What The Future Holds For The Business Of Student Loans

This is a guest post by Doreen Oppenheimer. If you want to guest post on this blog, check out the guidelines here.

First, we learned that this could be the “doomed generation of the middle class”, with a new report out by the Pew Research Center showing that the middle class has diminished since 2000. What’s more, 85 percent of people who identify themselves as middle class say it’s harder now than before to maintain some standard of living.

What does this mean for recent college grads?

Then we found out, $1 trillion in student loan debt burdens college grads and, in turn, plagues the U.S. economy, with new research from the Consumer Financial Protection Bureau showing that the nation’s student debt crossed the $1 trillion mark in early 2012 and, most importantly, now has a delinquency rate higher than consumer-based credit cards.

What does this all mean for the U.S. economy?

The U.S. Congress and President Obama introduced a series of new legislation to help students and graduates manage and repay loans, but the truth is that tuition and interest rates keep getting higher, and students are forced to borrow more to pay for education. Both politicians and economists are looking at the business of student loans in 2013 to find new solutions that benefit borrowers and lenders alike.

The State of the Student Loan

The U.S. Department of Education reported in September that 9.1 percent of borrowers, whose first student loan payments were due in 2010, had defaulted before the end of 2011, higher than 2008’s 8.8 percent. Borrowers who choose not to default are often delinquent on loans too. 11 percent of student loan debt-holders were behind 90 days or more on their monthly payment.

Tuition isn’t getting better either. According to USA Today, the average price of college tuition rose 8.3 percent from last year at public colleges and universities. The ambiguity of where the loans are coming from is getting worse for students too. According to Lifelock.com, many students don’t realize if the loan they’re applying for come from federal or private banks, making them vulnerable to higher interest rates and stricter payment policies.

What’s happening now?

The issue is serious, and it may get worse before it gets better. But unlike the housing bubble of 2008, the problem with student loan debt in America has been recognized and addressed early. At the beginning of President Obama’s first term, laws were passed giving borrowers the ability to extend the length of their loan up to 30 years, pay monthly payments based on income, and even be forgiven of student loan debt after 10 years if the borrower went into public service.

The awareness on smart borrowing is more prevalent as well. Here are some key factors to know when looking for loans, courtesy of the Wall Street Journal.

• Always use a federal direct subsidized loan, avoid private lenders that are notorious for higher rates and strict policies.
• Student identity theft and credit fraud is a rising concern. Students who maintain good credit and a clean report are more likely to pay back loans without delinquency or default after graduation.
• If scholarships/grants aren’t an option, public and community colleges are an ideal way to keep borrowing at a minimum. The quality of these schools has also risen over the last several decades compared to their private counterparts.
• Avoid “for-profit” online colleges. Their goal is to, in simple terms, make a profit off you. The easiest way for them to do this is convincing you to take out costly loans.

What happens next?

The reason some analysts call it the “iron bubble” is because it’s not likely to burst, like it did with the housing bubble in 2008, because student loans are still very easy to obtain, regardless of a student’s background or economic status. This is good news for borrowers who currently hold debt because it means Congress will still keep acting to prevent a burst from happening. On Jan. 3, Sen. Dick Durbin (D- ILL) proposed a bill that would allow private student loans to be included in bankruptcy, the Wall Street Journal reported.

Now, we don’t recommend you file for bankruptcy to solve your financial burdens, but the fact that Congress is still working to ease the tension off college graduates is reassuring.

By: Doreen Oppenheimer
A bank manager by day and finance writer by night, Doreen is always sharing financial advice to whomever is around to benefit.