Millions of student loan borrowers are faced with impossible choices. The average student loan balance has grown so significantly that many recent college graduates’ salaries are insufficient to cover these payments as well as a modest standard of living.
A confluence of economic factors including exponential increases in the cost of education, exceptionally high cost of living in urban areas and the precipitous decline in job security have all influenced this crisis.
Taking on student loans without fully understanding the repercussions of student debt has become a risky proposition. As a result, borrowers need an in-depth understanding of personal financial planning concepts to determine how much student debt they can afford.
Financial literacy needs to be instilled in potential borrowers before they sign up for student loans. Otherwise, they put themselves at risk of being saddled with that debt payment for many years following graduation. A lack of basic financial literacy has led to mounting debt for a generation that likely lacks the resources to address it.
A one-to-one correlation
Student loan debt in America stood at $517 billion in 2006. As of 2019, 44 million borrowers collectively owe $1.5 trillion. The average loan balance is $48,560. Additionally, parents agree to be co-signers on an astounding 90 percent of private student loans. As of 2019, one in 10 student loans is in default, a number that would be far higher without income-sensitive repayment plans.
A demand for higher education is unlikely to diminish, which consequently leads to higher tuition costs, especially at for-profit universities. Moreover, with the U.S. government acting as a guarantor on federal student loans, there are few incentives for colleges and universities to keep the cost of higher education in line. These factors have contributed to higher education costs significantly outpacing the rate of inflation over the last several decades, further necessitating the use of student debt to meet these rising costs.
Upon graduation, many young professionals flock to big cities seeking good-paying careers, where many find that the cost of living eats up all of their earnings. As a result, post-graduates resort to less-than-ideal methods to make ends meet, such as working a second job, taking on credit card debt, living with parents or deferring their loans. Before pursuing higher education, student borrowers need to develop realistic plans to pay off their student loans.