Student loan debt in the U.S. surpassed $1 trillion for the first time in 2013. This is up from less than $600 million in 2008.
In 2010 the bill overhauling the student lending market expanded the government’s capacity to extend Pell Grants at the same time that it cut fees that private banks can earn on originating student loans. Not surprisingly, the government has originated over 90 percent of the student loans in the country since 2011 while all but one of the country’s major banks have decided to exit student lending altogether.
The rising cost of college education, and the ability to finance it, is a scary topic for many. One estimate by the Community Bankers Association pegs the average yearly advance in college tuition and fees at about 8% per year since 1980, or about four times faster than the rate of inflation. Simply, there is a term mismatch problem with financing college. A college education has a payback that is recognized at some point in the future, but universities would like the money now. In many cases this necessitates a hefty student loan, and that loan can create a certain amount of stress that lasts years after graduation.
So with the nation’s student loan balances up, private lending alternatives down, and tuition costs up, this caused us to wonder: how big of a burden is student loan debt?
We’re not professional pollsters, but we surveyed a few of our friends, acquaintances, and colleagues in order to get a sense.
We asked six simple questions:
(1) When did you incur your student loans?
(2) How significant is the burden of your monthly payment?
You can view the survey here.
We received 40 responses to our survey: 12 respondents incurred the bulk of their student loan debt in the last four years, another 13 in the four years to 2008, 9 in the four years to 2004, and 6 in 2000 or earlier.
Here’s what we found:
Not surprisingly, the higher the perceived student loan burden, the less the respondent felt that they had financial flexibility to save for other things or pay down other debts. Six of the 7 respondents that perceived their interest rate to be exceptionally high responded that they would absolutely use a $2000 windfall to pay down their balance. All 7 of these responded that their student loan debt was so high that they were unable to think about saving for a home, retirement, investments, emergencies, or family needs. None of the 33 other respondents answered these two questions this way, suggesting to us that the 7 that perceived their student loan burden as quite high also felt a level of financial stress or trappings that the others did not.
Although we were surprised that there wasn’t a strong relationship between the perceived level of the interest rate and the time period when the student loan debt was incurred, not surprisingly, none of the 9 respondents from the 2001-2004 period identified their interest rate as high, and 8 of the 9 from this group perceived their rate to be quite low or exceptionally low.
Six of the 9 saw their student loans as not more than a minor burden, although that may be a more recent development. Seven of 9 had balances that fell in the lowest category, which doesn’t necessarily mean that the balances were always low. It could also suggest that they were more aggressive in paying down their balances in previous years.
Still, of the 40 respondents, this group of 9 seemed to be the most comfortable with their student loan debt. We thought that one explanation could be the attractive level of interest rates offered during this time frame. Remember that the Fed aggressively cut long-term rates in the years immediately following the bursting of the DotCom Bubble, and although long-term rates were held exceptionally low following the Global Financial Crisis, the availability and willingness of lenders to extend credit meant that low rates on student loans weren’t always easy to find. This means that the 2001-2004 crowd might be in the sweet spot over the last two decades for finding cheap student financing.
A couple of the results surprised us, starting with the responses from the group of 6 with student loans stemming from the period from 2000 or earlier. Of this group, despite having the most years to pay down their loans, 4 still identified the balance as a large debt burden, if not their single largest. Three of them still had balances that were greater than 80% of gross household income, and 2 thought their interest rate was exceptionally high.
We would have thought this group would have had the lowest burden from student loans, given a longer time period to pay down the balances and a number of opportunities to refinance. A number of explanations are plausible. Maybe this group was less risk averse to taking on more student loans, and so they took out larger balances, with most of the borrowing done in the heady days before the bursting of the Dot-Com Bubble in 2000 and almost a decade before the GFC. Or, maybe other significant borrowings incurred in the decade following graduation have taken higher priority and crowded out the ability to pay down student loan balances. Or, perhaps most likely, the sample size of this group is simply too small to make any real inferences.
Even while high student loan balances may be the cause of some financial stress, there appears to be a level of apathy in terms of paying them off. Of the 18 respondents that had student loan debt balances above 60% of gross household income, only 7 of them would use a $2000 windfall to pay down the balance, despite 14 of them thinking that they needed to pay student loan debt down first before even thinking about saving, and only 4 of them thinking that their interest rate was quite low. Perhaps there is a tipping point in the loan balance where borrowers get to thinking, “it’s so high, why bother trying to pay a little off, it won’t make much of a difference anyway.”
What are your thoughts on the results of our survey? Are you surprised?
This post was written by Sam Troge, an Equity Analyst at Colorado PERA. If you'd like to write a guest post for The Dime, email us at firstname.lastname@example.org.