Today we have 44 million families with substantial student debt. This type of debt was not heard of 50 years ago. It is a relatively new problem for economists to analyze.
Student loan debt in the United States has been growing rapidly since 2006, rising to $1.6 trillion by 2019.
The average student loan debt for college graduates who borrowed to get through school was $37,172 in 2016. This would cost about $350 a month for the next decade to pay off at 4.3%.
There are several key issues with student loans:
- Most students get some type of student aid but also borrow thousands each semester.
- Much of the student aid goes to students based on various factors which include need.
- Many students of middle class and working poor families pay full freight or retail college costs because both of their parents work or have jobs.
The average cost of college for the 2017–2018 school year was about $20,770 for public schools (in-state) and $46,950 for nonprofit private schools, including tuition, fees, room and board. The typical top 200 ranked college can cost over $60,000 per year.
Repayment of Loans - Problems and Tax Issues
- There are 44 million families with student loan debt who generally pay a monthly note plus interest.
- The debt in most cases is subject to floating interest rates affected by the Federal Reserve but the government did take over the student loan system.
- The loan repayment or debt is subject to taxes on money earned to pay the debt. Thus, many graduates may have a good earnings year after graduation, but they must pay 25%-40% tax on the income before paying the debt back to the lender or government.
- Student loan debt may be waived or forgiven for graduates who work in low income jobs in cities or in extreme rural areas.
- The student loan tax deductions are phased out for workers with a spouse who already has a strong income. Example: A social worker with college debt who is married to a government employee making $100,000-$150,000 per year.
Federal Reserve and Student Loan Interest Rates?
- There are various types of student loans. Some are subsidized with stable interest rates related to subsidized loans.
- Other loans are private student loans which are directly affected by Fed rates much like credit-card debt.
- Those who receive scholarships and certain types of tuition reductions based on need don’t pay tax on imputed income while others who paid retail for tuition must borrow the full costs plus paying state and federal income tax on money earned to later pay off the debt.
The U.S. Department of Education's National Center for Education Statistics shows 72 percent of undergraduate students received some form of financial aid in the 2015-2016 academic year, up from 71 percent in 2011-2012.
Over the years, I have met folks who borrowed around $100,000-$200,000 to attend graduate school for either MBA or Law. Some borrowed up to $300,000 or more for medical school training.
Presently, there are many traditional degree and college programs that are having trouble with recruitment. The long term cost of a degree versus the potential reward is becoming a bigger concern.
The increased income payoff for a graduate is well documented, but many people are now having trouble monetizing their degree in the private sector due to the inflation of college costs in the last 40 years.
Overall, subsidizing colleges with unlimited loans has created huge inflation of the costs for brand name college education.
With 2020 and the election, we are looking at candidates who want to forgive people with excessive loans; however, nobody is talking about the people who went to work before or after graduation and worked hard, did not overspend, paid taxes on earnings, and saved money to pay off the debt.
George Mentz JD MBA CWM Chartered Wealth Manager ® is a licensed attorney and CEO of GAFM ® global education, which is an ISO 29990 Certified professional development company operating in over 50 nations. Mentz is an award-winning author and advisory board member to several companies around the world in education, charities, and crypto currency.
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