In case you haven’t heard, there’s a little bit of a student debt crisis at the moment.
As I’m writing this, there are around 44 million borrowers in the U.S. who owe roughly $1.5 trillion in student loans! To add salt to the wound, I recently read a report from the Urban Institute which said roughly 1 million borrowers default on their federal student loans each year.
1 million! Each year! Do you know what that does to your credit? As I kept reading, I saw a couple statistics that really made me think:
- 32% of borrowers with a balance of $5,000 or less defaulted at least once within four years
- 15% of borrowers who owed more than $35,000 defaulted at least once within four years
Wait… so the people with lower balances default more often? How does that make any sense? As you look deeper into the statistics, some interesting and troublesome correlations emerge.
The Effects of Economic Inequality
As I’ve said before, our society conditions us to be consumers, not masters of wealth. It’s also logical to think that wealthy people teach their children how to maintain and build their wealth for future generations. So, if you come from a less-fortunate family, who can you rely on to teach you personal finance?
It certainly won’t be the public school system.
The report from the Urban Institute showed that the median household income is:
- $51,194 in the average neighborhood where a defaulter lives
- $61,138 in the average neighborhood where a non-defaulter lives
On top of that, borrowers who will eventually default lived in neighborhoods with a:
- Smaller proportion of white residents and a higher proportion of black and Hispanic residents
- Less educated population
Earning a college education is supposed to be the great equalizer in America; It’s a platform for people to build a better life for themselves and their family. However, there seem to be two big problems.
Firstly, a college education is becoming increasingly unaffordable. More importantly, our educational system doesn’t teach students the necessary personal finance skills to make big financial decisions. These problems are perpetuating economic inequality.
Making Sense of the Stats
The statistical findings of the Urban Institute study sent my mind in several directions. I was surprised to learn that the highest rate of defaulters had the lowest student loan balances. I was less surprised to learn that defaulters were from less educated and financially fortunate populations.
The study mentioned that borrowers with small debts may default more often just based on larger relative payments from trying to pay off their loans sooner than the standard 10-year period. Also, for those with higher debts, they might opt for longer repayment periods and lower relative payments. They could also be going back to school and deferring loans or incorporating income-driven payment plans.
Those are all good reasons. But do they really get to the core of the problem here?
When I considered all the statistics in this article, I was drawn to a larger issue at hand: inequality. With regard to the smaller balances having a higher rate of default, it makes sense when considering the fact that wealthier students get less need-based financial aid, but their parents are also more likely to help with payments.
Furthermore, let’s keep in mind that the parents of defaulters are more likely to be less educated. If the students’ have little or no personal finance education and are falling into bad financial situations, what’s to prevent their children from falling into the same mess?
College will keep getting more expensive, and people will keep enrolling. In turn, the people who aren’t prepared in terms of financial education will severely damage their financial future. That needs to stop.
The Importance of Personal Finance Education
When I graduated with my undergraduate and master’s degree in 2014, let’s just say I fell on the higher end of the student debt spectrum. I fell victim to the things I talked about above. I didn’t get a personal finance education from my school or my parents, and I was raised in a society that wants you to spend.
Thankfully, I was able to climb out of $170k worth of debt.
I created the Money Master Course so that people would have the personal finance tools necessary to build a brighter financial future. Best of all? It’s 100% FREE.
It’s time to even the playing field. Invest in your future today – or help someone you know invest in theirs.
All opinions expressed on this blog are solely those of Home at 30 and are in no way affiliated with any other organization or institution. The purpose of this blog is to give general education and information about investing, wealth, careers, and college; It is not intended to be professional advice.
Author: Josh Ramos
Josh attended Wake Forest University and paid a fortune for it. Since then, he’s realized the obstacles that Americans face in moving up on the ladder of wealth. By founding Home at 30, he wants to help students learn the skills necessary for taking the next step on their journey to building wealth.