Student loan burden threatens long-term financial freedom
Mark Garro
Wealth of Geeks
The Federal Reserve estimates total student loan debt now exceeds $1.7 trillion. Once bright with the promise of education and prosperity, the American dream is being overshadowed by a looming cloud of student loan debt.
This financial burden is not only altering the course of individual lives but is also reshaping family dynamics and the pursuit of financial independence.
The rise in student loan debt is a pressing issue that has permeated American households. It affects decisions on financial security, major life milestones, and even health and well-being.
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A growing problem
The student loan crisis in the United States has reached an alarming level. According to the Federal Reserve, individual students currently owe about $37,338 each. This figure surges to $54,921 per borrower for private student loan debt, based on a 2023 report from the Education Data Initiative.
Student loan debt burdens more than 45 million students in the United States. That’s about one in every seven Americans — even less if you only count the adult population.
This is not a short-term burden; half of student borrowers are still saddled with a $20,000 loan balance two decades after beginning their education.
The growth rate of student loan debt is equally alarming. Over the last 15 years, figures from Federal Student Aid show that the total debt has tripled from $577 billion in 2008. At the same time, the average debt per student has almost doubled from $19,300.
This rapid increase has far outpaced the growth of the average American wage, which rose just 35% over the same period. It’s little wonder the issue is putting financial strain on millions of individuals, families, and retirees alike.
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Pervasive impacts
Student loan debt has wide-reaching adverse effects on many aspects of graduates’ lives once they leave higher education. A review by The Centre for Global Higher Education, which analyzed research over several decades, found that loans can impact everything from career choices, home ownership, and health, to retirement, and even starting a family.
Those with higher amounts of student debt are less likely to start businesses, or see career paths become restricted, ultimately leading to lower job satisfaction. While the research failed to find a consensus on the impacts on one’s earnings, student debt is forcing many to delay significant life events such as buying a home, getting married, and having children.
Individuals burdened by educational loans generally possess reduced net worth, face heightened financial hardship, and have diminished savings. Retirement accounts and pension plans also feel the impact, particularly if students did not complete their degree.
Perhaps most concerning is that the crisis has broader ramifications on health and well-being, both during and after university. The emotional aspects of student loan debt are profound and far-reaching. Anxiety, depression, insomnia, and panic attacks are common among those grappling with the weight of repayments.
Parents are also stepping up to help their children with student loan payments in various ways. They are setting up automatic payments, taking on loans with high interest rates, and even co-signing refinancing loans. This assistance comes at a cost. The repayment of student loans can consume a significant portion of a parent’s retirement savings. Numerous studies also indicate familial conflict may increase as parents continue to repay loans for their children’s higher education.
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Seeking solutions
In response to the growing crisis, the federal government is implementing several policies aimed at alleviating student loan commitments. The Biden administration found ways to cancel more than $127 billion in debt through various federal forgiveness programs. These programs target specific categories of borrowers, such as public-sector workers, those with a total and permanent disability, or those impacted by historical inaccuracies.
More than 1.3 million borrowers who were misled by their educational institutions, had their schools suddenly shut down, or fell under associated legal settlements also stand to benefit.
Financial planning advice for families grappling with student loan debt is crucial. Experts recommend developing a plan to manage student loans as part of a long-term financial strategy. This plan should include understanding the amount owed, the terms of the loan contract, reviewing grace periods, and considering consolidating debt if it makes sense. Paying off loans with the highest interest rates first is another recommended strategy. These steps help individuals and families navigate the complexities of student loan debt and work toward financial independence.
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Future outlook
The future impact of student loan debt on families is a focus of ongoing research and concern. Predictions by the non-profit think tank D?mos suggest that $1 trillion in unpaid student loans stands to erode $4 trillion of lifetime wealth for households in debt. This forecast means that the average student debt burden for a $53,000 bachelor’s degree leads to a lifetime wealth loss of nearly $208,000. About two-thirds of this loss comes from lower retirement savings, while more than one-third comes from lower home equity.
The Biden administration’s policy on forgiving federal student loan debt has eased the financial burden for many. However, the cost of such forgiveness programs is substantial and could cost up to $1 trillion over a 10-year budget window.
As America approaches a staggering $2 trillion total student loan debt, there is a profound impact on both individuals and families and the federal efforts to address it.
One thing remains clear: the long-term repercussions on financial independence, family dynamics, and overall well-being demand both immediate attention and sustainable solutions.
