Are Student Loans The Next Big Bubble To Burst?

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Source: J.P. Morgan Asset Management, BLS, FactSet, Census Bureau. Unemployment rates shown are for civilians aged 25 and older. Earnings by educational attainment come from the Current Population Survey and are published under historical income tables by person by the Census/center> Bureau. Guide to the Markets – U.S. Data are as of September 25, 2019.

There are several different types of student loans available. The primary difference involves whether the loan is a federal loan or a private loan. Most loans outstanding are federal loans but students and their families sometimes also turn to private lenders (Exs. banks, credit unions, etc…) if the amount of the federal loans they receive is not enough. Here are some of the key differences between federal loans and private loans:

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According to NerdWallet, private student loans make up approximately 7.6% of total student loans outstanding as of their September 20, 2019 article while federal loans comprise the remaining 92.4%.

Once the student graduates from college with their four year degree, they then carry with them the burden of paying off their student loan(s). Their ability to repay their loans is a function of their ability to become employed and the level of wages they are paid during their employment. However, finding a job and earning a reasonable level of income can be challenging for many recent college graduates. Consider that in the U.S., while the overall unemployment rate is currently just 3.7%, the rate of unemployment for those between the ages of 20 – 24 is 7% (7.9% for Men and 6.2% for Women). For those that do find work in entry level positions, the average annual salary for those in the 20 – 24 age group is $29,770. This average rises to $41,951 for those in the age range of 25 – 34 but still creates budgetary issues for those trying to pay off their student loans.

Many federal loans have standard repayment plans, and some have income-driven repayment plans which can extend the timeline for having to repay the loan to 20 or 25 years. This may be necessary for some students to repay their loans in their entirety. Consider that if the average student loan balance is $35,477 (as stated earlier) and a borrower is applying 10% of their annual average income of $29,770 to pay down this debt, this would take them approximately 12 years, not accounting, of course, for additional accrued interest. The amount of potential additional accrued interest is not insignificant. According to Value Penguin, interest on federal student loans currently stand at 4.5% for undergraduate loans, 6.1% for unsubsidized graduate loans and 7.1% for direct PLUS loans. Of course, if borrowers wages rise, or they are able to apply a large percentage of their annual average income to pay down their loans, this timeframe could be less. Clearly, wages and the jobs market play a large role in the ability of borrowers to repay their student loans.

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Hennion & Walsh Asset Management currently has allocations within its managed money program and Hennion & Walsh currently has allocations within certain SmartTrust® Unit Investment ...

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