Getting a college degree was once synonymous with academic excellence and employment readiness for people across the globe. But that was before the economy took a dive. However, now, it has become a debt instrument and a financial burden that has compelled many graduates to either drop out of their educational institutions or look for jobs straight after high school! This doesn’t bode well for the economy as a whole either.
The reason for this crisis lies in the affordability level of the college education and the students’ inability to pay its fee. Sadly, the recent increase in tuition amounts has discouraged many high school graduates from pursuing higher education opportunities or applying for loans. The crisis has taken on epic proportions if we take the stagnant income growth and highly competitive job market into account. In other words, even if students manage to graduate with honors, they find themselves amused with exorbitant college loans which cannot be satisfied with an entry level job.
The loan debt has overwhelmed a majority of college hopefuls and graduates due to a still struggling economy. For people in their 20s and 30s, collecting enough funds to see them through their personal debts is proving difficult. Many take years to pay off their loans either because they cannot find jobs or work that pays enough to allow them to pay their debt in full quickly. Even if they go bankrupt, they will still be in debt since student loans cannot be liquidated. Total outstanding loans have exceeded more than $1 trillion since 2011 compared to the credit card debt, which amounts to $798 billion.
That is one of the reasons why this segment of the credit industry is deemed to be larger than the credit card and auto loan segments. In fact, according to FinAid, the total student loan debt is increasing by about $2,853.88/second. In a similar survey conducted by FICO Labs in which the company analyzed several bank risk managers in 2012, it was discovered that 60% of respondents believe that more and more people are going to ignore their loans in the first half of 2013. As a result, students or those who have pending student loans will face difficulty making ends meet due to their bad credit score. Additionally, since the survey does not take people who cannot afford to pay their loans into account, the actual numbers may be even higher.
In order to address this crisis, serious amendments need to be made in the lending industry. This includes a loosening of the terms and repayment regulations for such loans and a possibly new lending model to nip this issue in the bud before it gets worse.
How did we get here?
For one thing, the government did not take any action to curtail this catastrophe. Secondly, graduates tend to return for higher studies without acquiring employment that can aid them in paying off their loans or that can facilitate their future employability. In other words, students find themselves stuck in a never ending loop caused by a weak economy and lack of lucrative job opportunities. All of these factors amalgamated and resulted in a loan crisis that the country cannot seem to shake off.
According to Patrick Kandianis, the co-founder of SimpleTuition, due to the recurrent increase in college tuitions each year, borrowers tend to borrow more than they can pay off; if the economy falters, they end up borrowing more in order to pay off pending payments. Students with good credit history who cannot pay their loans or have stopped making payments can witness their credit score lower by almost 100 points, but such individuals are few and far between.
Future implications are not so bright either. College grads who find themselves burdened with unpaid loans also tend to put off marriage or raising a family. In fact, even if they do get married, most of their income goes in their mortgage and car payments.
Additionally, since students are finding it difficult to find and hold down decent jobs, their parents are delaying their own retirements in order to support them. So, it’s kind of like a vicious cycle that refuses to abate due to the perpetual economic strife.
Even experts have a hard time deciphering the magnitude of this crisis. According to the Vice President of the Institute of College Access and Success, Pauline Abernathy, there is a dire need for accurate student loan data if there is any hope of curbing this issue before it gets out of hand.
What can we look forward to?
The good news is that this mismanaged industry can still see a turn around, thanks to start-ups. These have been cropping up in the student loan space and have already been responsible for creating and implementing innovative business models. One of their innovations include Crowdfunding, which is a concept that has been responsible for providing lenders straight access to students who require additional funds for their college tuition.
Lenders (or Backers) also have the privilege of hand picking the individuals they believe deserve their loans and who can pay them back in time. Organizations such as SoFi and Upstart are taking part in this practice in order to enhance the selection for such promising borrowers who in turn can manage risks by pooling in smaller amounts per candidate.
Unfortunately, things are going to remain the same until and unless the labor market undergoes a change. This involves creation of opportunities for new graduates actively searching for jobs that can provide them a steady paycheck. There are some organizations that offer loans to students with a bad credit history, but unless the economy stabilizes, such companies may start to dwindle in number. Personal businesses or start-ups can aid in stemming the tide, which the recently passed JOBS Act might facilitate if the owner has sufficient venture funds.