Every Young Person Should See The Fed’s Startling Numbers On Student Debt

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Every Young Person Should See The Fed’s Startling Numbers On Student Debt

Every Young Person Should See The Fed’s Startling Numbers On Student Debt by Simon Black, Sovereign Man

Sovereign Valley Farm, Chile

What I’m about to tell you is not my own opinion or even analysis. It’s original data that comes from the United States Federal Reserve and national credit bureaus.

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  1. 40 million Americans are now in debt because of their university education, and on average borrowers have four loans with a total balance of $29,000.
  2. According to the Fed, “Student loans have the highest delinquency rate of any form of household credit, having surpassed credit cards in 2012.”
  3. Since 2010, student debt has been the second largest category of personal debt, just after a home mortgage.
  4. The delinquency rate for student loans is now hovering near an all-time high since they started collecting data 12 years ago.
  5. Only 37% of total students loan balances are currently in repayment and not delinquent.

The rest—nearly 2 out of 3—are either behind on payments, in all-out default, or have entered some sort of deferral program to delay making payments, with a small percentage still in school.

It’s pretty obvious that this is a giant, unsustainable bubble (more on this below). But even more important are the personal implications.

University graduates now matriculate with tens of thousands of dollars worth of debt.

Debt is another form of servitude. Like medieval serfs, debt keeps people tied to jobs they dislike in places they don’t want to be working for bosses they hate doing things that make them feel unfulfilled.

Debt makes it very difficult to walk away and start fresh.

In fact, ‘starting fresh’ is almost legally impossible when it comes to student debt. Even in US bankruptcy court, student debt cannot be discharged in almost all cases.

It is an albatross that hangs over you for a decade or more if you do make the payments, and it follows you around for the rest of your life if you do not.

(I’m not suggesting anyone default on what they owed—simply pointing out that nearly every other form of debt can be discharged EXCEPT for student debt.)

This kind of debt has a huge impact on people’s lives.

Again, according to the Federal Reserve, “[G]rowing student debt has contributed to the recent decline in the homeownership rate and to the sharp increase in parental co-residence among millennials.”

So the Fed’s own analysis shows that student debt is a cause for people in their 20s and 30s to live at home with their parents. Amazing.

This certainly hollows out the argument that a university degree is a one-way ticket to a higher salary, brighter future, and better standard of living.

Look, I’m not going to try to tell you that a university education is worthless or a cruel joke.

There are clearly both tangible and intangible benefits to completing a four-year degree, especially for vocations in science, medicine, etc.

But let’s be honest—many kids end up at university by default. They don’t know what they want to study. They don’t know ‘what they want to do’.

They’re just sort of expected to enroll, attend, major in something, and graduate.

Much of this is done merely to please other people or satisfy a social expectation without any real sense of whether the path they’ve chosen at that time is the right one.

Modern university education, in fact, is based on the premise that an 18-year old kid can make up his/her mind about what s/he wants to do in life.

But how can they really know what they want to do in life without first having some exposure to life itself? How can anyone know?

Most students grow up living at home with their parents. They graduate from high school. And they go off to college pressed to make some grand life decision without ever having dipped a toe in the world to get a sense of the infinite options.

From this perspective, spending four to five years discussing theory at such a formative age can be terribly counterproductive.

Subsequently graduating with an enslaving level of student debt can make the experience borderline destructive.

Again, it’s not to say that university has no benefit.

The question is whether it’s worth the cost at that particular time, i.e. whether entire generations should be forced into a cookie-cutter path where everyone spends ages 18-22 in university, graduates with a boatload of debt, starts a career in whichever industry is willing to hire them, and ultimately begins paying taxes.

This route takes away all the choice… the ability to live life deliberately.

It’s how people ‘end up’ doing what they do by default, instead of finding their professional passion and life’s calling.

Most people give up the choice. And it all starts with debt.

It didn’t used to be this way.

Long ago, people actually went to university to learn. That was the goal.

Today we’re told that it’s a necessary stepping stone for social and financial success.

Curious how the data demonstrates the exact opposite.

Like many of our prevailing social constructs, this education system is on the way out.

Just like our unsustainable monetary system in which we award totalitarian control of our money supply to unelected bureaucrats who conjure trillions out of thin air in their sole discretion…

… just like our unsustainable banking system in which commercial banks hold just a tiny fraction of their customer deposits and then gamble away the rest of it…

… and just like our political system in which a government that’s $60 trillion in debt continues to waste money with wanton abandon…

… this education system is unsustainable.

It’s just as unsustainable to expect a 22-year old to enter the world with uncertain prospects and tens of thousand of dollars of debt.

And, like our monetary, banking and political systems, it’s time for a reset. More on this tomorrow.

PS-

On the topic of real education, the application window for our free summer entrepreneurship camp closes tomorrow night at midnight. Find out more here: www.sovereignacademy.org

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13 COMMENTS

  1. Thanks, Derek. Let me make a few clarifications on what I said about default and delinquency resolution in 1 day here.

    Delinquency can, in most cases, be resolved without a payment in 1 day, many times with a single phone call (once administrative forbearance is applied).

    Default can be resolved without a payment, with consolidation, which takes 20 minutes (to complete the application) and another 4 – 6 weeks for its completion.

    In regards to your concerns, they are, of course, completely valid. Just 10 years ago, it took, on average, borrowers ’til they were about 33 to get an ROI on their student loan debt. Now, it takes significantly longer due to rising tuition costs (the real culprit)!

    And, due to the potential out of pocket costs as the result of tax liability and interest accrued from a longer term, IBR/PAYE is not always the answer (even if debt relief agencies like to package it that way). This is why I help my clients really take a look at, and understand, their student loan portfolios within the context of their personal financial landscape, before having them commit to IBR as a long-term strategy.

    The real answer IS different for everyone, but preparation is often the key.

    33% tax liability on the amount forgiven + cumulative payments are often still significantly less than total loan amortization on standard repayment — and it only takes a very small monthly savings contribution to be ready for a future tax lump sum.

    However, if IBR only lengthens your term and costs you more interest, there are *many* other strategies, specifically applicable only to student loans, that will make the necessary difference.

    I’m not trying to tell you that this student loan debt isn’t an issue for our economy. What I am saying is that this is actually one problem that usually has a solution — when proper education is available for students before and after they attend school.

    And, the media seems to love stoking the fire of negative attitudes around the issue, so the positive aspects of student loans are usually overlooked, or ignored.

    Student loans allow 70% of all student borrows to afford a college education. This directly and significantly impacts our economy from increasing average wages and reducing incarceration rates, to improving health and community service.

  2. Ok, so you have an 800+ FICO (which indicates a stellar balance to limit
    ratio), no other debt besides your student loans (Auto payment?) and
    you make too much money to qualify for one of the income driven plans?
    But you are having difficulty affording your student loan payment? Do
    you live in Manhattan NY? Betcha I can help you.

  3. I appreciate your knowledge, enthusiasm, and frankness. Keep up the good fight. There are definitely more programs now than ever before, however, I am not aware of any program that can rehabilitate a defaulted loan in 1 day with no payments. My issue is the massive debt on our younger generation whom will be forking over a lot of money to loans who will not be able to buy homes, etc. and put that money directly into the economy. I don’t see an end to that when IBR, Pay As You Earn (which is for an even more select group of borrowers), lower your payments, but stretch it out to over 20 years where you have possibly paid way more than the principal, yet get your remaining debt forgiven. The forgiven debt will likely be more than your original balance, plus it is taxed as income when forgiven (not for PSLF). At that point, try getting such consideration from the IRS! This is all out of sight, out of mind because no one has reached the 20 or 25 year mark yet since the program only starts with loans after 2007. It’s another train wreck down the road. I fear nothing will be done by Congress until 40-50 year old borrowers start getting property seized by the IRS. Look how many retired borrowers/co-signers are having SS garnished right now. I am encouraging my children to only go to college if they have a scholarship or GI Bill.

  4. We have no debt other than student loan debt and the minimum payments on our credit cards (which I don’t think should really count as debt anyway since we pay our cards off in full every month) We have 800+ FICOS, and my husband has a graduate degree in engineering and two years of verifiable employment. The only thing we can think of that would help us is a MUCH lower interest rate on our loans (all federal). Also, the cost of housing needs to be subsidized even for the relatively well-off, because when people like us can’t afford rent, there’s something seriously wrong with the housing market.

  5. Great question, Lil25. It actually helps quite a bit. The majority of the repayment assistance options that I’m referring to actually exist for the borrowers who are on time with their payments, as well.

    The best approach is to examine all of your debt and then build a strategy for your repayment, while taking into account the details of all that you owe.

    The first thing that you should know is that federal student loan repayment options and programs, once applied, do not hurt your credit at all. In fact, they help your credit by preventing delinquency and allowing you to pay down other debt that is lower your credit score.

    For example, if you owe a significant amount in student loans and credit cards, chances are your
    cards have a higher permanent rate. So by taking advantage of your student loan repayment options for a few years, you can redirect your payment to higher rate cards.

    Not only does this save you money on interest, but it will lower the balance to limit ratio of your revolving debt and, subsequently, your credit score will increase. This is just one example of many.

    Student loans exist not just to help you potentially get a return of investment financially (which, statistically, they do for most people) but also to help you pursue your academic and career dreams. They are an investment in your future. However, if the investment doesn’t pan out, there are a multitude of ways to make your repayment manageable.

  6. Great question, Lil25. It actually helps quite a bit. The majority of the repayment assistance options that I’m referring to exist for the borrowers who are on time with their payments, as well.

    The best approach is to examine all of your debt and then build a strategy for your repayment, while taking into account the details of all that you owe.

    The first thing that you should know is that federal student loan repayment options and programs, once applied, do not hurt your credit at all. In fact, they help your credit by preventing delinquency and allowing you to pay down other debt that is lower your credit score.

    For example, if you owe a significant amount in student loans and credit cards, chances are your cards have a higher permanent rate. So by taking advantage of your student loan repayment options for a few years, you can redirect your payment to higher rate cards.

    Not only does this save you money on interest, but it will lower the balance to limit ratio of your revolving debt and, subsequently, your credit score will increase. This is just one example of many.

    Student loans exist not just to help you potentially get a return of investment financially (which, statistically, they do for most people) but also to help you pursue your academic and career dreams. They are an investment in your future. However, if the investment doesn’t pan out, there are a multitude of ways to make your repayment manageable.

  7. How does this help those of us who are not behind in our payments but who can not afford to be adults because our student loan payments take up so much of our incomes that we can’t afford cars, homes, children, etc. What is the point of a college education if we’re all living like paupers?

  8. I hear that. But first, I have to say that the very fact that these incredible short-term solutions exist is quite an advantage over any other type of debt.

    Resolving an account that is 9 months past due – or 3 years defaulted – in one day, without a payment, is one heck of a great option, and can be a game-changer for anyone who’s running behind on their payments.

    (Try asking your credit card company or a bank lender for this kind of flexibility – yikes.)

    Many individuals across the U.S. fall further (and further) behind on their payments,
    and they often get to that point where they feel it is impossible to
    catch up. So, they let their accounts default, or, they do not consider (or know)
    that the above mentioned solution is possible.

    Also, delinquency and default resolution is only the beginning of the repayment assistance that’s available. Once they are in good standing, a whole slew of options are available to the federal student loan borrower. And I’m not just talking about IBR or consolidation.

    In my experience, I have never come across a borrower situation that is hopeless, and that is saying a lot since I’ve been working with borrowers for almost 2 decades. There is always something that can be done.

    Everything from spousal consolidation loans, to not qualifying for IBR/PAYE, to having huge medical costs, to being in wage garnishment, to having used up all your deferments, to having lots of private loans… clearly, it might not be pretty, and some sacrifices might have to be made — but there are solutions available.

    The problem is that many (okay, most) times, it takes someone with my knowledge of the complicated rules, regulations, policies and administrative practices of student loans to find the long-term answers. An education of how the system works is much-needed, across the nation.

  9. I am not sure what the solution is, but this growing debt and young workers’ ability (or choice) to repay is not getting better. This massive and growing debt will have to be dealt with in the near future.

  10. Ok, so default and delinquency can be resolved with or without payments being made. That buys time, but it doesn’t solve much of the long term problem in most cases.

  11. As a student loan consultant who’s been at this for 17 years, I must say that although these statistics need improvement, they are not as bad as they may appear.

    Federal student loans do not report delinquency until they’re at least 60 days past due, and they do not default until they are 9 months past due.

    Delinquency and default can also be resolved in most cases, without even a single payment being made (due to the many repayment options available with student loans).

    So, while these statistics are not desirable, they are not as foreboding as the media would like to present.

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