Student loan debt can be crippling, but here’s what we can do about it

14 Jan 2019

For most university students, graduating with student loan debt is unavoidable. Less privileged students have no choice but to turn to study loans, hoping their degree will act as a springboard to launch their career.

Despite the availability of scholarships or financial aid, not all students meet the merit or needs-based criteria. However, this does not mean they should be denied their opportunity to pursue tertiary education.

To add insult to injury, despite taking a loan, being saddled with debt even before getting a job and paying thousands in interest, graduating with a degree is not always a guarantee you will get a job, especially with factors such as a poor economy or a mismatch of skills at play in the labour force.

Long-term consequences

Financially, student debt can be crippling. In the US, the Urban Institute noted that a one percent increase in education loan debt decreases the likelihood of owning a home by 0.15 percentage points.

Meanwhile, the Center for Retirement Research at Boston College notes that degree-holders who have student loans, whether small or large, have significantly lower retirement assets at age 30 compared to those without loans, suggesting that monthly loan repayments reduces one’s retirement plan contribution rates.

U.S. student loan debt has reached a record $1,470,000,000,000 😮 pic.twitter.com/BVHvdaSM7e

— TicToc by Bloomberg (@tictoc) January 8, 2019

Apart from a lower likelihood of owning a house and having less savings and retirement funds, existing research suggests that student loan debt discourages entrepreneurship, delays home ownership, and, for women, puts off marriage and the prospect of starting a family. Individuals with student loan debt experience more financial distress while it also negatively affects health – particularly mental health – both during and after leaving university.

Research published in the Journal of Economic Surveys noted that “Indebted college graduates have lower net worth, less home equity, and compromised ability to accumulate assets, as compared to their peers with the same level of education but no student debt. They may also experience poorer educational outcomes, with independent effects on earning power and, then, later wealth accumulation.”

It was rather apt of the researchers to note that “there is a price to pay for having to borrow money to go to college”.

Possible solutions

The cost of tertiary education may be rising, but students can benefit by changing their attitudes towards community colleges and technical schools as affordable alternatives. Source: Shutterstock

Despite the seemingly gloomy outlook, a degree qualification is still a sound investment. Many reports, including this one, note that degree holders can earn more than non-degree holders and have higher employment rates, showing these aren’t merely perceived benefits, but actual benefits of having a degree.

However, avoiding loans altogether through the pursuit of tertiary education may be out of the question for some. Instead, a mindset shift is needed in regards to the type of education that should follow upon the completion of secondary school or high school.

Speaking to CNBC, Moody’s Analytics Chief Economist, Mark Zandi, noted that not everyone has to attend a four-year college programme, adding that students can benefit from changing their attitudes towards community colleges, technical schools, e-learning and more affordable alternatives.

Vocational education is generally perceived as having a lower status than the academic route. But Germany serves as a model country that has successfully embraced vocational education for the betterment of the economy.

Germany’s dual vocational education and training – or a combination of on-the-job training and part-time education – has worked well for the country, which enjoys relatively low youth unemployment rates by international standards.

The Times reported that degree apprenticeships can offer students a debt-free future; a company can gainfully employ students as they study, resulting in them earning a degree while staying debt-free.

“Degree apprenticeships were launched in 2015 to encourage more people into areas with a skills gap, including management, digital technology and engineering, as well as to help widen access to universities,” said the report.

It added that “The courses are fully funded by the employer and the government, with larger firms paying an obligatory apprenticeship levy – which they can then draw upon to find their own apprentices – and smaller businesses claiming 90% of fees from the public purse.”

Meanwhile, from a demand and supply perspective, Zandi added that it is important to increase the supply of education services to help lower the cost of tuition for students in higher education.

Reports note that education institutions are competing for students, providing lavish, but not always necessary, amenities that students end up paying for.

This student mailed a peanut butter sandwich to a university exec to protest the school’s lavish spending https://t.co/8l9bogfHfm pic.twitter.com/7N9YI4JxFp

— BuzzFeed News (@BuzzFeedNews) May 3, 2017

In the same vein, William B. Bradshaw notes on the Huffington Post that there is a need to lower the cost of higher education without reducing the quality of the education being offered. One of the ways to do this is to stem “the current rage among colleges to compete with each other in providing ‘luxurious’ lifestyles in their residential centres.”

Reducing the cost of education can have a multi-fold effect – students may need to borrow less money for tuition, which can result in them paying off their loans in less time depending on their financial circumstances.

Some graduates choose to extend their student loan debt repayments, resulting in loan borrowers paying more in interest. Source: Shutterstock

It may contribute to reducing the need for initiatives such as income-driven repayment (IDR) plans, which limits the amount of your income that goes toward your monthly student loan repayment. While laudable, such plans can also result in loan borrowers paying more in interest for extending their repayment period.

Student loan debt is clearly a complex problem with factors such as stagnant wages, the rising costs of education, and the profitability of student loans for certain parties, acting as contributing factors.

As such, none of the solutions highlighted above can act as a panacea to the problem on its own; multiple strategies and efforts of various parties are needed. However, with a combination of efforts from all parties, the burgeoning student loan debt can be a problem of the past.