Is there really a student loan crisis?

Are student loans really the next financial crisis?

Here’s what you need to know – and what to do about it.

Student loans: financial crisis?

The latest student loan debt statistics show that 45 million borrowers collectively owe $1.6 trillion in student loan debt. Today, according to Make Lemonade, student loan debt is the second largest category of consumer debt behind mortgages. Those who say there is a student loan crisis cite, among other issues, the increase in total student loan debt, the complexity of repayment options, the high rate of student loan cancellation denials, the difficulty of student loan release in bankruptcy and challenges with student loan officers.

However, as Brookings has shown in recent research, student loans are more important than you might think. These facts about student loans might surprise you:

1. Only 8% of borrowers owe more than $100,000.

The average student debt is around $30,000. Borrowers rarely owe more than $100,000. Typically, these borrowers owe higher education student loans, which is associated with higher incomes and lower student loan default rates.

2. Half of all student debt is for higher education.

About 48% of all outstanding student loan debt is from higher education. The student loan problem is usually associated with college debt. However, there has been an increase in graduate degrees and tuition fees over the past two decades, which has fueled graduate student debt.

3. Student borrowers who owe less than $5,000 default the most.

Common wisdom suggests that borrowers who owe the most student loans would default at a higher rate. Not true. It is the borrowers with the lowest balances – many of whom have not graduated, are unemployed or underemployed – who default the most.

4. Most students graduate with little or no debt.

This may seem shocking to some. Consider these two student debt statistics:

  • 30% of graduate students with no student loan debt.
  • 23% of graduates have less than $20,000 in student debt.

How to repay student loans

If these student debt statistics surprised you, you’re not alone. That said, you still need a game plan to pay off student loans faster. Here is a helpful framework for repaying student loans.

1. Refinance student loans

The best way to pay off student loans faster is to refinance student loans. Student loan refinance rates have fallen to 1.9% and are now among the lowest in recent memory.

Here’s an example of how much money you could save with this student loan refinance calculator. Say you have student loans at a weighted average interest rate of 9% payable over 10 years, strong credit and income, and you can refinance those student loans with a private lender at 3%. If you have $60,000 in student loans, you could save $181 per month and $21,683 in total.

2. Consolidate student loans

Federal student loan consolidation allows you to combine your existing federal student loans into one direct consolidation loan. Student loan consolidation is a good organizational tool, but federal student loan consolidation does it not reduce your interest rate or your monthly payment. Your interest rate is equal to a weighted average of your existing federal student loans, rounded up at the top to the nearest 1/8%.

3. Sign up for an income-driven repayment plan

Income-based repayment plans such as PAYE, REPAYE, and IBR are only available for federal student loans. Your monthly payment is based on 10-15% of your Discretionary Income as well as family size and state of residence. You may also qualify for student loan forgiveness, but you are liable for income tax on the amount forgiven.

4. Get student loan forgiveness

The Public Service Loan Forgiveness Program is a federal program that forgives federal student loans for borrowers who are employed full-time (more than 30 hours per week) in eligible federal, state, or local public service employment or 501(c)(3) nonprofit jobs who make 120 qualifying one-time payments over ten years. Unlike income-tested repayment plans, the amount canceled under the Civil Service Loan Forgiveness Program is not subject to income tax.

Here is a recap:

  1. Student Loan Refinance = lower interest rates, faster repayment of student loans
  2. Federal consolidation = same interest rate, arrange student loans
  3. Income-Based Reimbursement = lower monthly payment, student loan forgiveness
  4. Forgiveness of public service debt = lower monthly payment, student loan forgiveness

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