Attaining a degree at a college
or university has always enabled the recipient to be positioned to earn a
higher salary and the possibility of doing more pleasant and highly-skilled
work than those who have not completed school or concluded their formal education
with high school. Going to college has never been cheap, but it has gotten much
more expensive for the average student in the past few decades. According to
the U.S. Department of Labor, college costs have skyrocketed 538% since 1985.
That far exceeds other increases, like health care (up 286%), the Consumer
Price Index (121% higher), gasoline, and housing. [1]
Wages for most Americans outside
the wealthiest cohort have remained stagnant for at least a decade, and the
Great Recession (2007-2012) saw an earnings drop for the bottom 70% of workers.
[2] So the only
recourse for many students is to pay for their higher education costs with
loans from the Federal government or private financial institutions.
The loans have had a positive
effect in that they have enabled many prospective students to attend college
who would not otherwise have been able to afford it. But problems can begin
once the student has graduated. After the student has received her sheepskin,
the loan repayments begin. The loans may include interest accumulation aside
from the principal costs if the loan was from a private source, which adds to
the debt. Many recent graduates are then presented with bills which may
approach sums resembling an entire year’s salary ($29,400 last year). [3]
If that’s not enough of a
concern, the recent economic struggles have led to real uncertainty in the job
market, particularly so for the youngest and least experienced segment of the
workforce. Last year New York’s
Daily News reported that 40% of new graduates were unemployed, would need to
acquire additional training to get an inside track on their career path, or
were working jobs that didn’t require their degrees. About 16% were only employed
part-time. [4]
This toxic combination of large
loan repayments with a delicate economy has inevitably led to former students
defaulting on their debts in increasing and worrisome numbers. U.S. News &
World Report, assessing U.S. Department of Education data, reports that student
debtors who defaulted within 2-3 years rose from 9 to 10 percent for the 2-year
cohort and from 13 to nearly 15 percent for the 3-year group. [5] While these
numbers might seem small now, they show no sign of ebbing, and affect
approximately 600,000 borrowers, with their ranks expanding, because the rates
have risen consistently for the last 6 years. The most likely students to
default attended for-profit colleges where the default rate is a little more
than 1 in 5 (21.8%).
How does the loan process work?
Students in the U.S.
have the option of applying for loans from the Federal government or private
lenders in [6] addition to whatever they or their families can pay. They can also
obtain scholarships and direct financial aid from the institution they attend.
When a student is registered for half of the college’s normal course load she
becomes eligible for guaranteed federal loans. These loans, as stated earlier,
do not have to be repaid until after graduation based on the theory that
full-time students likely don’t have the ability to earn enough wages to pay
the loans. But repayment is expected soon after graduation, when the former
students have entered the career path their degree has created for them. If the
parents take out loans the payments are expected right away because the
borrower is expected to have a regular income. Interest on federal loans is not
added for either type of borrower until after the graduation. Private loans are
also available to both students and relatives of scholars. Financial
institutions appear attractive at first glance because they will generally
offer larger amounts than the government. But loans from financial institutions
also have higher interest rates that immediately.
What options do students have when struggling to repay loans?
The federal government offers
Income-based Repayment (IBR) on most types of public loans for those found to
be eligible. Eligibility occurs when the former student is considered to have a
financial hardship, such as unemployment, or has continued on as a full-time
student in a master’s or other professional course. The IBR system does have
the ability to postpone or make payments more manageable, but it does not stop
interest from accruing. A key factor, however, is that to be eligible for
assistance debtors must be up-to-date on their payments, meaning that those who
have already missed payments or fallen into arrears aren’t going to be helped.
Former students who cannot pay the initial plan also have the option of a
consolidated loan, but this type of loan does not hold back the accumulation of
interest. Students who took private loans have no similar recourse to postpone
or reduce payments, although some financial institutions may offer various incentives
where the loans could be reduced, usually based on school achievement benchmarks.
[7]
Some solutions
The growing student loan crisis
highlights a structural problem in society. The problem is that the value of
attaining a higher education degree is severely compromised if funding that
education becomes too expensive for the average student. Students attend
college for a demonstrably positive economic reason: to earn more money than
they would likely otherwise do without a degree. There are also important
intangible reasons such as become better critical thinkers, gaining more
understanding, or determining how to make contributions to society. But the
debt that students currently get saddled with prevents them from making those
economic or more intangible reasons from coming to fruition in the short term,
and increasingly in the long term as well.
Although the profile of the average
college student or recent graduate has changed somewhat from the traditional
young adult, the target population of those applying for and repaying college
loans remains the least experienced and savvy with money. The aspirational
value of going to college is so great that students are among the most economically
vulnerable populations. The players in the student loan “industry,” whether
public or private, have a huge stake in keeping this steady source of money
rolling in. The bottom line is that those most in need of the beneficial
aspects of a higher education are also the ones least likely to be able to
afford the ballooning costs or to make exorbitant repayments.
Comparing a student loan debt
with a mortgage is an instructive parallel. Few Americans are able to purchase
a home until they have means and have been approved by a lender. When accepted
they usually will be making payments for 30 years. According to a poll
conducted by One Wisconsin Institute, a Badger
State advocacy group, the average
length of student loan debt reported by respondents was 21 years. When coupled
with so-so job markets for many graduates, student loan debt can be the equivalent
of being handed a mortgage to a house you might not be able to move into.
There are also missed economic
opportunities for this growing group of Americans. Progressive reported that
the surveyed group had 36% lower rates of home ownership, and about two-thirds
opted for a used car instead of a new one. [Ross, Scot, and Mike Browne.
“Sentenced to Debt.” The Progressive Nov. 2013: 32+]
The economic pressures students
face to reduce their arrears and earn as much as possible have created
obstacles to public service and the common good. In an MSNBC report, Ben
Cocchiaro, a third-year medical student at Drexel
University in Philadelphia
noted that his interest in primary care outweighs his concerns about how much
money he will earn, but that many of his peers will instead direct their
efforts towards lucrative specialty practices. [8] Similarly, Ronald Applebaum, who was raised in
a household with a law enforcement background, wanted to put his law degree to
practice serving in a public capacity in the district attorney’s office. With a
lower salary, but loan payments due, Applebaum had to eventually give up public
service for a better paying but less desired private practice.
In 2009, when Washington
passed the multi-billion dollar American Recovery and Reinvestment Act to
stimulate the floundering economy, many home owners in desperate straits were
assisted. Applebaum launched an online petition effort to gain support for a
bailout of student loan debtors by forgiving current indebtedness. [9] The positive effect would be that the
money that former and current students are struggling to pay back could instead
be applied toward the marketplace or invested. Doing so promotes a “trickle up”
view in which money spent by middle classes would eventually assist the owners
of the economic engines. The plan has its critics though, since a precedent may
be set where other groups of debtors may also request forgiveness.
President Barack Obama’s
administration has made some minor changes to IBR, but these aren’t game
changers. We need more and additional options to tie repayment to ability to
pay. The White House proposes capping loan responsibilities to no more than 10%
of current income. [10] Additionally,
the plan would forgive all debt after 20 years, and after only 10 years if the
student takes up a public service career.
U.S. Representative Mark Pocan of
Wisconsin has proposed allowing
student loan debtors to refinance their loans in a manner similar to refinancing
mortgages. [11] Another
possibility, along the same lines, would be to offer tax benefits to those
paying interest on student loans, similar to how home owners get deductions for
paying mortgage interest.
We also need state political
leaders to show some courage and increase funding for colleges. Mother Jones
notes that, although between 2000-2012 enrollment in public higher education
has risen 34%, spending has been reduced 30%. That has led to colleges raising
tuition and fees, thus making college less and less affordable. This results in
upwards of a trillion dollars in total debt that has shot up 310% in the last
decade. It also means that about 1 in 5 households have student loans to pay.
Compare this with 1989, when less than 1 in 10 carried that burden. [12]
One plan that would truly change
the system is a “Pay it Forward” proposal Oregon
is looking to implement. Under this plan Beaver state students would not pay
tuition at all when attending public institutions. [13] Instead they
would receive a deduction from their wages for approximately 25 years after
graduation, which would work somewhat like a reverse Social Security system. Under
this plan current students would be the beneficiaries of the payments made by
the former students receiving the deduction from their wages and salaries. Certainly,
like Social Security, there could be controversies over time about means
testing, repayment rates, and affordability, but the “Pay it forward” method is
similar to how students in the United Kingdom
and Australia
repay college debts. Although the plan doesn’t account for other college
expenses, such as textbooks, housing, and meals, it does completely eliminate
the onerous loan system.
—Kirk G. Morrison
Kirk Morrison is chairman of the
National Committee of the American Solidarity Party.
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