Part 1: Understanding the Student Loan Crisis

The facts that compose the student loan crisis are endless.

Among the 41 million people who owe $1.19 trillion in student debt you have graduates of prestigious nonprofit Ivy League institutions and dropouts who attended for-profit schools like Phoenix. You have individuals who took years to pay off their debt, others who became teachers so their debt would be eliminated and a third group that never paid what they owed.

There are direct loans made through a long list of federal programs, each with different pay back criteria. Also there were federal guarantees for private sector student loans–a program that was discontinued in 2010. However the federal obligation will exist until all of that debt is eliminated.

So where are we going? To the overview that proves we have a crisis.

The Size of the Student Loan Crisis

The NY Fed points out that many of us reduced our outstanding debt during the great recession. But not our student loans. The number of borrowers and the average amount borrowed both went up. Yes, banks tightened their lending criteria but for student loans, the federal government was the source. As a result, student loan totals exceed our HELOC (home equity lines of credit), auto loans and credit card debt:

Looking at student debt from a life cycle perspective, it does not go away. For many of us who are over 40, a student debt obligation remains in our lives. Even the 60 plus crowd still has student debt (maybe loans for their children?). The result? Thirty-five percent all student debt is now held by people over 40.

Although the number of new borrowers has declined since 2010, each year we add to the student loan pot.

With so many people and so much money involved, the fact that only 37 percent of borrowers (below) are carrying out their loan obligations is a source of massive concern.

From: New York Fed Consumer Credit Panel / Equifax

Our Bottom Line: Externalities

Individually, student loans touch most of our lives. What we owe influences decisions about marriage and children, buying a home and what we can afford. Together, student loans require massive government spending while the higher education that loans finance affects unemployment and human capital.

So, when we see that Congress is talking about new student loan legislation, we can only begin to imagine the impact that economists would characterize as a slew of positive and negative externalities.