The slow and jagged recovery of the overall economy has made it painfully obvious how dangerous it is to have federal student loan debt reaching the staggering height that it has reached. Interestingly enough, private student loan debt has been growing at a steady and confident pace since the recovery from the financial crisis. Private student loan debt was booming in 2007-2008, with over $18 billion outstanding. It hit the low point of just over $5 billion in 2010-2011, but it has increased every year since. In 2014, private student loan debt reached $7.7 billion. Let’s take a look at this trend.
The Subprime Mortgage Crisis started in the housing market, but catapulted the whole of the US into a recession. The shock waves radiating off the housing market touched companies in every sector and banks began to fail. Lending of all kinds grinded to a halt and private student loans were no different. There was a sharp decrease of nearly $10 billion in private student loan debt from 07-08 to 08-09.
While the low point for private student loans was yet to come $3 billion later in 2010-2011, the rising level of federal student loan debt has triggered a crisis with striking similarities to the collapse of the housing market. With the intent to be helpful, the government has helped everyone gain access to the funding they need for higher education, and now the federal student loan debt is over $1.2 trillion. Private student loans have been slowing gaining ground since that low point in 2010, and there are several theories that may explain why.
The rate of growth that we can see in private student loans might be an encouraging metric of how the economy is performing as banks are increasingly lending more; additionally, more families see private student loans as an option. Lending institutions have been loosening the reigns and offering more attractive student loan terms for potential borrowers as well.
On the other hand, it could have implications that people are less and less trusting in the Department of Education. According to the Institute for College Access and Success, 47% of borrowers who hold private student loans did not take out all of the federal student loan money that they were entitled to. It’s agreed by most experts that students should exhaust all of their federal student loan options before considering a private loan because federal loans are safer, more flexible, and less expensive. If borrowers are still choosing private loans before federal loans, it could signify a lack of trust of federal student loans.
The rising level of private student loan debt could signify that more borrowers are being forced to take out additional loans over and above the amount of money the Department of Education will lend them. Tuition prices have risen steadily, so students need more and more loaned money. Private student loan debt could be rising with “overflow” tuition needs.
Eight percent of private student loan borrowers did not apply for financial aid, so it’s reasonable to believe that this portion of students have families with higher wealth.
Since 2008, the student loan playing field has changed for both schools and lending institutions. To avoid “bursting the student loan bubble” that they were unable to avoid in the housing market, Congress has passed measures cracking down on school who lure students into expensive programs with inaccurate marketing and on institutions who marketed student loans directly to students for amounts over and above what they needed for tuition.
These changes in private student loans may have slowed the rate of growth for debt, but it has tightened up who gets access to debt as well. That very well could mean that the borrowers holding private student loan debt are more likely to manage repayment successfully, achieved by only taking out what they need, graduating and successfully finding a job in their field. If private student loan debt were to rise again to the heights it saw in 07-08, it would at least be likely on a stronger foothold with less danger of a catastrophe.