The Impact of Student Debt on Financial Credibility

The escalating cost of higher education in America has led to a student debt crisis, with profound implications for graduates' financial credibility and overall economic well-being. American students graduating in 2014 were named the most indebted class in history. Student loans in the United States now total more than one trillion USD, exceeding American credit card debt, with over 40 million students in obligation to creditors. This article explores the multifaceted ways in which student debt affects an individual's financial standing.

The Rising Cost of Education

Since 1985, American colleges have seen a nearly 500% increase in total fees associated with university attendance. Several factors have contributed to this surge, including the rising necessity of a college degree for one’s career and the introduction of federal grants and loans, which have allowed colleges to charge students higher prices. The increased demand means students are willing to pay more, and the federal aid means that students who previously would have been unable to pay for college can now obtain enough aid for even massively increased tuitions. A problematic relationship exists between need-based scholarships, which benefit underprivileged students, and the subsequent tuition increases necessary for more advantaged students to subsidize these costs. As tuition increases, more students need scholarships, necessitating further tuition increases as more subsidization is needed.

Another factor in tuition increases is the “winner-take-all” mentality that has surrounded American universities. This has led to an educational “arms race,” leading colleges to spend millions on their infrastructure, on hiring the most famous professors, and on improving their standings in national rankings. By 2030, average total tuition costs for four years are projected to exceed $350.000. With the already immense cost of university tuition rising at a pace that outstrips cost-of-living inflation fourfold, the only option for the vast majority of students is to turn to financial assistance.

The Burden of Debt

Unlike in previous generations, it is no longer possible for students to put themselves through school by working a part-time job. As a result, as of 2011, the percentage of students receiving financial aid of any kind had surpassed 85%. In the vast majority of cases, students seeking financial assistance have to take out a federally-guaranteed student loan in addition to any grants. These loans do not accrue interest until six months after the student has finished enrollment in university. When seeking to bridge a gap between provided financial aid and available personal payment, students can turn to private loans. Private loans, provided by banks and financial institutions, do not have a limit, and accrue interest from the moment they are first taken. They are also tied to a relatively high variable interest rate.

Some students, as a result of choosing less lucrative professions such as social work or faced with unemployment, are unable to pay off these debts within their allotted timeframe, forcing them to eventually face a choice between a crippling financial struggle and bankruptcy. Student loans, however, require a demonstration of ‘undue hardship’ to be discharged, an exceedingly rigorous legal standard. Without any way for students to discharge a debt, even under hardship, disability, or when faced with bankruptcy, private creditors have no motivation to lower interest rates or to provide any sort of deferment option for debtors.

How Student Debt Affects Financial Credibility

Student debt affects not only immediate financial stability but also one’s long-term financial credibility. Financial credibility is determined by various factors, including your credit score, debt-to-income ratio, and your history of repaying debts. Student loans, like other types of loans, are reported to credit bureaus and directly impact your credit score.

Credit Score Impact

When you take out student loans, your lender or servicer will report the loan to the major credit bureaus - Equifax, Experian, and TransUnion. This includes the loan amount, your repayment history and any changes to the loan terms. Making your student loan payments on time has a positive effect on your credit score. Conversely, missing payments or defaulting on your student loans can severely damage your credit score.

Debt-to-Income Ratio (DTI)

The debt-to-income ratio (DTI) is a crucial metric used by lenders to assess an individual’s ability to manage monthly payments and repay debts. It is calculated by dividing total monthly debt payments by your gross monthly income, expressed as a percentage. Large student debt balances can significantly skew your DTI, particularly if your income must proportionately offset the amount owed. For graduates entering the workforce or professionals in lower-paying fields, substantial student loans can result in a high DTI. A high DTI can restrict access to additional credit.

Impact on Other Credit Opportunities

High levels of student debt can significantly influence your eligibility for other types of credit, including personal loans, credit cards, and mortgages. Lenders may be cautious in issuing credit or may offer higher interest rates to offset the risk posed by a high debt-to-income ratio (DTI). High student debt can be a critical factor in mortgage approvals. Lenders typically look for a DTI ratio that does not exceed 36%. In addition to the negative effects on the former students themselves, student loan debt is having additional consequences for the broader economy: as a result of the massive debt at high interest rates, and the damage that can be done to young peoples’ already-fragile credit scores, college graduates are greatly delaying other major purchases, such as houses and cars.

Reform Efforts and Management Strategies

A recent movement to reform the way student debt is handled is under way, but progress has been made in certain areas, with proposals in the works in others. President Obama recently announced an expansion of the Pay As You Earn program, which limits the amount students are required to pay to a percentage of their monthly income, rather than to a percentage of their total debt. In addition, the debtor can have the balance of his debt forgiven after twenty years of percentage-based payment, or after ten years if the debtor works for the government or for a charity. On another front, a number of Democratic senators have introduced a bill, the “Fairness for Struggling Students Act of 2013,” which aims to remove the bankruptcy exception for student loans, allowing graduates in dire financial straits to discharge loan debt like any other debt.

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Effectively managing your student loans is key to maintaining and enhancing your financial credibility. Enroll in automatic payments to ensure you never miss a loan payment. Explore options like deferment and forbearance to temporarily stop making payments or reduce your payment amount when you’re experiencing financial hardship.

The Genetic Counseling Profession: A Case Study

The financial landscape for those entering the genetic counseling profession has shifted significantly. Overall, educational costs, total debt, and salaries showed increases from the prior study, and many factors measuring the impact of genetic counseling graduate student debt showed little to no change. Ninety‐six percent of respondents still reported feeling burdened by their student debt, and 45% reported experiencing more hardship than anticipated, though most respondents were once again satisfied with their genetic counseling education. Student debt influenced many lifestyle choices to a strikingly similar degree, and a large majority still said that this debt did not change their career path post‐graduation. These results suggest ongoing burden and hardship caused by student debt and similar impacts on professional and personal life choices compared to a decade ago. This updated information will help highlight ways to increase financial transparency and suggest efforts toward improved access and diversity within the genetic counseling profession.

The financial burden associated with post‐secondary education also poses possible barriers to increased access and diversity within Medicine and allied health professions. Certain segments of the DPT population are more burdened by student debt, with rising education costs disproportionately affecting students from minority, low socioeconomic status (SES), and first‐generation families. Many allied health and medical programs have implemented initiatives to address the cost of training.

The Broader Economic Impact and Social Implications

In attempting to pay off their debt as quickly as possible, graduates cut corners, take on extra jobs, and vastly reduce their participation in the consumer economy. Education is one of the most basic necessities for a productive society - equality of education contributes to equality of opportunity, and a chance for all citizens to realize the oft-promised “American Dream”: that if you work hard, and have ability, you will be able to succeed both financially and personally.

The Mental Health Toll

Research focused specifically on student debt and health supports this notion. For instance, in the aptly titled 2014 paper “Sick of Our Loans: Student Borrowing and the Mental Health of Young Adults in the United States,” Katrina M. Walsemann, Gilbert C. Gee, and Danielle Gentile examined the association between student loans and psychological functioning for currently enrolled students and those between ages 25 and 31. They conclude that for both groups, “student loans are associated with poorer psychological functioning.” Reflective of the very real physical health concerns associated with unsecured debt, analysis revealed that “those with constant high debt or accumulating debt later in life were more likely to report pain interference or stiffness” than those with constant low debt. As one might expect, debt’s relationship to mental well-being is also particularly problematic.

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