The Student Debt Struggle

The Student Debt Struggle

If you’ve earned a college degree, chances are you’re still paying for it.

You’re absolutely not alone – millions of people in this country are in the same situation. The student debt crisis has been a topic of discussion among members of congress and presidential candidates for some time now, but it doesn’t seem like any real action will be happening anytime soon.

So, what can you do about your student loan debt? We did a little digging into the size and scale of the problem and the various methods borrowers have been using for repayment.


Americans Owe a Lot

About 44 million Americans have student loan debt (TIME), which makes it the second-biggest consumer debt category after mortgages (Forbes). Right now, the total bill for all that education weighs in at about $1.56 trillion as of February 2020.

The Institute for College Access and Success (TICAS) found that nationally about two in three (65%) college seniors who graduated from public and private nonprofit colleges have student loan debt, using data from the 2017 and 2018 school years. Borrowers owed an average of $29,200.

Specific to Indiana, about 57% of graduates have debt at an average of $29,064.


We Haven’t Been Great at Repayment

An early 2020 analysis from Moody’s Investors Service found that student loan debt was the fastest growing type of household debt over the last decade, partially because American’s haven’t been great at repayment. According to the report, only 51% of federal borrowers whose repayment obligations started in 2010-12 had made any progress in reducing their balances after five years.

Additionally, data from MeasureOne found that more than 22% of private student loans are in a state of either deferment (18.34%), forbearance (2.22%), or are 90+ days past due (1.46%).

The TICAS study found that loan default rates varied by the type of degree earned. They said, “Nationally, 5% of bachelor’s degree recipients who entered college in 2003-04 had defaulted on their federal student loans within 12 years of entering college, compared to 12% of associate’s degree recipients, 29% of certificate completers, and 23% of noncompleters.”

However you look at it, there are quite a lot of people who haven’t been very successful at repaying their student loans. What’s been working for those that have?


Individual Options Vary

Borrowers use all different kinds of methods to fulfill their loans as determined by their unique financial situation.

Federal loans typically have about eight various options for repayment. Each has ups and downs. Income-based repayment, for example, could be a good option for someone wanting a lower monthly payment. The downside is that completion will take longer and interest will continue to accrue. In contrast, a standard repayment plan would take less time but come with a higher monthly payment.

Federal loans also offer options like graduated repayment, extended repayment, pay-as-you-earn plans, and others. Some of these options offer forgiveness for remaining balances after a set amount of time, which could save money (but will count as taxable income).

In general, private student loans offer less flexible repayment options than federal ones, and they vary widely based on the lender.


Is Now the Time to Refinance?

The Federal Reserve cut the nation’s interest rates three times in 2019 and once again in early March 2020 as an emergency response to global COVID-19 economic disruptions. At first, you might assume this would lower student loan interest rates too, but it’s a bit more complex than that.

Interest rates on federal loans are established each May, and they’re fixed rates based on the 10-year treasury. So, the Fed’s recent rate cuts won’t directly impact federal student loans. They might, however, produce an impact on private student loans, especially those with variable rates. Private loan rates tend to follow the 1-month LIBOR rates as a benchmark, which are the interest rates that banks charge to lend money to each other. The LIBOR tends to move similarly to the Federal Funds rate that is set by the Federal Reserve, so rates on private loans could experience a reduction caused by the recent cuts.

But choosing to refinance is not a simple decision. There are several factors to consider. As we mentioned earlier, federal loans have more options for repayment and more opportunities to make adjustments should your financial picture change. Refinancing might save you money in interest, but it’s a decision that should be made after a careful consideration of all the factors.


Homework Doesn’t End with Graduation

In the end, it’s clear that repayment strategies are unique to the borrower. To find the best way to fulfill your loan obligations, you should crunch the numbers about your financial picture, determine what you’re going to end up paying, how long it will take you, and how much you might be able to save if you select a different path for repayment.