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Spiraling Student Debt – Huge Threat to Global Economy

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Paying Student Loans at Gunpoint

February 2015 must have been an unsettling month for Paul Aker. Seven US marshals – armed to the teeth – approached Mr. Aker’s house in Houston with warrant for his arrest. His crime? An overdue federal student loan of $1,500 – dating back to 1987.

But Mr. Aker might not be the only former student who received this wakeup call. It is estimated that over 1,500 other people got letters from the marshal’s office recently.

The incident sparked street protests by students and rights groups, with the demonstrators demanding that the government wipe away debts of students who cannot manage to raise payments. Such “fightbacks against educational debt” have been a commonplace in New York since 2010.

A storm brewing in Britain

Prior to last year, Britain might have taken credit for being one of the world’s most forgiving countries when it comes to matters of student debt, but that is rapidly changing.

After discovering that raising the income threshold below which people would be exempt from repaying student loans to £21,000 would place a larger burden on the taypayers, the government announced a freeze on further updates to the threshold.

Many people have pointed out that the outcry by college administrations against the government’s decision to freeze the repayment threshold is duplicitous because it is the same colleges that have been steadily increasing tuition fees and increasing their profits.

Britain has one of the most expensive education systems in the world. However, a similar trend of upsurge in college costs has been witnessed in many other countries. Data from the U.S. Bureau of Labor Statistics show that the CPI for consumer goods in America increased by 120 percent between 1980 and 2014, while college costs rose by over 260 percent during the same period.

In essence, the problem is not with loans; rather, it’s the rising college fees, accompanied by the increased costs of rent and food. The average student therefore has no option but to drown in debt.

Escape to Australia

If the sentiments by British Universities Minister are anything to go by, Australia may the new safe haven for student loan defaulters. Many fresh graduates from Britain move to the region annually in search of better pastures, and while majority continue giving back to the loan kitty, there has been a general fall in remittance rates.

Earlier last year, the ministry announced that it would tighten its grip on loan defaulters in foreign countries. It has always been easy to recollect the debts within, due to the use of a salary check off system. However, the same has not been possible outside.

Waning social mobility

Historically education has always been a source of socio-economic mobility. A person stood higher chances of securing a good job and a comfortable life with a college degree than when they only had a high school certificate.

However, job opportunities for graduates have fallen over the years. Whenever recessions like the ones of 2000 and 2009 happen, only a portion of those who get laid off from their jobs are reabsorbed when the economy recovers, and increasingly college graduates are forced to take low paying jobs that they could have gotten without a degree. This means that even if individuals are willing to service their student debts, the chances that they will manage to do so are slim.

Mass college enrollments

Not only has the population increased; the percentage of people in the world enrolling into colleges has also multiplied over the years. Instead of free education, governments have opted for student loans as a means of direct finance to higher education. The  majority of students from middle class families rely entirely on this money to  pay for tuition fees, food and rent.

Even though the British government offers to waive outstanding student loans if they are not repaid within 30 years, there are growing signs that this policy might change soon because it is fiscally unsustainable. The burden is rising and some people might have to spend their whole career years paying back their loans.

U.S. Student Debt Growing $2,726 per Second

The overall student debt in America is growing by over $2,700 every second. To put it into perspective, it means that by the time you finish reading this sentence, four thousand dollars or more will have been borrowed to finance higher education.

The total outstanding student debt in the US has surpassed the mind boggling figure of 1.2 trillion dollars. Even for the world’s largest economy, this amount of debt is unsustainable.

So the both the explosion of student debt is shaping up to be a threat both to individuals who are crushed under the weight of the loans they took upon themselves and to banks and governments who guaranteed these loans.

Regarding the mountain of debt already accumulated, only time will tell whether it will be repaid (unlikely) or defaulted on (at least partially), but society needs to reevaluate whether everyone needs a college degree and how to slash the cost of higher education so that it returns to being a worthwhile investment for the individual and for society as a whole.

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.