It was the number heard ‘round the world: American college students have amassed over $1 trillion in student loan debt. To many consumers, that number painted a picture of greedy colleges and lenders cashing in on their American dream. It’s easy in hindsight to point a finger at lenders for taking advantage of borrowers, or at colleges for allowing their students to get in over their heads. Whose fault is it really? There isn’t a simple answer. But the best way for credit unions to repair the damage is to realize that even if it isn’t our fault, it is our problem.
Past Private Lending Practices
Private student loans are not as prevalent as they once were, largely due to increasing scrutiny from the Consumer Financial Protection Bureau (CFPB). In fact, private student loans represent only about $150 billion of the $1 trillion student loan debt. But many profit-motivated lenders in the early 2000s took advantage of the increasing cost of college. They hooked families into high-rate, low-value loans, then off-loaded the assets into Wall Street securities. Some borrowers are still paying the hefty price of those loans, which presents the opportunity for refinancing options from trusted lenders like credit unions.
The government aimed to make higher education more accessible for all consumers. Because of that push, nearly 86% of the $1 trillion of loans are backed by the federal government. Unfortunately those loans are also the most credit-challenged as they carry no traditional underwriting criteria. According to the CATO Institute, this trend led to massive over-consumption of higher education, resulting in poor completion rates and even higher college prices.
The Role of Colleges
According to data from Bloomberg and the U.S. Department of Labor, the cost of obtaining a college degree increased by 1,120% between 1978 and 2012. What is the cause for that huge inflation? Some point to frivolous spending by schools on administrators, luxurious dorms, campus building projects, and other amenities. But as The New York Times reports, public colleges and universities, which enroll three out of every four American college students, have also been hit by funding cuts at the state level. Add in the rise in expensive for-profit universities in recent years (up 225% from 1998 to 2008 alone) and it’s clear that many factors come into play when explaining increases in the cost of college.
Are Students to Blame?
Although many are sympathetic to the plight of students and parents, personal responsibility can’t be overlooked. More than ever, college must be viewed as a financial investment. Sam Adolphsen of the Center for Open Government points out that racking up thousands in debt to achieve a degree in a field that yields a low wage simply doesn’t make sense. And as CNNMoney reports, the rising number of students attending graduate school is driving up overall student debt. While earning a college degree is still worth it and can be a sound investment in the future, planning and financial responsibility are crucial.
There are many factors at play when it comes to student debt. And although credit unions aren’t at fault for the current environment, they are charged with being part of the solution. Presently, students and parents are in need of guidance and fair-value education financing. In the mid- and long-term, credit unions can leverage their philosophy to help borrowers minimize cost and loan balances. This role also enables the credit union to assist with future auto and mortgage loans, as recent reports indicate that student loan debt is hampering the ability and willingness of young adults to buy cars and homes.
By becoming part of the movement to eliminate excessive student debt, credit unions can rebuild trust in the lending industry and help families obtain necessary funding for higher education.
Learn more about how you can become part of the solution by offering your members smarter private student lending options!