How Student Financing Has Affected the Current Economy

Student financing has taken a new meaning with the economic slow down. It used to be that student loans were among the safest bets for both borrowers and lenders. Borrowers were able to pay the loans back with the increased income they earned after achieving a degree. Lenders could count the loans as low risk because student borrowers tended to go on to become young professionals who cared about saving, investing and repaying loans. Unfortunately, a combination of rising education costs, poor loan decisions and a slow job market made what was once a safe loan option into toxic debt for both borrowers and lenders.

Rising Education Costs

The cost of education has risen sharply in the past decade. Today, even a public education can cost tens of thousands of dollars a year. A student loan used to be a low limit form of debt. With the higher education cost, student loan limits have also increased. A student using loans to acquire a standard four-year degree can be over one hundred thousand dollars in debt when he or she graduates. Even with an aggressive repayment plan, it could take fifteen years or more to repay this sum in its entirety.

Poor Debt Decisions

A change in the number of students working while in school has lead to a shift in how student loan debts are repaid. Many students used to work while attending college, partly paying their way through school by paying off debts as they were issued. Going to school part-time today, however, is not as popular. This is somewhat due to a shift in the social culture of schooling, where college and campus life provides more activity for an average student. The shift is also partly due to a change in the way colleges themselves require students to work. Many require students to carry very full schedules, asking for more credit hours to complete a major or earn a degree. Students are less likely to repay debts while in school. They may even take unpaid internships over breaks, resulting in more deferral on the loan. Lenders will not see a profit on the loan for many years down the line.

Slow Job Market

This system of large loans with slow repayment cycles was working temporarily. More students were going to college, and many of those students even went on to graduate school. However, when the economy slowed down in 2006 and 2007, these students were not able to locate those same high paying jobs after getting their degrees. Even law school graduates met deferrals on their job offers, once considered a safe bet. Students were facing a sudden crisis: what happens when the cost of the education loan is not worth the reward in a new salary? For many students, more and more deferral of loans was the answer. For others, default was unavoidable. In addition to the high number of home loan defaults lenders were facing, all of a sudden the once-safe source of funding from student loans was also compromised. The high amount of default on student debt helped fuel the crashing of the credit market.

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