POV: Student Debt Is Hurting Our Wallets and Our Health

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Generation Student Debt is the unenviable hashtag for 45 million borrowers. They believed that you go to college to get ahead. But for one out of every four Americans, that has required taking on more and more debt.

For the first time in US history, total student loan debt exceeds $1.5 trillion, surpassing both auto loan and credit card debt. Each quarter, students (and cosigners) add $30 billion in new debt at interest rates as high as 13 percent. Interest compounds once the loan is taken out, increasing the odds that students will graduate with greater debt than when they started. Even seven years after graduation, many owe more than originally borrowed.

Unlike typical consumer debt, these loans can’t be legally discharged in bankruptcy, so the consequences of default can be severe, a financial albatross. Since the 1980s, the average cost of college has increased almost eight times as fast as wages, leaving a widening financial burden to meet.

Some 70 percent of college students will graduate with significant debt. Many students also are doubling down: 40 percent of loans are linked to graduate degrees. After graduation, student borrowers are expending nearly one-fifth of current salary, averaging $393 a month, in servicing debt. And that debt can last decades, taking an average of 19.7 years to pay off. Many don’t expect the debt to be paid off until they’re in their 40s. For college-educated women, where peak earning potential is at age 40 (more than 10 years sooner than male peers), debt repayment can extend past peak earning years.

Recent public-health studies have shown that student debt can affect stress levels and sleep and lead to depression. This debt burden can fall hardest on people of color, for whom parental wealth may not exist and unemployment rates can be disproportionately higher.

High school students often base their college decision not on affordability, but on factors like the most prestigious institution or where friends are going. Loan repayment options are often confusing, and default rates—even in this relatively strong economy—are now 10.8 percent. A decade ago, it was half that. For those who have dropped out of college, default rates are 20 percent and climbing.

Managing this sprawling financial-health crisis demands a multipronged solution.

1. Government and private lenders need to show greater forbearance, including developing more flexible payment options and at reduced interest cost. Also, there needs to be expansion in the government’s existing income-based repayment plan.
2. Capping the amount of loan repayment to 10 percent of discretionary income should be a viable option for more borrowers. Doing so would relieve some financial pressure and increase the ability of students to pursue careers that best suit their interests and could provide greater societal benefit. This policy could also have the added benefit of freeing up disposable income towards important retirement savings.
3. More emphasis should be placed on the long-term financial benefits of graduating in four years or less, exploring needs-based and academic scholarships and possible grant opportunities.
4. Stakeholders, including lenders and colleges, must do better at teaching financial literacy to students, while disclosing the true cost, risk, and long-term consequences of debt.
5. High school guidance counselors must better advise students and parents about best-fit colleges, linking career paths with appropriate debt levels. There also needs to be greater focus on creative, lower-cost solutions—like attending community college for the first two years before transferring to a more expensive university. In some cases it might make sense to encourage students to work right out of high school, save money, and then attend college.
6. Recognize that college is not the right choice for all students. Many could better prosper by attending lower-cost trade schools than high-priced colleges. Public universities and community colleges can be a cost-effective way to gain a desired degree without putting on excessive debt upon graduation. Private universities must focus on finding new ways to tamp down escalating tuition costs, including offering more online course opportunities and the ability to graduate in three years.
7. More universities could institute “no student loan” financial-aid policies that replace student loans with scholarships, grants, and work-study programs. If colleges are forced to take on more of the financial risk, they may gain added incentive to keep tuition and loan levels manageable.
8. Financial literacy training needs to infuse high school curricula, especially around financial decisions related to how to best pay for college and other postsecondary educational opportunities. Massachusetts just passed financial literacy standards.
9. Companies can acknowledge the impact that sizable student debt has on their employees by expanding employee benefits to encompass loan repayments. Employees who commit to long-term employment could see debt reduced. Such good-faith benefits will help attract and retain talent.
10. Congress could finally address the elephant in the room and abolish legal roadblocks so that student-loan debt, similar to other consumer debt, can be discharged in bankruptcy.

As the ranks of Generation Student Debt grow and gray, they’ll gain more voter clout, forcing Congress to play a greater role in solving this growing financial-health crisis. Previous debt crises have taught us that it is better to address the risk sooner than later. If not, crippling student debt could double by 2025, ballooning to $3 trillion, reducing economic life choices, and further highlighting the sad financial fact that students accumulate much more than just knowledge, friends, nicknames, and diplomas when attending college.

Mark T. Williams, the Questrom School of Business James E. Freeman Lecturer in Management, can be reached at williams@bu.edu. This commentary originally appeared on Business Insider.

“POV” is an opinion page that provides timely commentaries from students, faculty, and staff on a variety of issues: on-campus, local, state, national, or international. Anyone interested in submitting a piece, which should be about 700 words long, should contact Rich Barlow at barlowr@bu.edu. BU Today reserves the right to reject or edit submissions. The views expressed are solely those of the author and are not intended to represent the views of Boston University.