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Paid in Full? The Student Loan Crisis
Student loan debt is a universal crisis in our nation that is transcending race, age, and gender groups. A CNBC report illustrates that while student loan debt has slowed in its rapid growth, a looming crisis remains. The current total student loan debt in the United States is $1.6 Trillion. Outstanding loan debt has doubled within the last decade and has tripled since 2006. This $1.6 Trillion debt has critical impacts on the U.S. economy. The Federal Reserve states that the outstanding loan balance accounts for 8 percent of our national income, doubling its share since 2006. Education is currently one of the most expensive purchases that young adults can make. It is “now second only to mortgages as the highest form of debt for all Americans.” The total outstanding loan balance is shrinking very slowly. One cause of this slow reduction has been attributed to repayment issues and high default rates. When a borrower defaults on their loan, they fail to meet their obligation of repayment. Borrowers are simply not repaying their loans. “Over the next few years, the combination of slow repayments and elevated, if no longer growing, levels of new borrowing will likely fuel further increases in outstanding debt.”
Currently, borrowers may choose from over eight different federal student loan repayment options such as standard repayment, income-based repayment, extended repayment and more. The U.S Department of Education provides a detailed explanation for each repayment type. Borrowers choose the best option for which they are eligible. For example, income-based options allow the borrower to repay based on their income level and family size. The article notes the correlation between income-based repayment and the slowly shrinking loan balances. When low income borrowers choose this option their payments remain low, lengthening the time of debt repayment, and keeping balances high.
What are the solutions? Several analysts and researchers have proposed numerous ways to solve the student loan crisis. One of the solutions is financial education. Financial education requirements are sweeping the nation. The U.S. Council for Economic Education (CEE) states that as of 2019, 17 states require a personal finance course prior to high school graduation. Critics have highlighted how fairly easy it is for students to acquire student loans. After completing a FAFSA, within weeks to months, a young adult (possibly straight out of high school) may easily have thousands of dollars at their disposal. “In lieu of high school personal finance classes, most teens either learn from their mistakes or look to parents for personal finance lessons. Unfortunately, not all parents are well-equipped to serve as financial models for their children” (CEE). Personal finance courses cover things like budgeting, insurance, college funding, and more. Financial literacy equips the student to make sound financial decisions. Personal finance and financial literacy courses also educate students on how to manage debt, seeking to reduce the probability that students will default on student loans or any other forms of debt.
If you are interested increasing your financial literacy and personal finance skills, the National Endowment for Financial Education has a free online course database: smartaboutmoney.org.
Questions:
1. Think of a student loan as a product, and the interest rate of the student loan as the price of the product. Student loan interest rates rise. Answer the following questions.
a. In this scenario: Who is the seller? Who is the buyer?
b. How does the increase in the student loan interest rate impact the quantity demanded for student loans?
c. How does the increase in the student loan interest rate impact the quantity supplied for student loans?
2. Imagine that the government has just passed legislation requiring Student Loan Banks to significantly increase the paperwork required to provide students with loans. This legislation has required Student Loan Banks to hire additional staff to process paperwork. Explain how this event will impact student loan rates.
3. Identify whether the following event poses an adverse selection problem or a moral hazard problem in the financial market. a. An individual who was recently approved for a loan to start a new business decides to use some of the funds to take a Hawaiian vacation.
