In June student loan debt surpassed credit card debt in this country for the first time. It certainly won’t be the last.
The Fed reported that consumers owe some $827 billion to credit card companies. While that may seem like a lot, it’s less than 10% of total consumer spending, and the figure has been going down. That’s because consumers have been deleveraging, paying down debt and adding to their savings.
But in one area consumers haven’t been reducing debt: college loans. Student loans now total $830 billion. With tuition season upon us, that figure is likely to rise. With many families reeling from the economic downturn, it’s no surprise that they are turning to borrowing to meet ever-increasing tuition costs.
But student loans are different. They can’t be discharged during bankruptcy, and borrowers who fall behind can face some pretty nasty penalties. The Wall Street Journal recently ran a story about a doctor who was careless and whose balance grew 2.2 times over 7 years since graduation, or 11.4% annually. That’s expensive.
Student loans are one of the dirty-little-secrets of higher education. They seem like free money at the time because of deferred payments and ease of borrowing. But because of this many don’t read the terms and get themselves into trouble. And the easy money allows schools to raise fees, seemingly without limit. Students need to be careful.
Douglas R. Tengdin, CFA
Chief Investment Officer
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