The average student loan debt keeps going up, with 2016 graduates owing a record average of $37,172 when they walk across the stage.
So why does the average student loan debt keep rising? Unfortunately, it’s the result of many factors, most of which are outside of students’ control.
Reasons for growing average student loan debt
Here’s what you need to know about why the average student loan debt is higher each year – and how to avoid graduating with a huge debt.
Rising cost of tuition
The cost of tuition at all colleges – include public, private, and community colleges – is rising faster than the rate of inflation.
According to the College Board, which tracks trends in college pricing, the average in-state college student at a public university had to pay $9,410 for tuition in the 2015-2016 school year, compared to $4,400 in 1995. The total sticker price for such a student living on campus, including room, board, books, travel, and other related fees and expenses, rose to an average of $19,550 from $10,550 in 1995.
For students at private universities, the total cost of a year of study on campus rose to $43,920, up from $27,200 per year back in 1995.
While community colleges remain the least expensive option, their costs are also rising. According to the College Board’s research, the average full-time community college student who lived at home paid $3,440 in annual tuition and fees for this school year, whereas 20 years ago it cost $2,080.
It should be clear that more expensive education equals higher student debt – that’s a pretty basic correlation. But what is contributing to the rising cost of education? That’s where things get a little murky.
Why higher education costs keep going up
If you listen to the sound bites on news programs decrying the student loan crisis, you might get the impression that student loans themselves are to blame for the increases in tuition.
A theory known as the “Bennett hypothesis” suggests that offering more federal student aid leads to an increase in the price of college. According to this theory, making college more affordable to more students creates more demand for education, which leads to an increase in education costs.
Universities are also often derided for allowing bloated budgets to impact students. With colleges spending huge amounts on administrative salaries, sports programs, and unnecessary amenities, the costs must be made up for by increased tuition.
It turns out neither of these theories is true. According to research from multiple government studies, there is no evidence of a connection between increased federal aid and rising tuition. Also, though large budget items at universities may generate a great deal of attention, they are responsible for a relatively small portion of tuition increases at their schools.
Ultimately, the real culprit for the continuing increase in tuition costs is a reduction in state spending for education. This has been especially stark since the 2007-2008 recession, after which point many states had to cut funding for higher education in order to balance their budgets.
According to the Center on Budget and Policy Priorities, 47 states were spending less per student for the 2014-2015 school year than they were for the 2007-2008 school year. The average state is spending 20 percent less – and both public and private universities (whose subsidies have been reduced) feel that pinch.
Credentialism and inelastic demand
It might appear that there is a simple solution to the problem of rising college costs: just don’t go.
In fact, this is often the answer touted by pundits and your know-it-all Uncle Jimmy. But there is a big problem with simply bowing out of college costs in that way: a college degree offers enormous financial benefits.
The New York Times reported in 2014 that “Americans with four-year college degrees made 98 percent more an hour on average in 2013 than people without a degree. That’s up from 89 percent five years earlier, 85 percent a decade earlier and 64 percent in the early 1980s.”
Of course, the improved financial prospects for a college graduate can become something of a Catch-22. Not only do you earn more by getting your degree, but in many cases, you can’t even get an entry-level or lower paying job without one.
This is known as “credentialism.” If you try to take Uncle Jimmy’s advice to get straight to work rather than get your degree first, you might find that you can’t get even get that entry-level job without a degree.
This creates a situation that economists call “inelastic demand.” That term refers to goods or services that people will buy no matter how expensive they get because of how valued they are. If graduating high school students feel that they must have an education in order to get ahead, they will be willing to pay a premium (to the tune of $37,000 in student loans) in order to get it.
Avoid becoming a student loan statistic
It’s not possible for students to fix a state’s budgeting issues or reduce credentialism. However, every student can and should learn about the federal student loan and financial aid options in order to avoid graduating with a huge debt burden.
According to a 2012 study by the Consumer Financial Protection Bureau and the U.S. Department of Education, many student loan borrowers who took on private student loans, “did not exhaust their federal Stafford Loan limits before turning to the private loan product. Some borrowers reported that they did not know they had fewer options when repaying their private student loans than they did.”
Federal student loans offer more flexible repayment options than private loans. Taking on private loans before exhausting your federal loan limits can end up costing you.
Additionally, many students don’t know about all the grant options available to them through the federal government and their schools. Qualifying for grant money allows you to pay for school without any obligation to pay it back.
Ultimately, the way to avoid the growing average student loan debt that plagues graduates is to understand all of the costs of earning a degree, from which university you choose to what types of aid and loans you take on.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.46% – 6.97%1||Undergrad & Graduate|
|2.57% – 8.44%4||Undergrad & Graduate|
|3.05% – 6.47%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|