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The 1.5 trillion usd student loan crises is a true dilemma even for American adults whether or not to encourage their children to pursue higher education
A student loan is money that banks or the federal government lend to students or parents to pay for higher education. Student loans can be used to pay tuition, fees and room and board, and they can also be used for living expenses and books.
The advent of this financial tornado began soon after the fall of Lehman brothers. The financial crises of 2008 caused a nation-wide recession accompanied with massive unemployment. During this period families sought education as the last resort to surpass the turmoil. Basically, when families had lesser to spend they wanted to spend more. People applying for “for-profit” institutions (institutions run by organisations or individuals seeking to earn profit) increased substantially from 2.5 million during the pre-crises period to 3.5 million during the recession period, with the hopes of making themselves more suitable for the decreased number of jobs. This wouldn’t have been so bad if it hadn’t been for the non-intervention of government, the one time when they shouldn’t have left things to demand and supply. As average state appropriations to full time students went to as low as $7500 from $8500 the share of revenue covered by tuitions increased from 36% to 42%.
The inability to pay, along with absurd interest rates and loan fees is another factor that contributes to the problem. As loan fees is charged on the total amount sanctioned, students end up receiving lesser in hand than what they have to pay back. The interest that keeps on accruing after every non-payment and getting capitalised further adds to the misery of the borrower. A typical borrower with $30,000 in loans who spends the first 3 years of repayment in forbearance would pay an additional $6,742 in interest, a 17% increase. The real bummer here is that the fancy institutions marketing their success stories failed to add to the productivity of its students leaving them exactly where they had started but now with a student loan of thousands of dollars
These loans further made the borrowers worse off as every non-payment had a humongous adverse impact on the credit scores of the borrowers. Since payment history comprises of 35% of one’s FICO score even one default could lead to a drop of as high as 100 points in the person’s credit score. This in turn affected the life styles of people as they remained resilient to getting their own homes, or buying their own cars and eventually renting them causing them to pay exorbitant rents on something of low value
The real problem arose for the borrowers when they tapped all of the federal funds and had to resort to private lenders having high and variable interest rates and even after consecutive repayment of the debt the amount keeps on rising as the interest rate experiences an upward trend so basically a loan of 10000$ taken over at 10% pa interest rate would lead to 11000$ end amount but if immediately the interest rate changed to 15% he’ll be liable for 11500$ , an extra 500$ in just a day which we shouldn’t forget further gets on capitalised.
Based on the most recent trends, it seems likely that by 2023, about 40% of borrowers may default on their student loans, amounting to about $560 billion in unpaid debt. This probably might be good news for people who despise schools and colleges as one day even their family won’t emphasise on quality education but a real nightmare for a developed country, and the fact that it was started by a financial crisis lead to the ultimate question whether America has truly emerged from the initial financial havoc or is it just driving into a new one?