Get Out of Debt Guy

Student Loan Debt Creates Drag on Economy

Posted April 10, 2013

Student loan debt is fast becoming a major problem in the United States. The level of student loan debt has now exceeded the amount owed on all credit cards. And it's growing.

While many of us have been crying out for some changes to the options consumers have to best handle student loan debt, no new changes are on the forefront. At least no good changes.

One upcoming proposal is to eliminate the fixed rate interest charged on student loans and instead make them variable interest. In good times that's a benefit but in times of high interest rates, the cost of servicing student loans will become a bigger burden.

Another change is an increase is scam companies that are popping up to charge student loan holders for help with their loans they can get for free from the Department of Education.

For the first time I can think of, the Federal Reserve has expressed concern over the level of student loan debt and is starting to pay attention that this debt is putting a drag on the economy.

If consumerism is the heart of the American economic engine, you can only imagine what can happen when people stop spending and start devoting more of their income to making student loan payments.

At a recent meeting of the Federal Reserve Open Market Committee the impression was, "Consumer credit sustained its moderate expansion in December and January. Nonrevolving credit continued to increase at a solid pace because of growth in student and auto loans, while revolving credit was roughly flat."

The Fed also said, "Both fiscal restraint and the high level of student debt were mentioned as risks to aggregate household spending over the forecast period."

If this was a good news / bad news situation at least we can find some comfort that federal backed student loans do have some reasonable programs to deal with the exploding burden of student loan debt. Private student loans on the other hand still do not have an opportunity at income based repayment plans or as many programs to discharge student loan debt completely.

For more information on dealing with student loan payments, see The Ultimate Guide to Dealing With Student Loans You Can’t Afford.

And student loan debt is not just the burden of 20-30 somethings. Americans age 60 and older owe roughly $43 billion in student loan debt and more than 10% are 90 days or more delinquent.

On top of this, more older American's are finding their Social Security checks garnished for delinquent student loans they either took out later in life or cosigned for the kids or grandkids. -  Source

Don't let student loans lull you into think they are good debt. They can reach up and ruin your life just like any other type of financial obligation.

Lately I've had more people writing to me they are actually contemplating suicide or leaving the country because of their struggle to live and meet their student loan obligations.

It's getting tough out here.

Steve Rhode

WRAL Get Out of Debt Guy

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  • steverhode Apr 12, 2013

    Excellent job at making it through unscathed.

  • hihuwatlu Apr 12, 2013

    Student loans can be a great tool for paying for college but many students entering college lack basic financial knowledge and most high schools don't require a personal finance class. I put myself through college and had about $13000 in loans when I graduated. I hated taking out loans and never took more than I had to have.

  • steverhode Apr 11, 2013

    I completely agree. In the Triangle area we have such awesome community colleges as well that are a fantastic bargin to get the first two years out of the way.

  • tarheelgrad1998 Apr 11, 2013

    I've long believed student loan debt is the modern version of indentured servitude.

    The only way to turn around that sinking ship is for students to really analyze the cost/rewards of a certain college degree. There's no reason to go to an out of state party school when you can get the same education in state for half (or less). There's also no reason to take (for example) $200k in student loan debt for a degree that may eventually net a job making $50k on average. However, so long as young people continue to line up for loans with no regard for the future, all of the costs will just keep going up.

    In my youth, the message "get a degree" was repeated constantly. Now we need to slap an asterisk on that message.

  • steverhode Apr 11, 2013

    Federal student loans are forgiven currently for a number of reasons. The school went out of business, public service, military service, death, or disability.

    Even with these forgiveness programs the government still makes billions and billions each year in profit from student loan lending.

    "The Education Department, led by Arne Duncan, was expected to earn $33.5 billion off student loans made during the 2013 fiscal year, according to budget documents. The agency’s Direct Loan program delivered a $24 billion profit on loans made in 2012, and nearly $27.5 billion on 2011 loans.

    All told, over the last five fiscal years, the Education Department has generated $101.8 billion in profit from student borrowers, thanks to low borrowing costs for the government and fixed interest rates for students, budget documents show. Some student advocates have charged that the department is profiting off the backs of students."

  • Terkel Apr 11, 2013

    Question: when a student loan is "forgiven", meaning the recipient who took it out and bought a product with it now doesn't have to pay it back, who is charged for it?

About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.