In Part 1, I discussed the total amount of student loan debt that U.S. citizens hold, about $1.3 trillion. Paying that money back has become extremely difficult for some people, leading us to a default rate of 11%
This is an absurdly high default rate and it has only been getting worse. For comparison, the default rate of payday loans is about 6% overall. If the U.S. experienced an 11% default rate for mortgages, we’d be looking at another depression. Even at the worst point of the 2008 housing crisis, only about 10% of all mortgage holders got behind on their home loan and the vast majority caught up at some point to avoid default.
On top of that, only about 60% of student loan holders are paying their loans off in a timely fashion once they are out of school. No other type of loan has delinquency or non-standardized repayment rates anywhere approaching that number.
Our 11% default rate has occurred primarily because students were told (and are still being told) that you can pay it off pretty easily once you get a job and that you’d see a positive return on the investment. Overall, that’s probably still true as college graduates do earn substantially more, on average, than just high school graduates, but the gap is shrinking.
The problem is that students are taking out tens or hundreds of thousands of dollars in loans to get degrees in fields that do not pay well relative to other industries. In addition, many of these jobs are only found in places with a high cost of living, acting as sort of a double whammy to graduates looking to pay their student loans.
Public student loan lenders usually do not care what you are majoring in since they know they will be getting repaid one way or another, especially if the loans are federally funded. By law, they cannot take into account what you are studying when they consider whether or not to give you a loan.
Private student loan lenders at least do a bit of due diligence to make sure you don’t already have defaulted student loans, but their interest rates are higher than you’d find through the government. Since they aren’t mandated by the government to give out student loans like candy, they will take a hard look at your credit score, often requiring above 680 to be eligible without a cosigner. They are also allowed to consider what you are going to school for to determine your eligibility, which does make a significant impact on how likely you are to repay your loans in a timely fashion.
It’s sort of a catch-22 situation – if you allow public lenders to take field of study into account when giving out student loans, you’re going to have an extreme drop in low-paying majors. If you don’t allow them to take field of study into consideration, you get the problem we have now.
At a certain point, we will probably see some sort of restrictions on how much you can borrow for student loans according to what you plan to study. Still, that does little to alleviate the crisis we are currently experiencing.