“Student debt in the U.S. stands at a record high of $1.1 trillion– it now surpasses both auto and credit card debt. According to a study by Fidelity 70% of the class of 2013 is graduating with about $35,000 in college-related debt.
And it could get worse. On July 1, interest rates on federally subsidized student loans are set to double from 3.4% to 6.8%. Nearly 7 million students will be affected by the rate increase, adding around $4.3 billion to the student debt burden next year.”
Student loans are recourse…they cannot be expunged in bankruptcy. But if they cannot be repaid for years and years, they will act as a long-term brake on fiscal progress for our youth and for the economy. Loans should not be free, but the borrowing costs have to be manageable–ie., possible to afford along with principle repayments over a reasonable period of time.
In 1991 I graduated from law school with $60,000 in student loans and the interest rate was 11%! Hard to believe today, but mortgage rates were also at a similar level at that point. Even managing to earn a 6 figure income starting in year 2 of my career, it still took me 5 years to pay off my student debt, and during that time the payments certainly restrained my ability to afford other discretionary spending and durable goods: I didn’t take trips, walked and took the bus–rather than buying a car. All of which is good and healthy incentives to work your way out of debt as soon as possible. But few young people are coming out of school today with strong earning power never mind high earning power. If the situation is hopeless, people will have no reason to strive. This is a big issue facing young and old today. Eventually, we are all in this economy together.
I am not a fan of bail outs–bailouts engender a lack of financial discipline– but, rather than bailing out reckless banks and antiquated car manufacturers again (who need to go through a deserved creative destruction in order to clean house and change their culture), the economy would be better served by helping students restructure and refinance their debts into feasible terms. We all have a vested interest in getting young people to a place of financial resilience.