How to finally address the country's out-of-control student loan crisis, according to a finance professor

• For the first time in US history, total student-loan debt exceeds $1.5 trillion - surpassing both auto-loan and credit card debt.
• Mark T. Williams teaches finance, risk management, and capital markets at Boston University and says the sprawling financial-health crisis demands a multi-pronged solution.
  

Generation Student Debt is the unenviable #hashtag for 45 million borrowers. They believed in the American Dream that you go to college to get ahead. But for one out of every four Americans, that has required taking on more and more debt. This growing class of debt holders, two-thirds of whom are female, range from newly minted graduates to 60-somethings. As loan defaults skyrocket, many are exposed to long-term financial harm while rising student loan debt impacts mental health and worsens gender and racial injustice. Managing this sprawling financial-health crisis demands a multi-pronged solution.

First, some intimidating facts.

For the first time in US history, total student-loan debt exceeds $1.5 trillion, surpassing both auto-loan and credit card debt (only mortgages are more).

Over the last decade, college enrollment of high school graduates has reached 67 percent, and student-loan debt has more than doubled. To meet this demand, federal government and private lenders offering less-friendly terms have ramped-up lending.

Each quarter, students (and co-signers) add $30 billion in new debt at interest rates as high as 13 percent.

Interest compounds once the loan is taken out, increasing the odds that students will graduate with greater debt than when they started. Even seven years after graduation, many owe more than originally borrowed.

Unlike typical consumer debt, these loans can't be legally discharged in bankruptcy, so consequences of default can be severe, a financial albatross.

Unfortunately, tuition costs have climbed while wage growth needed to cover this indebtedness has not kept pace. Since the 1980s, the average cost of college has increased almost eight times faster than wages, leaving a widening financial burden to meet. In the last two decades, the average cost of attending a public university has increased to over $20,000. Private university costs are at least double that. Long gone are the days when a student can work during college and upon graduation emerge with no debt. Students today graduate with both degrees and life-altering, potentially crippling debt.

Although the cost of college has exploded, so has the demand to attend. On average, college graduates can expect to earn 84 percent more during their lifetime than high school graduates. This income gap is at a historic high.

Such widely cited statistics have generated a boom in loan demand. In 2018, students arriving at American colleges and universities total 20 million - some 70 percent will graduate with significant debt. Many students also are doubling down with 40 percent of loans linked to graduate degrees.

And while the cost of higher education has mushroomed, middle- and lower-income families have experienced stagnant earnings growth, putting greater reliance on student loans. This is evident for Class-of-2018 students who graduated with an average $29,800 in debt, with 14 percent of parents taking out related loans totaling $35,600. On a U.S. household basis, average student loan debt totals $47,671.

Debt for decades that can impact health

Student loan debt is not simply a young person's problem. College may last 4 years but student debt can last decades, taking an average of 19.7 years to pay off. Not all students graduate on schedule with less than 55 percent earning a sheepskin in 6 years from starting.

Post-graduation, student borrowers are expending nearly one-fifth of current salary, averaging $393 a month, in servicing debt. Many don't expect payoff until in their forties. Trying to lower monthly payments, some restructure loans, pushing out maturity which results in greater debt. It is now more and more common for loans to have 25-year terms, making them feel more like mortgages.

For college-educated women, where peak earning potential is at age 40 (more than 10 years sooner than male peers), debt repayment can extend past peak earning years.

Recent public health studies also have shown that student debt can impact stress level, sleep and lead to depression. This debt burden can fall hardest on people of color where parental wealth may not exist and rates of unemployment can be disproportionally higher.

Shockingly, those 60 and older owe $86 billion in student debt, averaging $33,800. Over the seven-year period since 2010, debt for this senior category has increased by 161 percent, the single largest growth. For this graying population (taking on debt either for their children or for themselves), when loans can't be repaid it is not uncommon for the federal government to garnish Social Security benefits. Student-loan burden is a growing stress point for this population increasingly challenged to meet everyday costs of retirement and rising health-care costs.

Financial literacy is lacking

High-school students often base their college decision not on affordability but on what is the most prestigious institution they can attend, where friends are going or in avoiding otherwise less expense state universities thought too close to home. Oftentimes debt is viewed as not "real" until after graduation. And while unreasonable to assume high-school students should know their career path and earning potential in advance, the critical question of what is the best-fit college for career and cost shouldn't be ignored.

As college students near graduation, they must choose from an array of loan repayment options which can be confusing, complicated and require sufficient financial acumen to make the right choices. Many leave college with multiple student loans but not realizing they can consolidate them at better terms, lowering cost.

Female debt holders are also at a disadvantage. Although women hold two-thirds of overall student debt, the 20 percent gender pay gap between their male counterparts further heightens the challenges around loan repayment. Racial pay gaps also vary across the U.S. and can swing by 10 percent or more. Given the rapid run up in tuition costs and stagnant wage growth, it is no wonder overall student loan defaults are mushrooming.

Mounting debt levels also directly impact individual life choices and credit ratings. Federal Reserve Chairman Jerome Powell recently warned about the detrimental impact of unhealthy debt levels over a borrower's economic life. Servicing sizable debt reduces the amount of disposable income available for productive purposes, such as starting a new business, and reduces the likelihood of home ownership. This is particularly significant given homeownership has proven a critical path to accumulating wealth. Large debt burden can also create workforce inefficiencies, forcing students to take higher paying but less fulfilling jobs or seek work in fields deemed less beneficial to society.

To put this into perspective, the average starting salary upon graduating is about $50,000 yet student indebtedness can equal 60 to 100 percent of salary - leaving little room to cover rent, food or begin to build financial stability and security. With minimum cushion, unexpected emergencies get picked up with expensive credit-card debt, further triggering financial stress.

Meantime, the amount borrowed and how repayment is managed can materially impact individual credit scores. Regardless of whether employed, loan repayment starts six months after graduation. Credit rating companies wield immense power and their scores can determine a person's access to a car loan, rental apartment, credit card or mortgage. Students unable to secure a job six months after graduation can see their credit score damaged before entering the work force. Even for those employed, competing pressures around finite wage and ever-present debt can become a vicious cycle. If a payment is missed, truancy grows, personal credit scores (e.g., FICO) fall, and access to wealth-creating credit opportunities is reduced. Increasingly, job prospects also can be diminished as employers are using credit scores in hiring decisions.

Default dangers

Student-loan default rates - even in this relatively strong economy - are now 10.8 percent. A decade ago, it was half that. For those who have dropped out of college, default rates are 20 percent and climbing. A recent Brookings Institution study forecasts default rates could be as high as four out of every ten students by 2024. Should the economy slip into recession, which could happen by next year, defaults will spike, further threatening the prospects of aspiring graduates.

Even if a recession can be avoided, this year's graduates - collectively owing $20 billion of overall student debt - will be required, job or no job, to start repaying their debt. But possible solutions should be considered to help ease their burden and to safeguard the emerging cohort still in school.

10 ways to address the mounting student loan crisis

Moves to mitigate the student-debt conundrum can include both prevention strategies to protect future students against financial harm and repair strategies to lend assistance to borrowers who are currently struggling.

As part of this process, government and private lenders must acknowledge that loan defaults will continue to rise and harm borrowers as tuition costs outpace wage growth.

1. These lenders need to show greater forbearance, including developing more flexible payment options and at reduced interest cost. Next, there needs to be expansion in the government's existing income-based repayment plan.
2. Capping the amount of loan repayment to discretionary income at 10 percent should be a viable option for more borrowers. Doing so would relieve some financial pressure and increase the ability for students to pursue careers that best suit their interests and could provide greater societal benefit. This policy could also have the additive benefit of freeing up disposable income towards important retirement savings. Despite lenders' willingness to lend, students (and their parents) should be encouraged to borrow only what they need.
3. More emphasis should be placed on the long-term financial benefits of graduating in four years, exploring needs-based and academic scholarships, and possible grant opportunities.
4. Going forward, stakeholders - including lenders and colleges - must do a much better job teaching financial literacy to students, disclosing the true cost, risk and long-term consequences of debt, and not just focus on increasing lending - a hard nut to crack, indeed.
5. Meantime, high-school guidance counselors must better guide students (and their parents) on best-fit colleges, linking career path with appropriate debt levels. There also needs to be greater focus on creative, lower-cost solutions - like attending community college for the first two years before transferring to a more expensive university. In some cases it might make sense to encourage students to work right out of high school, save money, and then attend college. The stigma of not attending college also should be erased by acknowledging and supporting high-school students that aspire and whom could benefit from alternative career paths
6. Recognize that college is not the right choice for all students. Many could better prosper by attending lower-cost trade schools than high-priced colleges. College has become an increasingly expensive product, and with that comes the need to prove value. In this environment, public universities and community colleges can be a cost-effective way to gain a desired degree without putting on excessive debt upon graduation. Private universities must focus on finding new ways to tamp down escalating tuition costs, including offering more online course opportunities and the ability to graduate in three years - another hard nut.
7. More universities could institute "no student loan" financial-aid policies that replace student loans with scholarships, grants and work-study programs. If colleges are forced to take on more of the financial risk, they may gain added incentive to keep tuition and loan levels manageable - this means increase focus on value and return for investment, or face a decline in student enrollment.
8. States can take the lead. Similar to what was just passed in Massachusetts (January 2019), financial-literacy training needs to infuse high-school curriculum especially around financial decisions related to how to best pay for college and other post-secondary educational opportunities.
9. Companies also can step up by acknowledging the impact that sizable student debt has on their employees and by being willing to expand existing employee benefits to encompass loan repayments. Employees that commit to long-term employment could see debt reduced. Such good-faith benefits will help attract and retain talent
10. And Congress could finally address the elephant in the room and abolish legal roadblocks so that student loan debt, similar to other consumer debt, can be discharged in bankruptcy. Doing so will return more control to student borrowers as they address how best to honor their student-loan obligations.

As the ranks of Generation Student Debt grow and grays, they gain more voter clout, forcing Congress to play a greater role in solving this growing financial-health crisis.

Previous debt crises have taught us that it is better to address the risk sooner than later. If not, crippling student debt could double by 2025, ballooning to $3 trillion, reducing economic life choices, and further highlighting the sad financial fact that students accumulate much more than just knowledge, friends, nicknames and diplomas when attending college.

Mar T. Williams holds the James E. Freeman Lecturer in Management at Boston University's Questrom School of Business, and is the co-founder of FitMoney, a Massachusetts-based nonprofit, providing free financial literacy curriculum in public schools K - 12.