40% Default Rates Projected to Hit Student Loans...Soon!

The Brookings Institute reports that default rates for students entering college in the early 2000’s could top 40% by 2023. As we reported earlier, student loans continue to weigh heavily on consumers, and consumer spending makes up a majority of America’s economic activity.

You may have read that loans on cars and other consumer debts are rising steadily and, in some cases, are at record levels. This is troublesome in an economy that is at, or near, its peak.

Given historically low interest rates and near full employment, traditionally, consumer debts should not be this big of a problem. Many analysts consider that too many consumers are overextended or are simply not earning enough to make ends meet.

When the next recession hits (and it will hit), consumer spending could be severely strained as many borrowers head for default or personal bankruptcy. The problem with student loans is that they are not forgiven in bankruptcy, so the toll simply continues to grow and individuals are stuck with burdens that stick with them for years, decades, or until they pass (student loans do not haunt you in the grave).

The solution is baffling to lawmakers. Some have called for more loan forgiveness programs. However, such programs are exorbitantly expensive given that student loan debt now tops more than $1.6 trillion. Also, after the tax cuts, the deficit and national debt are growing at a faster clip, making Federal bailouts seemingly unavailable to lawmakers.

What is the solution if economic growth has not worked? The answer lies in fiscal discipline, but when/if that occurs is anyone’s guess. Governments at all levels seem averse to rein in spending, and consumers continue to find creative ways to leverage themselves into extraordinary debts.

Of course, at Oak Valley College, our belief is undergraduate students should not take any student loans. Next year, Oak Valley is on track gain access to Federal and State financial aid. Under these programs, students will have access to Pell and Cal Grants, but Oak Valley will not allow direct student borrowing. We know there will be some students who would prefer to borrow, but we do not think that is a wise decision,. And if Oak Valley were to extend lending to even one student, it would be required to open it up to all students. That is not a sustainable path for many students, even at Oak Valley’s low tuition rates,.