By  Updated on Wed Apr 4, 2012

$1 Trillion in Debt: The Price of Not Understanding Student Loans

$1 Trillion in Debt: The Price of Not Understanding Student Loans

Sydney Missionary Bible College / Flickr source

Total student loan debt in the U.S. has reached a disturbing milestone — the $1 trillion mark. And if you want to know how it’s possible that we got ourselves into so much debt, you need look no further than a recent study that found a majority of students don’t understand the terms of their loans.

Based on initial findings by the Consumer Financial Protection Bureau (CFPB), the total outstanding student loan debt, including private and federal student loans, broke the $1 trillion level several months ago.

“Young consumers are shouldering much of the punishment in the form of substantial student loan bills for doing exactly what they were told would be the key to a better life,” said Rohit Chopra, student loan ombudsman for the CFPB, at a banking conference on Wednesday.

The CFPB said student-loan debt is 15 percent higher than the estimates from an earlier report from the Federal Reserve Bank of New York. That earlier report found that total student loan debt was nearly $870 billion — surpassing total debt from credit cards and auto loans.

“Large levels of debt might also pose immediate problems for the rest of us,” Chopra added. “Excessive student debt can slow the recovery of the housing market. Student loan borrowers are sending big payment every month to their loan servicers, rather than becoming first-time homebuyers. This debt can also put added stress on the borrowing capacity of the household and government sector.”

Excerpts of the CFPB study are available on the agency’s blog.

Everyone needs to get it together

Part of the problem may derive from the lack of understanding of student loans.

In another study by Young Invincibles, a nonprofit group that advocates for those ages 18 to 34, nearly two-thirds of respondents said that they misunderstood or were surprised by aspects of their student loans or the student-loan process.

The same amount of respondents said that they did not understand the major differences between the private and federal loans. Federal student loans tend to offer friendlier hardship programs and lower interest rates.

Furthermore, 20 percent said they misunderstood or were surprised by their monthly payments. This was also the case for loan interest rates, which surprised 15 percent of respondents.

The CFPB has taken an initiative, called the “Know Before You Owe” project, that includes standardizing a simple sheet of information that clarifies the details of a student loan. Earlier this month, the CFPB also launched its student-loan complaint system to address any wrongdoings against student borrowers.

“But consumer protection is just one piece of preventing a student loan market meltdown,” said Chopra. “The financial services industry, the higher education community, and policymakers all bear responsibility to address the underlying causes of the growing debt levels.”

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  • TSJ

    Students borrowed the money, they got their education so pay it back as agreed to when you took the loan.  Ingorance is no excuse.

    Also Commercial schools that make large profits off of student loans and provide a low level of real education need to stopped from feeding on students and the student loan system.

  • http://cashadvancesus.com/ cash advance

    Well, between my wife and I, we spend $1,400/ month on student loans. I can
    assure you we would put more into the economy. And just because you
    obtained a degree doesn’t mean you will automatically be in some group
    of lucratively paid individuals. My wife is a special ED teacher and
    pretty much makes money. If we took our house hold income and put 100%
    of it towards our student loans, it would take over 4 years to pay off.
    And no, we weren’t those stupid students that take out student loans for
    spring break trips to Miami. We each obtained degrees from out of
    state schools and our families were middle class workers. So we received no
    financial support which was BS because it was factoring in our parents
    income when they weren’t paying for any of our schooling.