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President Obama Is Right. The Student Loan Crisis Is Scary and Getting Worse

No matter what you think of him, President Obama's remarks about student loans during the State of the Union ring true for millions.

Obama's prepared remarks included 6,778 words and the 41 words about the massive burden posed by student loans to millions of Americans were spot-on:

We're offering millions the opportunity to cap their monthly student loan payments to ten percent of their income, and I want to work with Congress to see how we can help even more Americans who feel trapped by student loan debt.

Reforms have been made when it comes to student loans, but there is absolutely more that needs to and can be done to help students everywhere.

Massive growth
Since 2003, the total debt of individual Americans has ballooned from $7.2 trillion to $11.3 trillion, an increase of 56%. And while that is certainly a huge gain, consider that the student loan debt held by Americans has quadrupled, growing from $241 billion to $1.03 trillion.

Over the last 10.5 years, the total debt has risen by an average of 4% per year, but student loan debt has risen by more than 14% per year. 

To put it all on a relative basis, student loans went from just being a little more than 3% of total debt in 2003 to more than 9% at the end of September. Excluding debt related to housing, those numbers are even more staggering, going from 12% to 36% of total debt:

Non-Housing Debt | Infographics | $in Trillions.

The combined total of auto loans, credit cards, and all other loans didn't even budge over the past 10 years, staying at $1.8 trillion in both 2003 and 2013. And while it would be easy to think this debt is a result of more and more students getting college degrees, the reality is while that is true, the staggering increases in the cost of college have also resulted in the average debt faced by students ballooning as well: 

Average Student Loans | Infographics.

In 2004, 65% of students graduated college with student debt, and in 2012, it was 71%. And 600,000 Americans who began repaying student loans in 2010 defaulted on those loans by 2012, representing nearly 15% of borrowers.  

All of this is to say there is no denying student debt is increasingly becoming a major problem in the United States.

Source: LendingMemo on Flickr.

What can be done
In 2010, Congress approved the Pay As You Earn plan, which sets up student loan payments based on a person's adjusted gross income and family size. It reduced the monthly payments on direct student loans from 15% of discretionary income to 10%, and also assured after 20 years of consecutive payments -- 10 years for those in public service -- the remaining loan balance would be forgiven.

While these are certainly noble initiatives, the reality is, more needs to be done. Whether it be through greater accountability with college costs, more education earlier on surrounding the true financial burden posed by student debt, better information regarding the benefits of community colleges, or a litany of other initiatives.

Ultimately, President Obama is right in asserting that it will take a collaborative, bipartisan effort to stave off the potential crisis that awaits the insurmountable levels of student loan debt.

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Read/Post Comments (19) | Recommend This Article (11)

Comments from our Foolish Readers

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  • Report this Comment On February 02, 2014, at 2:45 PM, gjsuhr wrote:

    When you make money readily available where the consumer doesn't have to come up with the cash out of pocket, the price will go up as the providers add services and amenities to compete for the consumer dollars.

    It happened for housing (easy mortgages), healthcare (insurance payments) and education (loans and grants). Our elected leaders think that by providing more money they can solve the problem. The solution, ironically, is to take the money away. Some people will complain, of course, but do we really think we can survive as a nation with beautiful homes, schools and hospitals.....while our factories lie in ruins?

  • Report this Comment On February 02, 2014, at 3:59 PM, CatDadJohn wrote:

    Random thoughts:

    - Drill down and you will find that much of the GOP is in the pockets of "For Profit" colleges...a very significant part of the problem.

    - Go to most public universities these days and you'll find massive construction going on....usually sports stadiums or state of the art student union buildings...things that can significantly increase tuition.

  • Report this Comment On February 02, 2014, at 5:05 PM, Craigie7 wrote:

    Except, gjsuhr, that the most rapid period of tuition inflation occurred when federal student loan borrowing limits didn't even increase, for 15 years.

  • Report this Comment On February 02, 2014, at 5:09 PM, spinod wrote:

    Here is an idea, and bare with me it's pretty complicated, how about..... we start capping state universities to stop over charging for education that isn't even working? Or forcing them to help students find jobs, its say....70 percent of their students fail to get a job after graduating they get docked in ratings and pay?

    No? We rather them keep blowing money, raising tuition, and say "good luck with life" to graduates? Gee no wonder why students are in so much debt....

  • Report this Comment On February 02, 2014, at 5:11 PM, spinod wrote:

    Not to mention, how many universities are rebuilding campus' or building new "state of the art" football fields?

    Hell 3 of the 4 universities here have done both for the past 5 years..... the same amount of time that tuition sky rocketed for both.....

  • Report this Comment On February 02, 2014, at 5:51 PM, eponak wrote:

    The "help" left out millions of students buried in student debt (myself included) because we were pushed into "consolidations" years ago. If your debt was consolidated, you are excluded from the policy changes created to assist those in need. Of course, if you weren't already in need, you wouldn't have been able to win for an awful lot of people. I have been trying to find a way to pay these loans off with my little bitty income for decades, and with fees and interest I now owe more than what I could make dedicating my entire income for over a decade. All for an original loan of $38,000. Many other folks have similar experiences.

  • Report this Comment On February 02, 2014, at 6:06 PM, Prettyfox wrote:

    Student Assistance isn't assisting anyone but banks. I've only been in school for two semesters out of the 10 that I'll need to finish out my degree and I'll already be working three years at a decent paying job to pay it off.

  • Report this Comment On February 02, 2014, at 6:55 PM, lilys wrote:

    One thing I don't understand is, why are the interest rates on grad student federal loans so much higher than undergrad loans? The argument I've always heard for why interest rates are so high on student loans is because so many students flunk out. It's a high-risk loan.

    My husband recently finished a Ph.D in engineering. Although we do know quite a few American-born engineers with graduate degrees who are unemployed right now, engineers are, on the whole, relatively employable. Two years into a five year program, his professor ran out of research funding and refused to pay my husband's stipend, tuition, or research expenses anymore. We also lost our health insurance and both had to buy insurance on the private market. I was making $8 per hour as a substitute teacher and 7.25 as a fast-food worker with my bachelors degree. BUT, I finished undergrad without owing any money. Only 3K of my husband's 58K in student loans was from undergrad. The rest was from grad school. He had to take out student loans to pay for frequent trips to the National Synchrotron Light Source in New York to do his research, and the bills for this added up very quickly. He considered dropping out of his doctoral program but found nobody would hire him without any work experience and without finishing the advanced degree he had already started, so he had little choice but to fund his research himself.

    What I don't understand is this: Why should someone who has proven himself academically have to pay a HIGHER interest rate to go to grad school than an undergrad who has not yet proven him or herself? The fact that he was admitted into a top-tier engineering program should be evidence of his ability to succeed. Shouldn't the risk, and, therefore the interest rates on loans to people like him be LOWER than the assumed risk and the interest rates on loans to undergraduates?

  • Report this Comment On February 02, 2014, at 8:52 PM, maguro01 wrote:

    That the US is rationing education by money instead of talent is a scandal and a blight on the future.

    Supporting large numbers of economically useless majors doesn't help and hurts taxpayer's willingness to support education. Journalism, for example, might be an interesting minor with history, economics, history of science, etc. It makes no sense as a mass major at all. Ditto undergrad psychology and others.

    Poorly run institutions don't help either. Too few hours of teaching time, too many very expensive amenities, top heavy very expensive management, all help to drive up costs. If a prof writes a text it will be used there forever and likely only there. Student costs are easily over a hundred per text. That expensive management does nothing.

    One model for many universities might be the New York city commuter universities of the past, before their standards cracked. They educated and assimilated generations of New Yorkers, many first generation students in their families. They were focused and they were free. People could work their way through in low wage jobs. That's not possible today.

    One purpose of this system is social control - people are indentured and in harness from teenage years to death. The purpose of their lives is to serve our would be plutocrats.

  • Report this Comment On February 02, 2014, at 9:41 PM, thtgrljme wrote:

    I made the mistake of taking out a ridiculous amount of student loans while I was going to art school. Now, I am in debt up to my eyeballs and am barely surviving in my underpaid career. My federal aid loan is my cheapest repayment I have.

    What about private student loans? That is what is killing us. I have two loans with a company that are getting ready to come off of my graduated repayment plan. I cannot afford the full payment amount on these loans and there is nothing else this company can offer me because the lender does not offer any additional repayment plans.

    I cannot consolidate to get a lower payment because my DTI ratio is through the roof. I struggle to make ends meet every month and not put myself in default with my loans because I don't want to completely screw myself. I appreciate the help I've received on my government loans, but we need help with our private loans as well.

  • Report this Comment On February 02, 2014, at 10:06 PM, kdavis860 wrote:

    This happens every time the government hands out money, it always turns into a crisis, just like when they backed all those liar loans and we got the 2008 banking meltdown.

    When I was going to school, one guy on my floor had a car, and I thought I was doing great because I had a moped. Now everybody thinks they need a car in college.

    Also, we're backing loans for junk degrees. What pays money? Anything that includes medicine (but not dietician, I mean real medicine, nursing, dental, etc.) engineering, law, some kinds of business degrees (it depends on which kind). Degrees that lead nowhere should not qualify for loans. That's a disservice to the student and the taxpayers.

    I know I'll get flamed for this, but it's my honest opinion: if a degree doesn't lead to a job paying over $40,000 per year, we shouldn't give out loans for it.

  • Report this Comment On February 03, 2014, at 9:25 AM, NewAccount wrote:

    When I was in college in the seventies there was a new kid from up north one year who showed up with a new car. When we asked him how he could afford it he said he had gotten a student loan. None of us in my dorm had even heard of a student loan. Most of us had part time jobs and our parents paid the rest. Of course you could get an entire college education including room and board for about five thousand dollars back then.

    I'm sure if you had told us that we would have to being paying off a loan for the next twenty five years most of us would have skipped college.

  • Report this Comment On February 03, 2014, at 1:11 PM, wata3000 wrote:

    I think the loans should be freely given, then should be aggressively collected. Wage garnishment, property liens, loss of licenses, confiscation and auction of any and all property of the debtor. College kiddies need to get a clue about what life is really like. Right now they're merely taking loans that most have no intention of paying.

  • Report this Comment On February 03, 2014, at 2:47 PM, mykidsmom99 wrote:

    Back in the Stone Ages of the 1980's when I was in college, a dorm room meant a shared 10X12 cinder block walled room with a bath down the hall. You ate in the cafeteria where there were 3 or 4 choices for each meal. My daughter's "dorm" is a four bedroom apartment in which each girl has a private bedroom (small but private) and in which two girls share a bathroom. They eat in the dining hall, if they choose, and have multiple options and if they don't like what's being served there, several fast food places on campus take "demon dollars" which are part of any meal plan. Kids with cars are more common than kids without them.

  • Report this Comment On February 03, 2014, at 3:46 PM, BeverlyT wrote:

    Gosh! Didn't he just say in his State of the Union Address that he had fixed the problem of student loans?? He bragged so much throughout the speech, misquoting figures on polls, and facts, that it's hard to keep up with his lies.

  • Report this Comment On February 03, 2014, at 3:56 PM, DTavona wrote:

    Some people think that students spend their money on frills, and for those who go to private colleges, there are a lot of those. Most of us go to public colleges. Grants used to be 3/4 of the funding for schools, now it is less than 20%. I have 4 year degree and working at just above minimum wage. When I lost my job five years ago, and had to go through bankruptcy where I lost my home and 4 years later got $375 in "punitive damages", my student loans were "protected" and remain today. I paid off two loans, but the last one, with the "variable interest" has continued to balloon. It's patently unfair to go through the humiliation of bankruptcy and lose so much and to still have that burden stay with you. I've run out of extensions or deferments due to low wages. It's crippling. Student loans are short sighted, for those who get higher wages pay more taxes, buy more goods. The problem is systemic, and the banks pocket the money, impoverishing those who want a better life for decades. If you don't want fast food jobs, it's either the military or college. Our middle class continues to disappear and this is one of the culprits.

  • Report this Comment On February 03, 2014, at 4:45 PM, intheknow2609 wrote:

    As a person who works at a state university, these kids are not being educated on the pitfalls of borrowing too much money. I see time and time again where students are getting refunds(after all expenses have been paid) in the thousands of dollars. These refunds are a result of federal subsidized and unsubsidized loans, grants and scholarships that the student receives. If they are getting enough from scholarships and grants (free money) then they don't need to be taking out federal student loans.

    These students then turn around and buy cars, electronics, clothes, etc. They admit it freely. Students should only be able to get the amount of the cost of tuition and fees and on campus housing, meal plans, and books. They should not be getting "refunds" to do with what they wish. They line up, get their refund check and spend, spend, spend. They do not (or wish to acknowledge) that when they graduate they will have to pay this money back. I have had many students state that they have no intention of paying the money back. There is no repercussion if they don't pay it back. Sure it gets reported to their credit bureau, but with so many people defaulting on student loans, it is no longer a derogatory remark. What needs to happen is that 1) we need to stop giving them more money than their education is costing; 2) we need to garnish any state or federal tax refund money they may receive when they owe federal loan money. 3) Parents need to be involved and steer their kids towards colleges that they can afford.

    If I couldn't afford the college that my daughter attended, I would have made sure that she picked someplace else to go.

    Students and Parents, please take responsibility for your child's education. If you can't afford to send them to the school, choose another school!

  • Report this Comment On February 04, 2014, at 12:48 AM, OldJim51 wrote:

    Obama is losing it faster than the republicans can hope. He depends on the young healthy first time employed to save the ACA then he rips them a new one by telling them they need to repay their loans faster than scheduled. I don't see companies offering the salary needed to do both. It will take a student owing $30K 4 to 5 years to pay it off at a rate of $525 a month along with Obamacare's rates averaging $725 a month. He won't say which has the greater priority and why he's overloaded them with debt. He's created the mess yet he seems unaware of the situation.

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Patrick Morris

After a few stints in banking and corporate finance, Patrick joined the Motley Fool as a writer covering the financial sector. He's scaled back his everyday writing a bit, but he's always happy to opine on the latest headline news surrounding Berkshire Hathaway, Warren Buffett and all things personal finance.

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