Benefits and Drawbacks of Student Loans

Group 1

Olanike Lawore

ENGL 2000

03 April 2018

Benefits and Drawbacks of Student Loans

Today, higher education is considered a necessity while being priced as a luxury. As the U.S. economy continues to expand employers are increasing the requirements and competition to join the workforce, leading to increases the demand for higher education amongst young adults. Institutions of higher education are increasing tuition rates to balance the supply and demand for their services while also increasing their overall profitability. When students are unable to pay out-of-pocket for these inflated tuition rates, they turn to student loans to finance their education. To service the growing demand of higher education, financial institutions increase the availability and obtainability of student loans; putting higher education within reach to more prospective students. While some students argue that the ease to obtain student loans strengthens the economy by creating a more educated workforce, others argue that it weakens the economy by contributing to the student debt crisis. When financial institutions have no regard to the supply and only servicing the demand of higher education causes the equilibrium price of tuition to rise, leaving the responsibility of an equilibrium to the institutions of higher education. As tuition rates rise students are pressured to apply for larger loans, putting loan recipients further into debt as they pursue a higher education. In the U.S. student debt affects more than forty-four million borrowers amounting to 1.3 trillion dollars (Friedman paragraph 2), second only to mortgage debt valued at approximately fifteen trillion dollars (Federal Reserve). The continuous loop, of increasing tuition as student loan availability increases, will be the needle that bursts the student debt bubble resulting in a damaged economy and possibly a recession.

College tuition has increased at a higher rate in the past two decades than it has ever before, leading to an increase the number of students applying for student loans. In 1974 the average tuition for a private four-year university was $10,273, measured in 2014 dollars, compared to $31,231 in 2014, roughly a 204% increase (Mueller, paragraph 1). While tuition prices have increased drastically, the average household income has only increased roughly 2% as the average household income in 1974 was $53,306 but $54,398 in 2014, both calculated off of the 2014 dollar value (Census; Amadeo). This nonlinear increase in college tuition forces students to apply for student loans that they will have to pay off for years to come after graduation. As tuition has recently increased, college enrollment and student debt have also realized increases. While college enrollment has increased 24% from 2002 to 2012, the average student debt increased roughly 50% in the same decade (Mueller, paragraph 2). This statistic illustrates that even though more students are pursuing a higher education, not all of them are able to pay it off. The average tuition and student loans form a continuous loop, as they both build upon one another. As tuition rises, the supply of student loans tend to rise as banks attempt to increase their profits, in hand increasing the student debt levels. When there is a higher supply of student loans more students have the opportunity to attend institutions of higher education, although the capacity of these institutions is not increasing proportionately. As the national student debt level rises, many economists are split between two sides regarding how student loans affect the economy, some argue it benefits the economy where others believe it will hurt the economy.

Now that we have discussed the history of how student loans affect tuition cost, we will talk about how student loans can be a good thing. Paying back student loans can be a very challenging task, but there are many reasons why taking on student loans can be beneficial to college students. The first benefit of taking on student loans is that for a majority of students, loans are the only way that college is made available to them. So even though loans may be expensive, there are many ways that the loans can be worth it for students. One reason why student loans are worth the expense is the fact that the student could get a longer college experience. With a longer college experience, comes more independence and knowledge; two tools that are very useful when it the time comes to begin a job career. These two tools go hand in hand the workforce because an employee is expected to be able to execute tasks independently, and the best way to do that is using the knowledge that employee gained from their college experience. Another reason why student loans are worth the expense for students is the fact that it was the only way they were able to attend college. An excerpt from the article Benefits and Pitfalls of Student Loans, says it best: “if a student loan is the difference between a well-thought out college choice and no college at all, the choice can be pretty easy to make for many students” (thebestschools.org, paragraph 17). This choice is easy for many students because they are able to get a college degree. As a result, a student without any college experience, and no degree, are not able to gain the independence and knowledge needed in the workforce. The second benefit of taking student loans comes after a student graduates from a university. A college degree results in higher paying job opportunities, and through those high paying jobs a student is more capable of paying back their loans. The Bureau of Labor Statistics (BLS) shows that “the average four-year college graduate makes nearly twice the monthly salary of someone who only has a high school diploma.” As a result, a student will not only be able to pay back their student loans faster, but they will also be able to make more money over time because they earned a degree. Now that we have talked about some of the advantages of student loans, we will address the disadvantages.

Student loans benefit recipients by granting the opportunity to achieve a higher education although, student loans are accompanied by heavy responsibilities that result in severe consequences if not accounted for correctly. Most federal student loans may fall under the classification of a predatory loan, defined by debt.org as “any practice that convinces a borrower to accept unfair terms through deceptive actions for a loan that a borrower doesn’t need, doesn’t want or can’t afford”. Federal student loans may be considered predatory because they do not require proof of income, credit score, or a cosigner, this also makes it easier to obtain the loan. Without the information of income, credit, or the need for a cosigner, banks have no knowledge of the applicant’s ability to repay the loan. The ease to obtain student loans has trapped families and students into debt that they may not be able to repay. Along with the ease of obtainability, the grace period is another trait that contributes to the attractiveness of student loans. A majority of student loans offer a grace period where the applicant does not have to start repaying the loan until six months after graduation, this allows recipients to search for work free from the debt obligation. Recipients may not realize that interest is still incurred during the grace period although payment is not required. During this grace period, some students may receive work while others may not be as fortunate. When students apply for student loans, most students intend on paying that loan with the income they receive from their future career. As students graduate to the workforce most of them will realize income levels lower than they previously expected. The difference between expected and actual income levels make it difficult for students to afford debt repayments along with other living expenses. In an attempt to ease the financial stress put on by student loans student may extend their repayment plan from the standard U.S. repayment plan of ten years to twenty-five years (Chaime paragraph 19). Extending the term of the loan decreased the size of instalments to be made leaving more cash to spend on living and other expenses, although the interest incurred over the loan is increased leading to a greater amount to be paid over the life of the loan. These repayment extensions increase the national student debt level by increasing the amount and time to repay these loans. As students struggle to balance loan repayments with living expenses some may be forced into bankruptcy. Contrary to other forms of debt, such as medical debt, student loan debt is nondischargeable, meaning that student loan debt is not wiped when a person applies for bankruptcy. According to Preston Mueller, “in 1976 Congress changed the Higher education act of 1965 which would exempt student loans from discharge in bankruptcy” (Mueller, Abstract and Introduction). While this change made student loans available to everyone, it also made it more difficult to escape student loan debt. Without an escape to the student loan debt, applicants are forced into paying these loans off for many years after graduation. The national student debt level continuously rises as the number of student loans granted increases and the number of loans paid off decreases. As students struggle to pay their student loans they are left with less money to spend on houses, living necessities, and entertainment according to Joseph Chamie. The U.S. economy is then weakened as national spending slows due to less money circulating the economy and more going towards debt repayments. If the issue of student loan debt repayment is not corrected national student debt levels continue to rise, leading to catastrophic consequences. The weakening U.S. economy will be pushed into a recession when the student debt bubble bursts as banks fail to stay afloat as the number of applicants defaulting on the loans increases.