Running head: EFFECTS OF STUDENT LOANS 1

Long Term Effects of Student Loans

on College Graduates

Sean K. Maseng

Nevada State College

EFFECTS OF STUDENT LOANS 2

Long Term Effects of Student Loans

on College Graduates

In today’s century, higher education is becoming more important than ever in the world

economy with over one third of all jobs requiring a college education. And as our world

continues to become more automated this number is only expected to grow. Currently in the

students in the United States owe more than one trillion dollars’ worth of debt to the United

States government, and this debt is only from thirty-seven million Americans. Most of whom

struggle to pay back this debt because they are unable to keep up with high interest rates

associated with many student loans. As more students continue to take on student debt, a look

must be taken toward how this debt impact the financial status of college graduates and examine

how this debt is being handled by the government’s loan managers.

Discussion

The best way to examine this topic is by first breaking it up into the two appropriate

subtopics of financial burden and lending practices. From there an adequate picture can be built

to show how student loans can impact the life of a college student in the long run. Unless the

people are informed the issue of student debt will plague the next generation

Financial burden

For the topic of financial burden, a look must be taken at the average burden that is payed for

student loans and then compare that to how it will impact their financial wellbeing is necessary.

This understanding is necessary so that a student’s financial future is taken into account when

issuing these loans for higher education.

Loans and repayment. In 1965 the federal government created the Guaranteed Student

Loan (known as GSL) program as a place where students could turn to in order to make ends
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meet. It was supposed to be used after a student had exhausted all other options, such as, grants,

scholarship, family savings, and money saved from work. But today that system has exploded

beyond its reach and has become the primary source of financing for postsecondary education.

Zimmerman’s (1994) study found:

GSLs are a principal source of financing for postsecondary education. Four out of five

student-loan dollars-come from this program. More than 13,000 lending institutions, 55

guarantee agencies, 50 secondary markets, and untold servicers and collection agencies

are currently involved in the GSL program. Students at more than 8,000 postsecondary

institutions borrow under it every year. (p. 5)

This trend can be further proven by showing how students are consistently increasing the

average loan amount that they are borrowing. Adjusting for inflation, the average loan amount by

the senior year of a student for their undergraduate degree has only increased since the creation

of GLS. In the 1989 to 1990 school year the average total loan amount was $15,200, by the

1999-2000 school year it was $22,100, and by 2011-2012 it was $26,300 (Velez, Erin Dunlop

& Woo, Jennie H., 2017, p. 2). Meaning that over a period of 30 years the average student loan

debt has increased almost 70%, after adjusting for inflation. This shows how students today are

becoming more dependent of the financial aid provided by the GSLs. Then as far as repayment

of these loans are concerned, graduates are forced to dedicate at least 9% of their salary towards

the repayment of their loans (Velez, 2017, 3). This number is only expected to grow as

dependency for GSLs is increased across the board with all students and majors.
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Long term financial health. With the fact that overall debt has increased 70% in mind,

now consider the long-term financial health of the student once they leave their undergraduate

studies. “Compared to those without student debt, graduates with debt also have lower rates of

attending graduate school, owning a home, and having savings or investments” (Velez, 2017,

p.3). Meaning that if a student were to take out a loan for their undergraduate studies, they would

not be as likely to purse a graduate degree or maintain a sound financial standing. This affects a

person’s ability to support a family and build a retirement.

But one thing to consider is that these numbers are just the average. Some professions

pay better than others meaning that some degrees will provide a better long-term investment.

National Center for Education Statistics’ (NCES) data suggest that the benefits of an

undergraduate degree are largely dependent on the major that a student chooses. “Beginning

bachelor’s-level workers with engineering degrees make 2.5 times more per month after taxes

than their humanities counterparts — $3,250 compared to $1,300” (Texas Guaranteed Student

Loan Corporation, 2012, p. 2). While engineering graduates are earning more money out of

college than a humanities degree the monthly student loan payment appear to be similar across

undergraduate major categories, ranging only from $227 to $265 on average (Texas Guaranteed

Student Loan Corporation, 2012, p. 3). So, while an engineering degree and a humanities degree

are about the same overall cost those with engineering degrees will receive more money in the

long run compared to their counterpart.

Lending Practices

The next issue that needs to be addressed is how these loans are being managed. While

the Federal government is the one making and financing the loan, there are middlemen who are

managing the loans on a day to day basis, most of them without any accountability. These
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lending services were created in order to provide advice, help, and accountably for all loan

financed by the government, unfortunately this is not the case.

Loan repayment measures. Not only is the topic of how a person will be able to utilize

their new degree important in this discussion, but when looking at a person’s financial health

when student debt is a factor, a look must be taken at how their debt is being managed. In the

GSL system, the Federal Family Education Loan Program created an unholy relationship

between colleges and loan managers. This program ensures that colleges are able to increase the

rates of tuition and guarantee that lenders that will subsidize the higher rates of tuition for

families who are unable to pay for this increase. But in the end, the people who are hurt the most

by this relationship are the students because they are now forced to repay the original loan with

the increased tuition plus interest. And as discussed before, higher levels of debt cause students

to become much less prepared for their long-term financial health (Wolfston, 2009, p. 1).

One of biggest managers of Federal and Non-Federal student debt is Navient, a company

who is currently engaged in litigation with the Consumer Financial Protection Bureau. “Among

the most serious allegations in the complaint is that Navient encouraged borrowers to postpone

payments through forbearance, an option in which interest continues to accrue, rather than enroll

them in an income-driven repayment plan that would avoid fees. The consumer bureau said the

practice cost borrowers up to $4 billion in interest from January 2010 to March 2015, a claim

Navient disputes” (Douglas, 2019, p. 4). Not only are student having a hard time repaying their

debt, but companies such as Navient are actively increasing the overall cost of their loans by

providing inaccurate information on their loan in order to increase their profits.

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Conclusion and Future Study

The American Student loan system is severely flawed. If the country truly believes in

allowing students to put their best foot forward when leaving college, then this debt should be

structured so it doesn’t push them 10 steps back. The current system is like a track race, but

when the pistol pops everyone’s shoes have been tied together and have been told to run

backwards by the coach who expects them to run three miles like that. The current system

suppresses a undergrads ability to continue their education, build savings and capital, while

allowing for companies to take advantage over their borrowers. This system was originally

created to supplement the cost of education for those who were unable to make ends meet. But

over the course of the last 50 years, unholy alliances have been made that would increase overall

profit margins of colleges and lending agency’s while leaving the borrow financially ruined. That

is why there must be some institute of reform in the current lending system if the United States to

continue to be competitive in the world economy. If any future study were to continue in this

topic a closer look at the how this money is spent by both colleges and students should be taken

into account. This would ensure that the high amounts of money being lent to the students are

being spent appropriately and fulling the original purpose of these loans. Because in the end, the

initial premise of the Guaranteed Student Loan was to ensure that students had the opportunity to

receive a post-secondary degree while making them financially successful, and now it’s time to

return to that idea.

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References

Douglas, D. (2019, September 20). Navient memo raises questions about its student loan

servicing practices. Retrieved from

https://www.washingtonpost.com/education/2019/09/19/navient-memo-raises-questions-

about-its-student-loan-servicing-practices/ 

Texas Guaranteed Student Loan Corporation. (2012). Balancing Passion and Practicality: The

Role of Debt and Major on Students’ Financial Outcomes. Research Report. TG (Texas

Guaranteed Student Loan Corporation). TG (Texas Guaranteed Student Loan

Corporation). Retrieved from http://search.ebscohost.com/login.aspx?

direct=true&db=eric&AN=ED542016&authtype=sso&custid=s2892362&site=ehost-

live&scope=site

Velez, E. D., Woo, J. H., National Center for Education Statistics (ED), & RTI International.

(2017). The Debt Burden of bachelor’s degree Recipients. Stats in Brief. NCES 2017-

436. National Center for Education Statistics. National Center for Education Statistics.

Retrieved from http://search.ebscohost.com/login.aspx?

direct=true&db=eric&AN=ED573698&authtype=sso&custid=s2892362&site=ehost-

live&scope=site

Wolfston, J. (2009). Let’s Kick the Lenders out of the Student-Loan System. Chronicle of Higher

Education, 55(25). Retrieved from http://search.ebscohost.com/login.aspx?

direct=true&db=eric&AN=EJ832542&authtype=sso&custid=s2892362&site=ehost-

live&scope=site

Zimmerman, D., & Miles, B. (1994). Substituting Direct Government Lending for Guaranteed

Student Loans: How Budget Rules Distorted Economic Decision-making. National Tax
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Journal, 47(4), 773–787. Retrieved from http://search.ebscohost.com/login.aspx?

direct=true&db=eric&AN=EJ498571&authtype=sso&custid=s2892362&site=ehost-

live&scope=site
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