Ideally, student loans should enable borrowers to pay for college, graduate, find a job with a higher salary, and repay the loan. However, this is less and less the case because of financial policies, profit-driven financial institutions, the education system, and income gaps, which have created a frustrating, unsustainable, and unmanageable educational financial situation that has resulted in a $1.75 trillion student loan debt crisis. According to a report from the Bipartisan Policy Center, the federal student debt portfolio was $642 billion in 2007, which has increased by 144% to $1.56 trillion by 2020, exceeding the growth in borrower numbers, which rose from 28 million to 43 million during the same time period. The federal budget, economic policies, loan lending, and tax payers have all been significantly impacted by this trend.
A Historical Overview
The student loan debt bubble has developed over time as a result of numerous elements and dimensions. Looking back in time, the National Defense Education Act, which provided students with loans and scholarships to attend college, was passed by Congress in 1958 as a result of concerns that the United States was technologically lagging behind because of the Cold War. Further, the subsequent Higher Education Act of 1965 was a result of former President Lyndon B. Johnson’s War on Poverty. Grants were now offered to students based on their income, greatly increasing their chances of going to college. College enrollment was rising, school expenses were low, and the American economy was expanding at the time.
During the 1980s, as a result of public opposition, states were forced to establish tax and spending legislation that limited or restricted the states’ ability to tax and spend. States started to reduce expenditure on highly subsidized higher education as a result of the threat to their finances, either by raising tuition or cutting back on other expenses. College costs rose as a result of these governmental cuts to student aid and funding for higher education. Since the 1980s, the cost of college has only increased. According to the Institution Board, tuition, fees, lodging, and board for students attending a private and public college during the 1980–1981 academic year averaged $17,410 and $7,900, respectively. These expenses rose to $26,050 and $9,800, respectively, by 1990.
Reasons for the Present-Day Crisis
Because federal loans are widely available, lending limits have increased, and the federal government has loosened its oversight of institutions of higher learning, it is simple for colleges to raise the cost of a college education. In the last 20 years, the price of tuition and fees has increased significantly more than the rate of inflation. According to US News and World Report, in-state tuition and fees at public National Universities have grown the greatest, by a factor of 175%, while out-of-state tuition and fees at private National Universities have increased by 141%. In addition to tuition costs growing, additional college costs have climbed over the past 20 years. These costs include paying for housing, food, transportation, books, and other school-related fees and expenses that add up to thousands of dollars spent on education. The average cost of attending a full-time, four-year college in 1980, including tuition, fees, room and board, was $10,231, according to the National Center for Education Statistics. The entire cost climbed by 180% by 2019–20, reaching $28,775.
Additionally, loans are now easier to get because borrowing is now unrestricted and simple, such as with PLUS loans. Parents who use PLUS loans can borrow money from the government to pay for their children’s education. The cost of attending a school serves as the sole borrowing cap for PLUS loans, allowing borrowers to incur debt regardless of their capacity to repay it. Additionally, PLUS loans have the highest interest rates of any federal loans, which makes them particularly challenging/difficult to repay.
Student debts have increased as a result of the state and federal funding for higher education shrinking during the past two decades. States have had a crucial role in funding postsecondary education, along with the federal government, which has received significant financial support for higher education. According to Pew Research Center data, the state provided about 140% more financing per student in 1990 than did the federal government. However, over the past two decades, particularly since the 2008 financial crisis (Great Recession), spending across levels of government has converged as federal investments have grown, largely due to increases in the need-based Pell Grant financial aid program, while state investments have decreased, particularly in general purpose support for institutions. As a result, the gap has narrowed considerably, and state funding per student in 2015 was only 12 percent above federal levels.
Loan defaults may also result from student loan decisions. Once a student takes out a loan, they are responsible for repaying it in full. Some students borrow money for college, but because they are frequently overburdened and under stress from trying to combine employment, school, and personal obligations, many give up on their aspirations to earn a college degree. Such students made an investment that yielded no return, are burdened with debt, and struggle to escape it. Only 62% of students complete their college education with a bachelor’s degree in six years, according to the National Center for Education Statistics. The remaining 38% of students frequently drop out because of expenses, obligations to their families, or other reasons. College dropouts experience the worst financial difficulties of their lives since they have a lot of debt from student loans but no degree that will earn them a respectable wage to pay off their debt, and they frequently have to pay back the money they got in financial aid or even scholarships. College dropouts frequently fall behind on their payments from time to time, and little debts rapidly add up to big sums, due to compounding interest.
All in all, the financial literacy necessary to make borrowing decisions is often lacking among students, since many are missing out on financial education at home and in school. Financial literacy will help students make wise borrowing decisions and become responsible people by receiving financial education about saving, budgeting, and other topics like interest, which will be even more critical in their adult life. Early information and planning for high school should include investigating average salaries in the desired field, calculating future monthly student loan payments, and learning how to take advantage of available financial help and scholarships. For parents and students to make wise financial decisions regarding their children’s education, it is clear that financial literacy is essential. Therefore, it would greatly help if financial literacy is taught in high schools and introduced beginning at an early age, especially enforced through effective public policies and public-private sector collaboration.
