According to a CNN report published recently in Jan 20 states that in recent years, the number of students enrolled in higher education has declined and the cost of attending college has stabilized relative to people’s incomes, Moody’s analysts said. But borrowers have been slow to pay back their debt, meaning student loan balances will keep growing over the years.
Only 51% of federal borrowers who were scheduled to start paying back their loans in 2010 to 2012 had made any progress after five years, the report said. Students who attended all types of institutions have struggled with loan payments, although people who attended for-profit or two-year institutions have had a particularly tough time. Many of them haven’t paid down their balances at all.
Harmeet Kaur of CNN further goes into details of why the repayment has been this low. One of the reason is that the job prospects for many graduates of for-profit, two-year and non-selective four-year schools aren’t great, making it hard to earn the income needed to pay back loans and otherwise stay afloat. Some students don’t complete their programs or receive degrees, and yes this is true and a bigger problem for the U.S. economy.
Another reason that Moody’s investor services cites for slow repayment is a rise in income-driven repayment plans, which can lower monthly loan payments based on their incomes and the size of their families and make paying back those loans more affordable.
“As you can imagine, the monthly payment will be lowered to reduce their monthly obligation but at the same time that keeps the loan outstanding for much longer and the repayment rate is going to be much slower,” Nicky Dang, senior vice president/manager at Moody’s, told CNN.
Finally, more people are opting for extended repayment plans, meaning that they plan to pay back their loans on a longer schedule. Only about a quarter of balances are currently being repaid on 10-year or shorter terms, the report said.
Many people are on longer repayment plans because they cannot afford traditional loan payments, although analysts believe others are opting to pay back loans on a longer schedule by choice, Warren Kornfeld, senior vice president at Moody’s, told CNN.
Student loans affect other areas of life
Student debt was the fastest growing type of household debt in the US in the last decade, and it’s now the second largest household debt category after home mortgages, according to Moody’s. About two in three college seniors who graduated from public and private nonprofit colleges in 2018 had student debt, according to the most recent data from the Institute for College Access and Success. Those borrowers owed an average of $252,200.
“The growth in student loans has slowed in recent years as states have invested more in public colleges, but millions of students continue to struggle with their debts,” Debbie Cochrane, executive vice president of the organization, said in a statement at the time.
The student loan debt burden, Moody’s analysts said, is “weighing on household finances and the broader economy.”
Having student loan debt affects whether a person can access other forms of household credit, including whether they are able to save for a down payment on a home, qualify for a mortgage or start a small business — all of which drive economic growth and wealth creation.