Till Debts Do Us Part: Some Policy Solutions Toward the Student Loan Crisis

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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