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In the new decade, student loans have been a significant challenge to the economies of many countries around the world. College students used to work through their vacations while universities were closed to increase the fee, but students today are normally not committed to working to raise their college fee, resulting in a heavy reliance on borrowed loans. The rise in college fees is also a major factor that causes students and their parents to go into debt to make up the difference (Glantz, Kissell, Mun & Paul, 2013). The problem of high cost of college fee has raised the query to many people across the world on the importance of attending college, and sometimes most students defer their studies due to lack of adequate finance to settle the expensive college fee.
The research paper will examine the current debt conditions of the student loan debts and discuss some the effects this debt status has to the economy of developed countries such as the United States. Finally, the paper will give recommendations on how to manage this debt to avoid causing adverse effects in the economy.
Current Debt Conditions
The debt level of college student’s loans has risen in the present generation as compared to the previous time. The primary contributing factor is the increased tuition fee that has tripled at the moment when compared with the tuition fee students used to pay in 1980; increased fee crisis affects both private and public universities in the world (O'Connell, 2004). Due to this challenge, students and their families are forced to borrow up to $106 billion from the federal direct loans in the united states and other lending institutions to enable them to attend the colleges, since education is a human right to every child. Using the United States as an example in the study, statistics show that the rate of the current student's loan debt stands at $1.2 trillion. The figure is too high as compared to the existing total credit card debt. These number continues to grow since the US continues to pay college fee for the student to become a significant people in the future.
Rising Tuition Fee and Rising Debt
Rising debt and increasing tuition fee are directly proportional. Statics shows that in the recent two decades from 2002 to 2012 the tuition fee in both private and public university has risen by 40 percent. Prices of other necessities in colleges such as room and boarding amenities also have increased with the same percentage. This rate of increasing tuition fee is almost four times the rate of inflation (O'Connell, 2004). Rising tuition fee in the university is as results of factors such as allocation of fewer resources by the states to the public Universities. For example, in the United States, in the year 2008 -2013, The state allocated funds which were twenty-eight percent lesser on each student in the higher education colleges.
Before united states experience the great recession, the net tuition was around thirty-six percent of all the total higher education revenue; currently, it has increased to forty-seven percent. It implies that students and their families will be responsible for the increasing share of the cost of paying college fee. Many students usually end up in making the difference through student's loan debt. Grants such as that provided by Pell in the United States are important in helping many students from low-income families to raise the fee hence reduces borrowing that will lead to increased debt level.
Various studies conducted in the United States shows that need – based grant aid such as the Pell grant help in increasing the number of low- and moderate-income students to enroll in school and also contributes to their staying in those colleges even after enrolling. Pell grants are also being given to African – American undergraduate students to help them cover their college expenses this contributes to increase of the student loan debt in the America. The other contributing factor for increasing debt level in the United States is that students that receive Pell loans also have other loans. A survey conducted in the recent year in the United States shows that sixty – one percent of the Pell grant recipients also have the student loan as compared to the remaining non-Pell recipients.
In Some instances, the credit and financial grants may not be sufficient to pay the college fee, these many forces students to opt for private loans to help them to meet the fee and other academical needs. Such moves have made private loans debt to increase to $150billion in the United States. Their decision to take a private loan instead of the federal credit can cause serious financial implications to those students in some ways. As opposed to the federal loans, many private lenders do not usually offer borrowers safety net features like deferment, income – based payment and forbearance that accompany the federal loans to students.
The other risk that is associated with private loans is that they are harder to discharge in bankruptcy or in event of death as compared to federal loans. Despite the risks, the volume of private loans has increased in the United States in recent year reaching a figure of 6.2 billion by the year 2012 – 2013. This also contributes majorly to the students' loan debt crisis in the United States.
Students loan debt affects the economy of developed nations such as the United States in both positive ways, and negative ways as discussed below.
The recent report from the white house in the America indicates that students loan debt has a net positive impact on their economy. The main macroeconomic impact of the student loan, in the long run, is mainly through the boosting of the countries productivity from the educated workforce that it provides in the market (Lee & Mueller, 2014). According to the report, student loan debt is crucial in helping the students of America to be able to access the college education, and through attaining higher education level, there are several benefits that the country will obtain from the graduates.
Graduates funded by the huge student loan debts plays a crucial role in increasing the countries income. Student loans enable the students to attain the degree that will help them get a higher income. For example, workforce who reaches a bachelor's degree in the United States usually gains $ one million in their lifetime earnings. High-income rates of graduates show that they will have more money to spend throughout their lives. Increased student debt in the current times lowers the ability of graduates to spend freely as compared to those who graduated in the earlier years (O'Connell, 2004). Graduates usually earn more as compared to non-graduates, and this put them ahead in measurements such as home ownership.
The other positive impact of the student loan debt is that it helps in increasing taxes revenues. Workers who are educated usually earn more as compared to uneducated workers high income earning leads to high taxation hence making the government increase their incomes that they can use in servicing the huge loans used to educate the workforce (Kuzma, Kuzma & Thiewes, 2010). The other positive impact of the student loan debt to the economy is that I help in reducing the rate of unemployment in the economy. An individual with the university degree have a lower rate of unemployment, and they have increased odds that help them in moving up the economic ladder as compared to the now – graduates.
A significant amount of student loan debt stifles spending by the loan borrowers. Many youths continue to struggle with the students' debts many years after their graduating from the various colleges they attended as well as looking for employment opportunity during this significant period of recession. Increased level of debt and economic factors have mainly contributed to the troubling outcome from the borrowers. However, the unemployment rate for the college graduates are slightly lower compared to those without degrees; youth unemployment still stands at 7.4 percent a rate that double the old graduates of the 30s.
High unemployment rates affect a significant number of Latino, and African American populations, many young adults who can find work in these regions, are underemployed and frequently work for reduced wages (Glantz, Kissell, Mun & Paul, 2013). The combination of the high debt level and the poor employment conditions for the graduates’ results to falling behind of the loan repayment that makes the standard of student loan debts to remain high.
Student loan debts usually slow down the development of housing market, high debt level in a country often affects the ability of the borrowers to achieve the financial stability needed in wealth creation and reach milestones such as owning homes, marrying and starting a family (Lee & Mueller, 2014). From the recently conducted survey in America, it was found that sixty percent who secured job can only afford to purchase expensive cars. Seventy percent of the graduates indicated that student loans made them delay investing and preparing for retirement.
Student debt is a very crucial consideration in the willingness and ability of the graduates to buy homes. Many student borrowers who are willing to buy homes usually find it impossible of difficult to be cleared for mortgage loans due to the student loan delinquency or the challenge of high debt to income ratio. The problem of loan delinquency affects almost thirty-five percent of the student loan borrowers in repayment; it frequently creates adverse credit history to the student borrowers that makes the approval for mortgage becomes impossible or difficult. The high amount of debt owed by the student borrower will make the monthly loan payment amount to be high thus makes it difficult for one to save money to pay down payment for homes.
High students' debts hold back the development of new businesses in an economy, according to the research done by the federal bank of Philadelphia, overall more students loan debts usually reflect fewer new businesses (Kuzma, Kuzma & Thiewes, 2010). This is because one out the five graduate interviewed in the research indicated that huge students' debts prevent them from investing in new businesses. Getting approval for the businesses loans also becomes difficult for graduates who are willing to start businesses as a result of huge student debt.
In conclusion, Despite the few positive impacts that students loan debt has to the economy, it is the most problem in developed countries and developing countries that needs to be addressed with a lot of concern. Positive recommendations made by various research conducted in this topic should be implemented and other fee payment methods to be adopted rather than the one that relies on borrowing which results to huge student loan debt crisis.
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Glantz, M., Kissell, R., Mun, J., & Paul, K. (2013). Multi-asset risk modeling. San diego: Elsevier academic Press.
Kuzma, A., Kuzma, J., & Thiewes, H. (2010). An Examination Of Business Students Student Loan Debt And Total Debt. American Journal Of Business Education (AJBE), 3(4). http://dx.doi.org/10.19030/ajbe.v3i4.416
Lee, J., & Mueller, J. (2014). Student Loan Debt Literacy: A Comparison of First-Generation and Continuing-Generation College Students. Journal Of College Student Development, 55(7), 714-719. http://dx.doi.org/10.1353/csd.2014.0074
O'Connell, B. (2004). Free yourself from student loan debt. Chicago: Dearborn Trade Pub.
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