This article was published on pages 9 and 10 of the February 2013 issue of CURRENTS, a publication of the Council for Advancement and Support of Education (CASE).
Copyright © 2012 Council for Advancement and Support of Education. All rights reserved. Used by permission.
Lightening the Load
By MARK KANTROWITZ
Student loan debt in the United States recently hit a couple of significant milestones. In 2010, total outstanding student loan debt exceeded credit card debt. About 18 months later, total student loan debt reached $1 trillion. While these thresholds may attract attention, they are not surprising. Student loans are repaid over decades, not months and years like credit card and auto loan debt, so it was inevitable that student loan debt would eventually exceed these other types of debt.
Borrowing has become a standard tool for paying for college, but how much debt is too much? The total borrowed should be less than the graduate's expected annual starting salary. If total debt is less than a graduate's annual income, he or she will be able to repay the loans in about 10 years. Unfortunately, according to the 2008-09 Baccalaureate and Beyond Longitudinal Study, conducted by the U.S. Department of Education, about one in six bachelor's degree recipients who is working full time has total student loan debt in excess of his or her first-year annual income. The average graduate in 2008 had $24,842 in debt and earned $33,787 in 2009.
The magnitude of student debt carried by individual borrowers can force them to delay life cycle choices. A March 2011 Pew Research Center survey found that a quarter of recent college graduates said student loans made it harder to buy a home, and 7 percent reported that they delayed getting married or starting a family because of their student loans.
The Consumer Financial Protection Bureau, which is required by Congress to issue an annual report on private student loans, recently solicited public comments to inform its work and received feedback about both private and federal loans. One borrower noted, "I am unable to afford a car, home, or any other luxuries because of my student loan payments. I work a full-time job as a registered nurse. I dream of one day reaching the American Dream and having a family, house, and cars. ... Now I am living a nightmare instead of my dream."
Are there any options to provide financial relief to borrowers who are struggling to repay their student loans?
A BROKEN CYCLE
Federal loans provide some options for financial relief. Borrowers with short-term financial problems can get a temporary suspension of their repayment obligations, but because interest on the loan continues to accrue, the total the borrower must eventually pay increases. Borrowers facing long-term financial problems may qualify for an income-based repayment plan. The term of the loan may grow, however, increasing the total interest the borrower must pay.
Private student loan borrowers don't have as many protections. Although federal loans tend to be more affordable, students turn to private loans for a variety of reasons. Some families are unwilling to file the Free Application for Federal Student Aid or believe that they don't have enough financial need to qualify for federal loans. Some students aren't enrolled at an institution at least half time or don't meet the minimum GPA requirements to receive federal loans. Whatever the reason is for choosing a private loan, a borrower faces significant challenges if he or she has trouble repaying the debt.
Most private student loans limit forbearances-temporary postponements of loan payments-to one year. By contrast, federal loans offer a three-year limit for economic hardship deferments and a five-year limit for forbearances. In addition, most private loans do not offer income-based repayment, and extended repayment options are limited.
The differences in repayment options between private and federal loans are important because approximately 15 percent (about $150 billion) of outstanding student loans are private loans. Those borrowers are more likely to encounter financial problems because students who use any private loans are twice as likely to have total student loan debt at graduation exceeding their annual income (average private-loan debt load: $30,659; average federal-loan debt load: $17,897).
Compounding matters is the fact that federal and private student loans are almost impossible to get rid of in bankruptcy. Federal loans offer some protections, but with both types of loans, borrowers often encounter lenders who are unwilling to compromise. "Thanks to the lack of consumer protections on student loans, I can't file bankruptcy, so I just sit here while the loan sharks gnaw me to pieces. It's maddening," wrote one borrower in the CFPB comments.
RECIPES FOR RELIEF
There are several solutions that, individually or in combination, can help address the student loan problem and its fallout. Most of these recommendations require congressional action, but colleges and universities could take some steps on their own. The CFPB and Department of Education have made similar recommendations.
Increase student and parent understanding of education loan debt. The education department has introduced tools to help families make more informed decisions about financing college education, including the net price calculator and the financial aid shopping sheet. Both tools, however, continue to be developed, are not mandatory for institutions to use, and don't include information about post-graduation outcomes (including debt, income, and unemployment rates by field of study and degree level). Financial literacy training should be included both in the secondary school curriculum and during college orientation programs. This will help students make smarter borrowing decisions and teach them how to manage money throughout their lives.
Increase college and university awareness of student loan debt. Both institutions and the federal government need to do a better job tracking the health of the college financing system and its borrowers, especially how many students graduate or drop out with excessive loan debt. The Department of Education's National Student Loan Data System, a useful tool designed for borrowers of federal loans to keep track of their repayment status, should be expanded to include private student loans. Expanding the NSLDS would enable students and parents to generate annual reports detailing their average loan debt at graduation. At the institutional level, schools should certify private student loans and counsel students about borrowing federal loans first and minimizing debt.
Restore the bankruptcy discharge for federal and private student loans. Having student loan debt forgiven through bankruptcy is not a panacea, but it does provide borrowers an opportunity for a clean slate. Moreover, when faced with the prospect of losing loans to a bankruptcy discharge, lenders will be more likely to offer borrowers compromises and alternatives to enable the borrower to continue repaying the debt.
Overhaul federal student loan programs to provide more rational loan limits based on the borrower's projected ability to repay. Stafford, Perkins, and PLUS loans-the main federal education loans-should be replaced with a single student loan with limits based on the ability to repay.
The aggregate loan limit, or total debt, a borrower could take on would equal the projected starting salary (based on field of study, among other factors) at graduation.
This aggregate limit would include all previous education debt, such as loans taken out for a completed associate's degree if a student is now enrolling in a bachelor's degree program. The annual loan limit would be determined by dividing the aggregate loan limit by the number of years of the educational program.
The rationale for this system of aggregate and annual limits is to prevent the student from borrowing the full debt load early, then having no money left over for the ensuing years of education. While this would apply to federal loans only, such limits would provide clear signals to private lenders and borrowers about what affordable loan levels should be.
A FRESH START
As the tuition at U.S. colleges and universities grows more expensive each year, the number of students who graduate with excessive debt swells. Students, as well as their parents and institutions, must be better informed about their loan and repayment options. Increased awareness about the dangers of debt and improved assistance for borrowers in distress will help graduates enter the professional world on more solid footing.
Mark Kantrowitz is the publisher of Fastweb.com and FinAid.org.
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