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Original article URL: http://bridgemi.com/2012/05/guest-column-student-loan-debt-is-next-big-bubble/
15 May 2012
By Evan Montague/Lansing Community College
Graduation stories abound this time of year, inspiring students and educators alike with the promise of a career and personal success.
Imagine starting this journey with a monthly payment of $276 for the next 10 years — if not longer.
The average Michigan undergraduate student loan borrower is graduating with $24,000 in student loan debt. According to statistics from the New York Federal Reserve Bank and the United States Department of Education, student loan debt is nearing $1 trillion, even exceeding total credit card debt ($791 billion).
The growth in debt could mean that this is the first generation to fare worse than their parents.
Most of the recent attention has been focused on the pending doubling of the student loan interest rate, which will go into effect July 1. If this change were to go into effect, the rates on new Stafford student loans would go from 3.4 percent to 6.8 percent. This would impact more than 300,000 students in Michigan, resulting in nearly $1,000 in additional loan burden. Finding solutions for dealing with this $6 billion issue, which will impact up to 7.4 million student borrowers nationwide, has much support, but little agreement on how to pay for the lower rate.
Student loan indebtedness and the reliance on student loans as the primary federal student-aid program have resulted in alarming growth in borrowing. Student loans comprise 39 percent of all federal aid administered for the 2010-11 academic year.
The related issue looming large is the increase in the student loan default rates. The U.S. Education Department is transitioning from a two-year to a three-year calculation in these rates. All institutions have seen their default rates increase based on these new calculations.
The fiscal 2009 official cohort default rate published by the Education Department indicated that 10,711 Michigan student loan borrowers defaulted on their loans, leaving the state with an 8.2 percent default rate. Many observers see this as the beginning of the next housing bubble — a bubble nearing the bursting point.
The surest way to impact the growing debt, as well as default rates, is to minimize the reliance on federal student loans. This requires advance planning regarding higher education choices and options.
There are numerous new requirements for colleges and universities to post clear information about costs, outcomes and indebtedness. Financial literacy is an often stated concept and some institutions are looking for support to implement programming, trying to move from short-term borrowing to a long-term approach.
There is no question that the current trajectory is unsustainable, with pending economic implications. There also is no question that, as a state, we need to increase the number of individuals completing continuing education and training for long-term economic development.
Paying for higher education continues to rank as a top concern for parents and students; having an educated work force skilled to meet the demands of a changing economy is a central focus for policy-makers, as well.
Hopefully, these common goals will bring individuals together to begin releasing “air” out of the balloon avoiding an all out “pop!”
Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.