The alleged growing student debt crisis is one of the most overrated issues of this young century. We were treated to thousands of reports when student loan debt topped $ 1 trillion in total, more as it continued to rise, and a growing avalanche of stories designed to create sympathy for these students. indebted university graduates (and dropouts). Yet auto loan debt in the United States has now reached $ 1.1 trillion, up 30% from its pre-recession peak, without a similar mountain of press warning of the impending disaster. . This divergence in media coverage and analysis tells us a lot about how the student debt crisis is more fabricated than real.
The total sum of US auto loans fell during and after the recent recession as Americans sought to reduce their debt load. Now auto loans have regained all that lost volume and are set new records for total debt. In addition, a significant portion of these auto loans go to people with lower credit scores. Yet the auto industry and car buyers seem completely puzzled.
The average college graduate who has graduates in student debt with between $ 25,000 and $ 30,000 in student debt. On a standard ten-year repayment schedule, this means monthly payment in the range of $ 280 to $ 330 per month. The average new car loan in the second quarter of 2015 averaged $ 28,500, was five years, and carried a monthly payment of $ 483 per month. Payments on student loans and auto loans both account for almost exactly the same percentage of income.
For example, auto loans have an average payment between 45% and 75% higher than the average payment for a student loan. Yet the auto loan is all about buying an asset that depreciates and forces you to spend extra money on insurance, gasoline, and maintenance. Student loan debt, assuming you are a graduate, has no ongoing costs and gives you greater earning power that lasts the rest of your life. Student loan debt is incurred by acquiring an asset that lasts longer than a car and has a positive net financial benefit.
By objective standards, a college education is a much better investment than a car, but it’s the people with student loan debt who are complaining rather than those with car loans. The question is, what is causing the different reactions to these two fairly equal sized loan pools?
Most college graduates are young, poor, and used to what other people (like parents) pay for things. Plus, students get student loans just because they’re going to college and asking for money. In contrast, car buyers have their credit and income checked to make sure they can afford car loan repayments. College students often don’t have a clear idea of the final monthly payment amount on their student loan debt until they graduate (because they take out several loans as they go). Car buyers know exactly what their monthly payments will be before they sign the papers to buy the car and commit to the loan.
An organized effort is underway to convince American taxpayers, or more accurately American voters, that college must be free. As part of this effort, student debt is presented as somewhat unfair and a heavy burden that college graduates cannot afford to pay off. While college dropouts with student loan debt have a more legitimate argument for having difficulty paying off their student loan debt, and thousands of students have been abused by for-profit colleges, a few sympathetic cases do not. not provide a sufficient basis for a comprehensive change to a program that would involve the transfer of over $ 1 trillion in taxpayer wealth to college graduates, many of whom will have higher lifetime incomes than the taxpayers who would be forced to pay their taxes. university degrees.
While the majority of student loan borrowers are responsible and pay off their loans, some borrowers have real repayment difficulties. The lack of auto loan crisis gives us some clues on how to alleviate some of the legitimate student loan problems. Perhaps student loan approvals should depend on likely repayment capacity, which could include credit history, major and current student loan balances. Second, as current disclosures attempt to make students aware of what they are up against in terms of repayment, perhaps this process can be improved in the hope that student borrowers better understand what they’re up to. engage, to make sure they understand the full implications of their borrowing.
More importantly, the comparison of student loans and auto loans shows that there is no student loan crisis. Payments on almost all student loans are lower than payments on mid-size auto loans. The student loan “crisis” exists because borrowers simply do not want to prioritize their loan repayments and believe that the political process could make their student debt go away. The student loan crisis is primarily political and a sentiment of entitlement, not economic.
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