Is There Really A Student Loan Crisis?

Are student loans really the next financial crisis?

Here’s what you need to know – and what to do about it.

Student Loans: Financial Crisis?

The latest student loan debt statistics show that 45 million borrowers collectively owe $1.6 trillion of student loan debt. Today, according to Make Lemonade, student loan debt is the second highest category of consumer debt behind mortgages. Those who say there’s a student loan crisis cite, among other issues, the surge in total student loan debt, the complexity of repayment options, the high rejection rate for student loan forgiveness, the difficulty of student loan discharge in bankruptcy and the challenges with student loan servicers.

As Brookings has shown in recent research, however, there is more to student loans than you may realize. These student loan facts may surprise you:

1. Only 8% of borrowers owe more than $100,000.

The average student loan debt is about $30,000. It’s rare for borrowers to owe more than $100,000. Typically, those borrowers owe student loans from graduate school, which is associated with higher income and lower student loan default rates.

2. Half of all student loan debt is for graduate school.

Approximately 48% of all outstanding student loan debt is from graduate school. The student loan issue is typically associated with college debt. However, there has been a surge in graduate degrees and tuition over the past two decades, which has fueled graduate student loan debt.

3. Student loan borrowers who owe less than $5,000 default the most.

Common wisdom suggests that borrowers who owe the most student loans would default at a higher rate. Not true. It’s borrowers with the lowest balances – many of whom didn’t graduate, or are unemployed or underemployed – who default the most.

4. Most college students graduate with little to no debt.

That may sound shocking to some. Consider these two student loan debt statistics:

• 30% of college students graduate with no student loan debt.
• 23% graduate with less than $20,000 of student loan debt.

How To Pay Off Student Loans

If these student loan debt statistics surprised you, then you’re not alone. That said, you still need a game plan to pay off student loans faster. Here’s a helpful framework to pay off student loans.

1. Refinance student loans

The best way to pay off student loans faster is to refinance student loans. Student loan refinancing rates have dropped to as low as 1.9% and are now among the lowest in recent memory.

Here’s an example of how much money you could save with this student loan refinance calculator. Let’s assume that you have student loans at a 9% weighted average interest rate payable over 10 years, strong credit and income, and you can refinance those student loans with a private lender at 3%. If you have $60,000 of student loans, you could save $181 each month and $21,683 total.

2. Consolidate student loans

Federal student loan consolidation enables you to combine your existing federal student loans into a single Direct Consolidation Loan. Student loan consolidation is a good organizational tool, but federal student loan consolidation does not lower your interest rate or monthly payment. Your interest rate is equal to a weighted average of your existing federal student loans, rounded up to the nearest 1/8%.

3. Enroll in an income-driven repayment plan

Income-driven repayment plans such as PAYE, REPAYE and IBR are available for federal student loans only. Your monthly payment is based on 10-15% of your discretionary income as well as family size and state of residency. You also can receive student loan forgiveness, but you’re liable for income tax on the amount forgiven.

4. Get student loan forgiveness

The Public Service Loan Forgiveness program is a federal program that forgives federal student loans for borrowers who are employed full-time (more than 30 hours per week) in an eligible federal, state or local public service job or 501(c)(3) nonprofit job who make 120 eligible on-time payments over ten years. Unlike income-driven repayment plans, the amount forgiven through the public service loan forgiveness program is not subject to income tax.

Here’s a recap:

1. Student loan refinancing = lower interest rate, pay off student loans faster
2. Federal consolidation = same interest rate, organize student loans
3. Income-driven repayment = lower monthly payment, student loan forgiveness
4. Public service loan forgiveness = lower monthly payment, student loan forgiveness