Share  |  Print
The Tom Joyner Show
Money Mondays

February 19, 2018

Large-Balance Student Loans are on the Rise. That is a Problem.
Mellody Hobson on the Tom Joyner Morning Show - Money Mondays
Mellody discusses the wide-reaching effects of rising student loan balances.
 
Today we are talking about student loans again. Why?

We have known for some time now that American college students and graduates are being swamped in a tsunami of student loans. Now, a new study released by the Brookings Institute last week shows that the number of large-balance student loan borrowers – individuals with over $50,000 in student loans – is on the rise. In 2014, 5 million borrowers had these large loan balances, representing 17% of student borrowers leaving college or grad school, up from 2% of all borrowers in 1990. Large-balance borrowers now account for 58% of the nation’s $1.4 trillion in outstanding student debt, and Brookings found that most borrowers who owed at least $50,000 in student loans had not paid down any of their debt four years later. On the contrary, their loan balances had on average risen by 5% as interest accrued on their debt.

Why are we seeing more people who are in more debt? And why are we seeing balances going up instead of down?

The main drivers of these large-balance student loans are rising tuition levels and increased demand for graduate and professional degrees. Nearly half of today’s large-balance student loans are held by individuals who went to graduate school. Students who attend graduate school are not subject to the same federal loan limits that undergraduate students are, allowing graduate schools to charge higher levels of tuition and resulting in higher loan amounts. That being said, tuition costs have been on the rise for undergraduates too, which has contributed to the increases in student loan debt. With regard to balances rising rather than falling, the biggest factor is interest on these loans. Whether borrowers are using debt-relief plans that have low monthly payments, known as income-driven repayment, or they have postponed making payments on the plans, interest continues to accrue, adding to the overall balance.

Have we seen an uptick in loan defaults?

We have, Tom. According to another Brookings study, two in five borrowers are likely to default within five years. Analysis of recently-released data on student loans concluded that almost 40% of borrowers entering college in 2004 are likely to default on their student loans by 2023. Among those students, there was a broad spectrum of risk. Students who enrolled in for-profit colleges were twice as likely to default within 12 years as those who entered public universities, while the default rates for black graduates are five times those of their white peers.

What effects do these loans balances have?

To begin with, the rise in large-balance student loans creates significant financial pressure for those who are burdened by them. When the balances rise or the borrowers default, credit scores can be damaged. Student loans are also not dispensable through bankruptcy, so the debt will be with them until they have repaid it.

The effects are not restricted to individuals. They also ripple through the economy. Student debt stifles spending, as borrowers have less to spend. According to a StudentLoanHero survey, nearly half of student loan borrowers have put off buying a car because of their student loan debt, and a third of shoppers say they will limit holiday spending due to student debt. Forty-one percent of student loan holders have delayed homeownership. Finally, a report from the Federal Reserve Bank of Philadelphia notes that student loans prevent borrowers from starting businesses. Combined, the effects of student loans have wide-reaching, indirect effects linked to slow economic growth and productivity.




The information on this page is provided for educational purposes only and is not tax, legal, financial planning or investment advice. Neither the information nor any opinion expressed in this section constitutes an offer to buy or sell any securities or advisory products. The information provided is general and is not information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security. You should not regard this information as a substitute for the exercise of your own judgment. Investing involves risk.

 
Past performance does not guarantee future results. © Ariel Investments, LLC. This website and all of its content is for informational and educational purposes only and should not be considered to be investment advice or a recommendation to buy or sell any particular security. The mutual funds offered by Ariel Investment Trust are distributed by Ariel Distributors, LLC, a wholly-owned subsidiary of Ariel Investments, LLC. Use of this website is subject to our Terms & Conditions. The Ariel mutual funds referred to in this site may be offered only to persons in the United States. This web site should not be considered a solicitation or offering of any investment products, funds or services to ineligible investors, investors for whom such products, funds or services are not suitable, or investors outside the United States.

Check the background of this firm on FINRA's BrokerCheck
Ariel Distributors, LLC is a member of the Securities Investor Protection Corporation