Whether we are working to pay off student loans, or credit card debt, paying for elders or childcare, or even trying to save for retirement, the idea of the American dream remains just that – a dream. I am trying to solve the problem of excessive student loan debts. Excessive student loan debt refers to the burden of large outstanding student loans that a borrower cannot pay in a timely manner. According to Friedman (2018), “Student loan debt is now the second highest consumer debt category – behind only mortgage debt – and higher than both credit cards and auto loans” (p.1); This is a growing concern in the US, with the average student loan debt per borrower rising to over $30,000 (Friedman, 2018). This large debt can significantly impact the lives of young people just starting out in their careers, as they are often forced to make difficult financial decisions such as deferring home ownership or other large purchases. This paper discusses the causes of excessive student loan debts, the drawbacks of solving this problem, who is impacted by the problem and how they are impacted, and a solution to the problem and its strengths and weaknesses.
One of the reasons why the problem exists is the rising cost of tuition. According to Henager et al. (2018), “With the rising cost of tuition, the burden of student loans on individuals and families is increasing” (p.1). In recent years, the cost of attending college has increased much faster than inflation and wages, leaving many students and their families no choice but to take out large loans to finance their education; This has put pressure on students and their families to take out larger loans to pay for their education, leading to a cycle of debt that can be difficult to break Henager et al. (2018). Thus, the rising cost of tuition contributes to excessive student loan debts. The effects of excessive student loan debt can be far-reaching and long-lasting. Borrowers may struggle to make payments on their loans, leading to a negative impact on their credit score and making it more difficult to secure loans for other major purchases, such as a car or a home. Additionally, excessive student loan debt can limit borrowers’ ability to save for retirement, which can significantly impact their financial security in later life.
Another cause of the problem of excessive student loan debt is the lack of awareness about the financial implications of taking out student loans. According to Dynan (2020), many students are not fully informed about the terms and conditions of their loans, such as interest rates, repayment terms, and the consequences of defaulting on their loans. This lack of knowledge can lead to students taking out more loans than they can afford to repay, leading to excessive student loan debt. The lack of adequate loan repayment options is also a cause of excessive student loan debt. Currently, many loan repayment plans are not designed to meet the needs of students and are often too rigid, making it difficult for students to repay their loans on time Dynan (2020); This can lead to students falling behind on their loan payments, further contributing to excessive student loan debt. Thus, the lack of awareness about the financial implications of taking out student loans contributes to the problem of excessive student loan debt.
There are drawbacks to solving the problem of excessive student loan debt. According to Dynarski (2021), some proposals to lower the cost of tuition would require increased government funding or tax increases, which could be politically controversial. Additionally, forgiving student loan debt may negatively affect the economy, as it could lead to decreased confidence in the value of higher education and potentially lower the demand for loans to finance education Dynarski (2021). Thus, there are drawbacks to solving the problem of excessive student loan debt.
One of the primary groups impacted by the problem of excessive student loan debt is students themselves. According to Amin et al. (2021), as tuition costs continue to rise, many students are taking out larger and larger loans to pay for their education; This can result in a significant financial burden for students, even before they have entered the workforce. With high levels of student loan debt, students may struggle to make ends meet, pay bills, and make necessary purchases Amin et al. (2021); This can lead to a cycle of financial stress and difficulty, which can have long-lasting effects on their well-being and financial stability. Thus, the students themselves are impacted by the problem of excessive student loan debt.
Recent graduates are another group impacted by the problem of excessive student loan debt. According to Amin et al. (2021), as they enter the workforce, they face the reality of having to repay their student loans. For many, this can mean a significant portion of their monthly income is being used to repay debt, leaving them with little money for other necessities such as housing, food, and transportation; This can lead to financial hardship and make it difficult for recent graduates to build a strong financial foundation for their future. Thus, recent graduates are impacted by the problem of excessive student loan debt.
One solution to the problem of excessive student loan debt is to offer income-driven repayment (IDR) plans. According to Yu (2020), IDR plans are designed to make it easier for borrowers to repay their student loans by linking their monthly payments to their income; This means that borrowers who are struggling to make their payments can have their payments reduced so that they are more affordable. Additionally, after 20-25 years of making payments, the remaining loan balance will be forgiven. Thus, income-driven repayment (IDR) plans to solve the problem of excessive student loan debt.
The strengths of income-driven repayment (IDR) plans are affordability, forgiveness, and flexibility. IDR plans are designed to make student loan repayment more affordable for borrowers. According to Delisle (2021), affordability is a significant strength of the plan because it can help reduce the debt burden for those struggling to make their payments. Another strength of the IDR plan is that after 20-25 years of making payments, the remaining loan balance will be forgiven (Delisle, 2021); This can provide significant relief for borrowers who may otherwise be struggling with student loan debt for the rest of their lives. IDR plans are also flexible, allowing borrowers to switch between plans if their income changes (Delisle, 2021). This is important because it allows borrowers to adjust their payments to their financial situation. Thus, affordability, forgiveness, and flexibility are strengths of income-driven repayment (IDR) plans.
Complexity and tax implications are weaknesses of income-driven repayment (IDR) plans. According to Lacey (2018), IDR plans can be complex, making it difficult for some borrowers to qualify for the loans. Private student loan borrowers may not be eligible for IDR plans; This means that the solution may not be accessible to all who need it, which is a significant weakness. Tax Implications are another weakness of income-driven repayment (IDR) plans because the forgiven balance at the end of the repayment period may be taxed as income. This can result in a significant tax burden for borrowers, which can offset some of the plan’s benefits. Thus, the weaknesses of income-driven repayment (IDR) plans are complexity and tax implications.
In conclusion, excessive student loan debt is a problem. The problem exists because of the rising tuition cost and the lack of awareness about the financial implications of taking out student loans. The students and the recent graduates are the ones impacted by the problem. IDR plan is a viable solution to the problem of excessive student loan debt. It offers affordability, forgiveness, and flexibility to borrowers struggling to make payments. However, it has weaknesses, including complexity and potential tax implications. Excessive student loan debt is a growing problem that has the potential to cause significant harm to individuals and society as a whole. While there is no single solution to this problem, there are steps that can be taken to help alleviate the burden of student loan debt and make higher education more accessible and affordable. It is essential that policymakers and stakeholders act to address this issue, as doing so will positively impact the economy and individuals’ lives in the long term.
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Dynan, K. (2020). Rising student loan burdens and what to do about them. Business Economics, 55, 129-133.
Dynarski, S. M. (2021). An economist’s perspective on student loans in the United States. In Human Capital Policy (pp. 84-102). Edward Elgar Publishing. Https://doi.org/10.4337/9781800377806.00012
Friedman, Z. (2018). Student loan debt statistics in 2018: A $1.5 trillion crisis. Forbes: New York, NY, USA.
Henager, R., & Wilmarth, M. J. (2018). The relationship between student loan debt and financial wellness. Family and Consumer Sciences Research Journal, 46(4), 381-395.https://doi.org/10.1111/fcsr.12263
Lacy, T. A., Conzelmann, J. G., & Smith, N. D. (2018). Federal income-driven repayment plans and short-term student loan outcomes. Educational Researcher, 47(4), 255-258. https://doi.org/10.3102/0013189X187595
Yu, P. (2020). Relief for borrowers in income-driven repayment. Student Borrower Protection Center Research Paper.