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Student Loan Defaults Show Change is Needed in the Current System



College used to be a luxury once upon a time in America. Ivy league schools were havens for the elite to network and launch their careers. In modern times, however, college has almost become a prerequisite for finding an entry level position in most industries. But with that college degree also comes with debt. And what once was a bit of assistance to help students achieve their dreams has now turned into a full scale cash machine generating trillions in student debt. However, that industry is taking a hit as more Americans than ever are defaulting on student loan payments.

What Does Student Loan Mean for Those Who Default?

The federal government outsources student loans to certified companies. Now, new data released by the U.S. Department of Education shows that 1.1 million more Americans have defaulted on payments in 2016 – up 17 percent from 2015 to a record high of 4.3 million American defaults.

That means that at the end of 2016, 42.4 million Americans owed about $1.3 trillion in federal student loans – not counting private student loans, credit cards, and other financing options such as home equity loans.

While the system works well for the student loan industry, it doesn’t seem to be quite as great a deal for borrowers or taxpayers, who often have to pick up the slack.

The average student loan borrower owes $30,650. Up 17 percent from 2013 when the average debt was $26k. That totals to about $137 billion in defaulted student loan payments. Taxpayers are often the ones left footing the bill as a result of student loans originating with the federal government. And while those defaults cost $137 billion in lost loans, there are also another $40 billion or so in administrative fees.

The odd thing about the rising debt is that the job market is strong at the moment, which conflicts with the rising debt. Unemployment is at a low point, and average starting salaries are rising, with inflation being low. Unfortunately, most defaulted borrowers are those who never graduated and have not found steady work.

The Obama administration looked to reduce student loan defaults by promoting income-driven repayment plans which would limit how much borrowers would pay to a share of their monthly income, and eventually forgive part of their balances.

While President Trump had mentioned doing something similar during his campaign, as yet he has not addressed the issue. With Betsy DeVos in as Secretary of Education, schools could see tuition rising as a result of her voucher plan. That means more student debt could be in the works.

Watch this video from AJ+ regarding student loans:

Clearly, the current education and education financing system looks to have issues. However, traders can take advantage of the rising student debt by investing in publicly traded student loan companies such as Nelnet, Inc. (NNI) and SLM Corporation (SLM), both of which are up.

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