As of June 2010, total student loan debt passed total credit card
debt for the first time.
According to the Federal Reserve's statistical release,
G.19 Consumer Credit,
the seasonally adjusted revolving credit totaled $826.5 billion as of
June 2010. As much as 98% of revolving credit is credit card debt.
Student loan debt outstanding totaled at least $830 billion as of June
2010, with roughly $665 billion in federal education loans and $168
billion in private student loans. The President's FY2011 budget
reports actual federal education loans totaling $605.648 billion as of
FY2009. The first nine months of FY2010 involved approximately $59
billion in additional federal student loan debt. The private student
loan figure is based on a conservative spreadsheet model of loan
repayment trajectories created by financial aid expert Mark Kantrowitz.
Revolving credit has decreased steadily from a peak of
$975.7 billion
reached in September 2008.
Consumers have been paying off their debt due to higher minimum
payments, which were increased to 4% of the balance from
2%. Tighter credit underwriting standards and lower credit limits due
to the economy have also reduced the amount of new debt that can be incurred.
In contrast, there has been significant growth in the total amount of
student loan debt outstanding. About $300 billion in new student loan
debt has been made in the last four years. New federal student loan
volume will exceed $100 billion for the first time in 2010-2011.
It is not surprising that consumers would pay down credit card debt
first, given that credit cards often have higher interest rates than
student loans.
The growth in student loans is also attributable to a combination of
increases in college costs and inadequate government grants. It is
much less expensive for the federal government to provide student
financial aid in the form of loans instead of grants. The unsubsidized
Stafford and PLUS loans are profitable to the federal government. The
average Pell Grant per student has not kept up with increases in
college costs. While the maximum Pell Grant was increased to $5,550 for
2010-2011, there will be no increase in the maximum grant next year,
so the problem will only get worse.
This milestone marks a point on a continuing progression toward
greater student loan debt. The number of borrowers with student loans
outstanding now exceeds the number who carry a balance on their credit
cards. Education debt probably has almost as much of an impact on
consumer behavior as credit card debt.
Practical Advice on Managing Debt
Consumers should accelerate repayment of the most expensive debt
first, which is usually credit card balances and private student
loans. The most expensive debt is the debt with the highest interest
rate, not necessarily the highest monthly payment.
Students should try to minimize their student loans. Loan limits are
not targets. Live like a student while you are in school so you don't
have to live like a student after you graduate. A good rule of thumb
is to not borrow more for your education than your expected starting
salary after you graduate. If you are borrowing more than $10,000 for
each year in school, you should consider switching to a less expensive
college. Otherwise you are likely to graduate with excessive debt and
have difficulty repaying the loans.
College students should also borrow federal first as federal loans are
cheaper, more available and have better repayment terms than private
student loans. The interest rates on federal education loans are fixed
rates and will not increase when the economy recovers.
Students should also exercise caution with credit cards. Spending $500
on a credit card feels the same as spending $5, so it can be difficult
to exercise restraint. According to a
2009 survey by Sallie Mae,
college students graduate with an average of $4,100 in credit card
debt on top of student loans.
The Credit CARD Act of 2009
has made credit cards less available to college students by requiring
a cosigner for students under age 21. Even so, college students should
pay off the balance on their credit cards in full each month in order
to avoid spending beyond their means.
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