Student Loan Debt: A Vicious Cycle

Student Loan Debt: A Vicious Cycle

Last updated on August 19th, 2019 at 08:33 pm.

I recently saw a Facebook post that seriously got me thinking about student loan debt. This is not to say I have not done so before – I most certainly have. However, this particular post made me think about things from a new angle.

I wasn’t able to find the original post, but here’s the gist of it. The post said:

It’s easier for an 18-year-old to take on $200,000 in student loans than it is for him/her to be approved for a $20,000 business loan.

The post raised no specific question; this was intended to be a self-explanatory, rhetorical post.

And while this original poster seemed to expect this post to be profound, many of the responses were much more thought-provoking. For example, this is one of my favorites:

So many things; where do I even start? Lots of great points raised here.

Little Risk in Student Loan Debt

This is extremely important. Because there is so little risk in student loan debt, the following happens:

  • Student loans cannot be discharged in bankruptcy. This means that even if the borrower declares bankruptcy, he/she cannot have their loans forgiven.
  • The lender can order wage garnishment of up to 15 percent of your wages at their discretion.
  • With federal student loans, if the borrower dies, the loans will generally be forgiven. But this does not apply to most private student loans. In other words, if the borrower dies without having paid off their student loans, someone else will likely be held responsible.

Regarding that last point: your loans literally follow you to the grave – and back – to find someone who is still liable.

Think of it this way: 2008 taught us a valuable lesson. Or, to be precise, it taught mortgage providers a valuable lesson.

In a way, student loan debt becoming similar to the years leading up to 2008 with one key difference. And the key difference is that lenders have significant levels of protection.

However, those protections make things seem better than they are. Many are struggling to repay their student loans.

With all these safeguards mitigating the risk a lender would normally bear, lenders can lend to nearly anyone with little consequence.

Bottom line – and this why it matters – this works to significantly inflate to cost of tuition. If that cost had to be kept more in line with what people can actually afford, the cost would have to be lower.

Guaranteed Loans Causing Higher Costs?

The idea here is simple. It basically comes down to supply and demand. Let’s say the average student can afford to pay $5,000 for school over the course of four years.

Now, the average cost of attending college in 2017-2018 for in-state tuition of a four-year state college was $20,770. If that cost were to stay the same, we’re looking at $83,080 for four years. If we subtract the $5,000 mentioned, we’re left with $78,080.

Of course, many students will receive grants/student aid/scholarships, but those will vary widely. Since they would be nearly impossible to estimate, we won’t take that into consideration.

If we plug those numbers into a student loan calculator, the results aren’t great. Even over 25 years, that would leave you with monthly payments of $432 based on the 4.45% interest rate on federal student loans for 2017-2018.

The odds are high that many would be unable to keep up with these payments every month.

Student Loan Debt: A Growing Beast

Another important detail in the above screenshot is that student loans could be discharged in bankruptcy before 2005. At the same time, student loan servicers are consolidating with the Nelnet acquiring Great Lakes in 2018.

What we’re left with is a growing beast of just a few student loan servicers who are increasingly insulated. This allows them to lend more and more while making more in return.

The problem with this, as mentioned above, is that it increases costs for borrowers. Because students can borrow more, universities can increase costs more than they otherwise would.

…And A Vicious Cycle

I’ve written before about how the rising cost of college is an unsustainable trend.

The cost is still worth it for the majority of college grads, but starting salaries have remained stagnant. At the same time, the cost of tuition continues to rise at a blistering pace – one that far surpasses inflation.

Meanwhile, colleges increase costs more and more for a number of reasons. One is increasing competition as they vie for students’ attention. Other reasons could be that spending is left unchecked while they make their schools “nice.”

But, again, because lenders take on such little risk with student loans, they continue to fuel the fire.

The whole thing is a seriously vicious cycle. It keeps itself going while continuing to make things worse.

On some level, things seem great; schools are building this amazingly beautiful facilities. And yet, the student loan debt crisis continues to grow.

The Case For Regulation Changes

I know many cringe when they think about increased government regulations. Some assert that markets self-correct and can be left to their own devices.

While that sounds great and is true in a perfect world, we, unfortunately, live in a world full of very imperfect people. I know I’m on the list.

It is difficult for me to what all of the changes need to be. Still, I do think that forcing students to keep their student loans, even in the case of bankruptcy, was a mistake.

I understand the concept here: this is something that can be abused. The borrower declares bankruptcy and they can fix their credit later.

And yet, lenders can abuse things all the same.

At the end of the day, I think those whose pay grade is much higher than mine need to take a good, hard look at this. If they don’t, we could be headed in a seriously scary direction.

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Bob Haegele

Hey there. My name is Bob Haegele and I blog about personal finance here at The Frugal Fellow. I was raised in the Windy City, also known as Chicago. After working for a few years in the Midwest, I’ve bounced around to different parts of the country in my mission to become a full-blown digital nomad. I’m also an alternative energy and EV enthusiast and have recently become semi-vegetarian. Another thing I started doing recently? Dog walking. I’m now doing that as a side hustle and loving it! I’m now working toward financial independence making money via my own ventures. If you’d like to work together, send me an email.

This Post Has 6 Comments

  1. Wow I never know that the lending was part of the reason costs are so high. I have a TON of student loan debt and it’s a weight that hangs over me every day

    1. Yep. It’s a complicated issue and it’s difficult to pin it on any one factor. Still, the fact that lenders are so insulated definitely doesn’t help.

  2. Great post! I definitely learned a lot. I do agree that supply and demand causes inflation; however, it could limit access for some. I personally don’t agree with the concept of bankruptcy or wiping out student loan debt completely, because you should pay your bills. Anyway, great post, Bob!

    1. I don’t disagree that loans shouldn’t be wiped out completely. I think the problem right now is that it’s similar to the pre-2008 crisis where students are being allowed to borrow way too much. That is what I think needs to change.

  3. I’d definitely be interested to see what would happen if student loans could be discharged. I agree that the most likely result would be a freeze in lending, which would necessitate a lower cost of education. But for a few years things would be in a freefall, with schools scrambling to make up their student body numbers.

    But I think at this point we’ve got too many people with crushing debt to let the loans be something that can be wiped out. We’d go through a bankruptcy crisis in this country as people with $100k+ finally saw a light at the end of the tunnel. Still, it might be good in the long-term.

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