Student Loans: Debt for Life

September 27, 2012

The cost of going to college has skyrocketed and has resulted in more students taking out loans to pay for their education. Indeed, there is a lot of speculation that college debt is the next bubble after housing, says Peter Coy, economics editor at Bloomberg BusinessWeek.

  • In 2010, student debt exceeded credit card debt for the first time.
  • The accumulation of student loan debt has surpassed $1 trillion.
  • On average, two-thirds of college graduates ended up with student loan debt of $25,000.
  • Under extended repayment plans, many students take 20 to 25 years to pay their loans, allowing interest to accrue.

As a means of attracting more students to attend school, colleges use the financial aid process to distort the cost of college for many. For instance, schools practice a form of legal price discrimination, where they use a family's financial statement to determine how much a student should pay for college. In this situation, a poorer family would have to contribute less than a wealthier family.

Most of the aid a family ends up receiving is in the form of loans. Some schools abbreviate "loan" as L or LN on financial aid letters as a means of creating some ambiguity on what the students are accepting when they accept a loan. The Education Department is attempting to remedy the situation by giving standardized forms that include information about how much debt a student will owe once they graduate along with the school's loan-default and graduation rates.

One other problem to the rising cost of college is the choices that students make. Some students end up staying in college longer than the typical four years, forcing them to take out more loans. Moreover, some students get degrees in subjects that there is a low demand for and don't require degrees in the first place.

Educators around the country are attempting to reduce the cost associated with getting a degree. One promising method of doing so is to create online classrooms where thousands of students can enroll and watch a prerecorded lecture on a subject.

Source: Peter Coy, "Student Loans: Debt for Life," BusinessWeek, September 18, 2012.

 

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