt, the less you’ll have to pay in the long run, and the more money you’ll have in general, to put towards more worthwhile endeavors.