How Student Loans are Affecting the U.S

by Pauline Coston

Over the past 20 years, student debt has skyrocketed, to the point that it is beginning to look like younger generations such as Millennials and Gen-Zs will face issues such as having a more difficult time getting things that require credit. The increasing rates of student debt are also harming the economy in ways that we cannot completely grasp, because the consequences are so novel, that we’re only beginning to see them unfold.

When students need money for college and they cannot afford to pay out of pocket, get a scholarship, or FASFA, they turn to student loans. Student loans can be taken out in the form of Private and Federal loans.

Private loans come from a bank that has a higher interest rate, and if the person who is borrowing is late on payments, then the interest rate will continue to rise. This makes it more difficult for people to pay off their loans over time. If the borrower chooses to default on their loans, then property, taxes, wages, may be taken or an arrest in certain states. After 3 - 10 years the statute of limitations on private student loans is up, which means that the private bank can no longer sue the borrower. However, they still have to pay their loans. They have to pay the loans and interest. The statutes say they cannot sue, but the bank can still garnish wages, or keep their credit score low so they will never be able to invest. They will also pay more than what they initially intended to pay.

Federal loans come from the government and borrowers have to pay them until they are completely paid off, no matter how long it takes. The government will use the Federal Collection Act, which allows them to make sure that they get their money. The Government begins the process of getting their money if a borrower defaults by taking a certain percentage of money out of the borrower’s paychecks, taxes, retirement, social security, and disability check. The government can not only take parts of a borrower's income— they can take all of it.

In the United States, student loan programs have been around since 1944, when the GI bill allowed veterans to go back to college after World War Two. An official lending system was put into place in 1993 called the Student Loan Reform Act.

In 2010, lenders began to offer private student loans to students from the government. This was a bill that was signed by President Obama as a future investment for higher education. Essentially, this bill gets rid of certain fees that have to be paid to private banks when someone gets a loan from them. This bill also started the process of taking 68 billion dollars and putting it toward a pell grant for the next 11 years.

We could see that this did help out some students because private loans interest rates could go as high as 14%. The only way to lower your interest rate is to have great credit, which is unlikely for many students. When looking at federal loans, the highest the interest rate could go is 6.08% and the lowest is 4.08%. At this point in 2010, Americans owed over 811 billion dollars in student debt to banks alone.

Presently, in 2021, there have been almost 45 million Americans that have taken out student loans and still owe them. Currently, all those people owe about 1.73 Trillion dollars. The Biden Administration allowed pandemic forbearance until October 2021. This pandemic forbearance means that students are allowed to not pay their monthly student loan payments. As student loans start to increase, many people are not able to do things for themselves like buy a house or buy a car because their debt is so astronomical and their credit has fallen. The inability to pay off their student loans led to debt, which led to a plummeting credit score.

Students in the United States who get a student loan can be followed by the consequences for years, if not their entire lives. Many students do not pay off their loans for an average of 18.6 years after they graduate from college. This affects college students because they will be too focused on paying student loan debt that they will not be able to focus on improving their credit to do certain activities in their life.

There are several tangible negative effects of student loans on a graduate’s life. According to StudentLoanHero, people who owe student l0ans are less than 11% likely to have babies, 23% less likely to move, 28% less likely to invest, 33% less likely to invest in retirement, and 44% less likely to travel. If students are less likely to do all of these things then consumer spending goes down, which translates to lower economic growth in America. This could also mean for many students that because they have so much debt, that it is more difficult for them to survive an economic recession. This is due to the fact that they are having to pay all of their bills while prices shoot up, working fewer hours, or possibly being laid off from their job. This can lead to a much higher stress level which could lead to mental health issues and in extreme situations, suicide.

The Student Loan debt issue in The United States may affect the borrowers, but it will also affect the future of the economy. Many students who have loans will default on them. The amount of people who default on their loans has doubled from 2003 and 2011. Also, an incredible 40% of people who have student loan debts have been predicted to fall behind by 2023. So over time, the critical damage that student loans are doing to the economy is going to be a long slow hit over time versus a sudden wake-up call.

Student debt also discourages entrepreneurship, and the government loses 170 billion dollars in loan forgiveness when people default. Borrowers are also inclined to work longer which will, in turn, stress the unemployment rate. Another big issue is that people with crushing student loans are not buying any long-term investments. Long-term investments like home loans or venture capital keep our economy moving. Without these big purchases, the economy will slow. After enough economic slowing, we hit another recession.

So we are aware that there are serious issues going on with student loans, but there are ways to address and fix those issues. The easiest option and the one that makes the most sense is to forgive student loans. This could be possible by a variety of plans to raise two trillion dollars. His plan proposed to raise this money over the course of ten years. We would need to raise this amount because this covers the total of the student loan debt, which would then be paid to the government forgiving the debt. We would need to raise this money because there is still money that's owed that has to be paid.

One plan that was suggested by Bernie Sanders was to tax stock trades, bond trades, and derivative trades. This option has tons of benefits such as attempting to fix the wealth gap by giving people more available income to use as well as helping people raise their children so they would be more inclined to have more children and make large purchases because they would feel more secure financially. This would not be an instantaneous effect; it would take time to see the results.

However, this does come with some negatives, although those are negatives that could be lowering the tuition costs or making community college more accessible for high school graduates. One of the possible negatives is that if debt is cancelled or wiped out then the cost of college will still rise, so people will still need to get loans. Another possible negative is that when student loans are cancelled it will cause chaos in the credit world and interest rates/inflation will rise for the first few years after debt is cancelled.

Whatever path we choose, we have the convenience of looking at the solutions that other countries have taken to provide free college for their citizens. Ireland is one of the many countries around the world that provides free college for its citizens. Ireland decided to invest more into the education of their citizens when they started to see a decline in employment because their citizens did not have as much education as the generations before them. Ireland's economy has also benefited greatly from its citizens going back to college as it has increased the economy by one-third between the 1990s and the 2010s.

The United States needs to realize that the effects that student loan debt will have on this country long term are harmful and it makes more sense for student loan debt to be forgiven or have more accessible college for everyone.