With student loans continuing to soar, the crisis has become a hot topic in both political and financial news. Student loan debt has reached astronomical levels in the United States, with 44.2 million Americans carrying an estimated $1.48 trillion in education debt. Within the last 20 years, the cost of higher education has risen faster than income levels. It should be clear to us, as members of the financial services industry, that this isn’t sustainable for the future. So what role do credit unions play in this issue and how can we provide the education our members need for the long term?
Student Debt Statistics
In the first quarter of 2019, student loan debt rose to $1.49 trillion—that’s more than the national totals for auto loan debt ($1.28 trillion) and credit card debt ($850 million), combined. Student loans are now the second-largest debt category after home mortgages.
- Average student loan debt: $31,172
- Average monthly student loan payment: $393
- Average time it takes to pay off the debt: 21 years
- Average debt-to-income ratio at graduation: 12.95%
And the student loan problem isn’t going anywhere anytime soon since 70% of new college graduates have student loan debt. According to data from LendEDU's fourth annual Student Loan debt by School by State report 16% of student loan borrowers will have debt-to-income ratios above 20% at graduation.
What Caused the Crisis
So how did our country get to this point? There are several contributing factors, but skyrocketing tuition costs is certainly a major one. Today’s students pay close to twice what their parents paid for an undergraduate college degree. These costs have risen much faster than other things such as the cost of living or medical expenses. It's a positive that, as a society, we stress the importance of education and having a college degree, making it practically a requirement for many. Today’s families believe in the value of college and many are willing to stretch themselves financially or take on debt to make it possible.
But this also can set an expectation that every high school graduate should go to college and that may not be the best choice for everyone in the long term. According to LendEDU, the average college dropout leaves campus with nearly $14,000 in student loan debt. More than half, 53%, aren't making any payments towards their loans and 47% of dropout debtors are in default on their loans.
Leaving so many new graduates in crippling debt, or causing them to drop out over the accruing debt, from the start can lead people on a path that can be hard to recover from, especially if their career earnings don't live up to expectations. When they graduate and begin paying their student loans, that monthly bill can be a major burden. The economy as a whole is affected since these young Americans have less to spend on big-ticket items. The housing marketing is a perfect example, with homeownership for young Americans (ages 24-32) falling almost 10% due to the inability to afford to take on a mortgage loan.
The Credit Union Difference for Student Loans
So where does that leave the credit union? In a perfect position to provide the Credit Union Difference, of course. By being member-focused, credit unions can advocate from the member perspective and work to educate membership on their financial options.
Financial education has greatly increased in the U.S. overall, however, there is still a huge gap in understanding. A recent study by financial services firm Edward Jones found the number of Americans who don’t recognize a 529 plan as an education savings tool has risen to 67% – a 5% increase from 2012, the year the survey was first commissioned.
There is also a large gap in basic financial understanding about student loans and what they mean for the student in the future. One of the biggest regrets among student loan recipients is that they didn’t realize what they were getting into when taking out the loan in the first place. The loans are so accessible and simple to apply for which can lead to bad financial decisions being made without recognizing the future impact.
90% of families agree that college is an investment in their student’s future. Figuring out how to pay for that investment can be complex and time-consuming. That is where credit unions can have the greatest impact, by working to educate members and help them understand the options available and how each will impact their future.