Cost of Higher Education
The US might be dealing with another one of those "bubble" crisises real soon. Remember the last time this happened and a whole bunch of people lost their houses because Wall Street needed that bailout in 2008? Yeah, that sort of bubble... Only this time with Student Loan Debt.
Yup. Student loan debt has reached over $1.3 trillion dollars. You can acutally watch it grow $2,726 every second here.
In short, the 2008 Great Recession. In long, there's a lot of speculation as to what has caused such steep tuition increases. There are definitely a lot of factors at play here but a major foe is the Great Recession back in '08.
After 9/11 in an effort to revive the economy, the Federal Reserve led by Chairman Alan Greenspan was providing loans to banks with an interest rate as low as 1%. Wall Street (major corporations) took several of these loans. They invested them and made serious mullah. Fast-forward a few years, one of these places where Wall Street was making these profits was the housing market. At this point, banks were giving out mortgages, again at very low interest rates, to at-risk families, at-risk meaning they couldn't afford it otherwise. When these families weren't able to make their payments, the market crashed and their houses were foreclosed on.
Whats school got to do, got to do with it?
Because so many Americans were newly unemployed after the recession, states were bringing in less income and sales tax revenue, the major sources of funding for education. As a result states had to make decisions about where to put their now limited revenue. Unfortunately for us, these decisions played out to be major budget cuts, with funding for higher education being one that was hit pretty hard.
After the Great Recession (thanks a lot, Corporate America) it became a lot more difficult to go out into the world and get a job. The market crashed and after that happens it takes a seriously long time before the economy is feeling comfortable again (think Netflix and chill in jeans vs. Netflix and chill in sweats).
WHAT'S THE LATEST?
This has been a big discussion in the 2016 Election with all the Presidential nominees. But no politicians seem to be able to agree on this (...like that's new). Bernie has made this a staple for his campaign and believes all college education should be free. There are a few other countries in the world that do this, watch the video to head first hand from some of those students how it all works!
Let's break it down now.
We bring up the Great Recession and interest rates to make an important comparison that is gravely affecting the student loan issue. These major corporations that got bailed out to the tune of $700 billion through the Emergency Economic Stabilization Act in 2008 have much lower interest rates. They are paying back their loans at a 2.65% interest rate, while students have interest rates from anywhere between 4.29% and 8.25% (see image above).
Now, let’s put these numbers into a more comprehensible, tangible example. The average student debt is $30,000. So let’s say we have a $30,000 loan to be paid off in 20 years. How much extra will a student have to pay in total accrued interest vs. a big corporation? For a corporation, say Wal-Mart, they would pay an additional $8,681.33 in accrued interest. But for a student, for federal loans an additional $14,738.65 to $25,132.13 and for private loans an additional $31,348.73.
However, these totals for student loans are actually incorrect - they’re technically even higher. Here’s why: A standard loan with a typical repayment plan, the one our calculator measured, assumes that we will start making payments on our loan the next day. But student loans work differently. Payments are usually deferred during school, yet the interest still accrues, ultimately inflating the loan balance. When it comes time to make the payments, for federal loans, they are about 17.2% higher than the original borrowed amount. Phew.