Student loan debt is $1.6 trillion and people are struggling to pay it off

By Harmeet Kaur, CNN

(CNN) — The student loan burden in the United States is about $1.6 trillion and growing, mostly because people have barely managed to repay their loans.

That’s according to a report released Thursday by ratings agency Moody’s Investors Service. While higher college enrollment rates and rising tuition fees were the main reason for the growth in student loan balances, the report says slow loan repayments have recently become the main driver.

“Over the next few years, the combination of slow repayments and high, if not growing, levels of new borrowing will likely fuel further increases in debt stock,” the report authors write.

In recent years, the number of students enrolled in higher education has declined and the cost of attending college has stabilized relative to people’s incomes, Moody’s analysts said. But borrowers are slow to repay their debt, which means student loan balances will continue to grow over the years.

Over the past decade, the overall annual net repayment rate for student loans — that is, the amount of existing balances eliminated each year — has averaged about 3%, according to the Moody’s report.

Only 51% of federal borrowers who were due to start repaying their loans between 2010 and 2012 had made progress after five years, according to the report. Students who attended all types of institutions struggled to repay their loans, although those who attended for-profit or two-year institutions had particularly difficult times. Many of them have not repaid their balance at all.

Why repayment was slow

There are several reasons why people delay paying off their student loans.

On the one hand, the job prospects for many graduates of for-profit, two-year and non-selective four-year schools are not great, making it difficult to earn the income needed to repay loans and stay afloat. Some students do not complete their programs or receive degrees.

Another reason Moody’s cites for slow repayment is an increase in income-driven repayment plans, which can lower monthly loan payments based on their income and family size and make repayment of these loans more affordable. .

“As you can imagine, the monthly payment will be lowered to reduce their monthly obligation, but at the same time it keeps the loan outstanding much longer and the repayment rate is going to be much slower,” said Nicky Dang, senior vice president/director. at Moody’s, told CNN.

Finally, more and more people are opting for extended repayment plans, which means that they plan to repay their loans over a longer time frame. Only about a quarter of balances are currently repaid over terms of 10 years or shorter, according to the report.

Many people have longer repayment plans because they can’t afford traditional loan repayments, though analysts believe others are choosing to repay loans on a longer schedule by choice, Warren said. Kornfeld, senior vice president at Moody’s, told CNN.

Student loans affect other areas of life

Student debt has been the fastest growing type of household debt in the United States over the past decade, and it’s now the second largest category of household debt after home mortgages, according to Moody’s.

According to the most recent data from the Institute for College Access and Success, about two in three seniors who graduated from public and private nonprofit colleges in 2018 had student debt. These borrowers owed an average of $29,200.

“Student loan growth has slowed in recent years as states have invested more in public colleges, but millions of students continue to struggle with debt,” said Debbie Cochrane, the organization’s executive vice president, in a statement at the time.

The burden of student debt, according to analysts at Moody’s, “weighs on household finances and on the economy in general”.

Having student loan debt affects a person’s access to other forms of household credit, including their ability to save for a down payment on a home, qualify for a mortgage or start a small business, which stimulates economic growth and wealth creation. .

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