The price of dinner for two: $30. The price of rent for one month: $1100. The price of electricity for one year: $480. The price of a college education: priceless – well, not really. The cost of a college education continues to rise in a time when unemployment and underemployment plagues 50% of recent college graduates, this according to the associated press. College graduates are entering a weak job market with debts equivalent to a home mortgage with little hope for relief. Student loan borrowers must be aware of current trends in the cost of higher education and obtain knowledge of repayment options and obligations in order to avoid the debt trap in which many borrowers have found themselves – a problem that our government will need to address.
The Problem
Many students chose their school and degree with the thought that they would be rewarded for their effort and indebtedness with a well paying career; however, many who have graduated within the last ten years have been disappointed. During the last decade alone, between 1999–2000 and 2009–10, the price of a 4-year education at a private institution rose 25% and at a public university, 37%, after adjusting for inflation[i]. This increase in cost has lead to increased borrowing: total parent and student debt for college doubled for the same time period. The costs are evident upfront, but the hope is that the benefits of an education will pay off in the end. The median annual earnings for people 25 and older who held a bachelor’s degree in 2010 was $53,976[ii]. This means that half of college graduates do reap the benefits of their college degree. The other half, unfortunately, are struggling to make the monthly payments on those hefty loans they took out four years ago. According to Time Magazine, 41% of borrowers who entered repayment in 2005 became delinquent or defaulted within five years.
According to Lawrence Mishel, president of the nonpartisan Economic Policy Institute, wages for people who have a college degree have not improved relative to those with less education over the last decade[iii]. In other words, the return on college debt is negligible. An article in TIME states that too many students are spending too much money on degrees that may never generate the expected return on investment. Degrees from Harvard may still open doors, but lesser known private schools may not lead to the same opportunities. Furthermore, some degrees lead to lower-paying professions, like theater or religious studies. Couple the high cost of an education with the likelihood of little pay, and the result is employee burn-out, as debtors work two, sometimes three, jobs to meet their monthly obligations.
The trouble with meeting monthly obligations is compounded when interest is calculated into the figures. Historically, loan rates have fallen as low as 2.47% (variable rate) and have risen as high as 12%, with most falling between 6 and 8%[iv]. A typical mortgage rate is currently between 3% and 5%[v], and those with higher rates have the opportunity to refinance. Even car loans, which offer rates of 2.5% to 5.5%[vi] can be refinanced for 0% interest. Yet there is no hope of refinancing for those struggling to stay afloat under school loan debt. Only a minute few get dismissed in bankruptcy, so even if all else fails, your student loan debt will still be there. Currently, Obama is trying to keep interest rates low for new borrowers, but little help is being offered to those who are currently struggling to repay with higher interest rates. On the contrary, the government does offer a variety of severe consequences if you should default on your student loan payments. The government can seize tax refunds, deny new student loans and grants, garnish wages without a court order, take a portion of Social Security benefits, and charge very large collection fees. Furthermore, there is no time limit for collection on federal student loans[vii].
Advice for Those in Repayment
Is there any relief for current borrowers who are struggling to make their monthly payments? Yes, current borrowers who are currently in repayment do have some options that will help them make their monthly obligation on federal student loans only. Federal loans include Federal Perkins Loans, PLUS Loans, and Stafford Loans, Direct (borrowed from and repaid to the Department of Education) or FFEL (borrowed from and repaid to a private institution but guaranteed by the Department of Education). Borrowers do have the option to select a different payment plan which may lower their monthly payment; however, you should be aware that some repayment plans may require you to pay more interest over the life of the loan. Extended repayment plans, for example, allow borrowers more time to pay back their loans but also continue to accrue interest until the final payment has been made. Borrowers should contact their lenders to discuss which option is best for them.
Borrowers who are struggling to pay back their loans may also consider postponing their payments with a deferment or forbearance. However, people who choose these options should also do their best to continue to at least pay interest on a monthly basis in order to avoid increasing the principal amount owed. Unpaid interest during either of these events is capitalized at the end of the period, increasing the amount of interest charged and monthly payments. These options are only available for a limited amount of time over the life of the loan and should, therefore, be used wisely.
Finally, if a lender offers to reduce your interest rate, take advantage of the opportunity! A lender may require you to make a certain number of payments faithfully in order to receive a discount. If you are able to uphold your end of the bargain, this is a worthwhile exchange. Lenders are currently offering to reduce interest rates if borrowers sign up for automatic payment services. If you remain in control of your payment options with this service, sign up and take advantage of the offer! Once in a while, an offer to consolidate may promise to reduce interest rates. Make sure to understand the deal and how it may affect your rights and obligations. If it is legitimate, use the offer to your advantage. Regardless of the option you choose, make the effort to adjust your monthly budget to aggressively payoff your loans. The faster you pay, the less you will owe in the long run.
Advice for Those Entering College
The most hope remains for those who have yet to borrow – if they choose to learn from the mistakes of the previous generation. For those just embarking on the college adventure, the world is your oyster. Anything seems possible, and it is, if you make decisions with your future in mind. Many college freshmen would say that when they graduate they want to be happy and successful. If this is your goal, choose your major based upon real skills and passions that you have that relate to careers that show future potential. Then, choose your college based on the financial cost and the real opportunities the school can offer you upon graduation in your desired area of study, i.e. name recognition, accreditation, or career placement. Ask yourself if a four-year degree is necessary for your field or if vocational training or a two-year associate’s degree would be a better choice. Finally, decide how much debt you can realistically afford and stick to your budget. Consider what your monthly payments will be each month based upon the amount you decide to borrow. Figure your budget assuming that you may make less than you would like to make upon graduation. No one ever regretted not borrowing enough when they realized how much they owed in order to pay it back. Mark Kantrowitz, publisher of FinAid.org and Fast Web.com, suggests limiting undergraduate debt to $45,000 for someone who plans to earn a degree in engineering, computer science, or business, and $35,000 for students more likely to choose a liberal-arts major[viii]. When borrowing for college, use Federal subsidized loans only in addition to grants and scholarships to avoid accumulating unnecessary interest. While a student is enrolled in school, the federal government will pay accrued interest on subsidized loans, but unsubsidized loans will continue to accrue interest at all time. Making smart choices before college will allow you to be happy and successful when you leave college.
The Solution
Something must be done to alleviate U.S. student-loan debt which is on track to reach $1 trillion this year[ix]. It is true that borrowers were aware of the terms of repayment at the time they signed their name on the line which implies that they are responsible for paying back the money they initially borrowed voluntarily. Repayment of the principal amount often is not the problem. Interest accrued on the principal amount, however, often makes repayment of the entire debt nearly impossible for some borrowers. Someone who owes $30,000 must pay $350 a month, nearly half of which goes to pay down interest accrued, in order to be debt free in 10 years. A person who owes $100,000 must pay $567 a month just to keep up with accruing interest. For those who are having trouble making their monthly payments, there are some options available to avoid delinquency and default, but these options often require the borrower to pay more in the long run. To avoid future economic catastrophes associated with student loan debt, new borrowers need to be educated about the pitfalls of borrowing large sums of money for college and law makers should revise current repayment policies for current debtors in order to curb the potential impact such high debt may have on the American economy.
We saw the effect of bad mortgages on the U.S. economy. Student-loan debt has the potential to cause a similar catastrophe unless something is done to help alleviate the problem. It is unnecessary for debtors to sink deeper in debt despite their efforts to repay their debt. The government has recently made some effort to help borrowers to avoid default. Recently, the government created an income-based repayment plan for borrowers whose debt exceeds their salary. It reduces the amount owed each month, and any amount still owed after 25 years is forgiven. However, the plan may require borrowers to pay much more in interest over the life of the loan. Furthermore, this option applies only to people who have federal loans. Even less help is available to borrowers who are repaying massive private loans. Little can be done to help any of these borrowers without the support of congressmen and lawmakers. One congressman, Michigan Representative Hansen Clarke, did introduce a bill last summer that includes a provision about forgiving student loans, but more support is needed to make this kind of law reality[x]. Only Congress can change the laws regarding federal loan interest rates, repayment, and forgiveness. If you or someone you know is struggling to keep up with student loan payments, then contact your congressmen and ask them to fight for fair loan repayment laws.
For more information on federal loans and repayment options, go to:
http://studentaid.ed.gov/students/publications/student_guide/2010-2011/english/main.htm
http://studentaid.ed.gov/PORTALSWebApp/students/english/repaying.jsp
[i] “Fast Facts: Tuition costs of colleges and universities”. National Center for Education Statistics. Institute of Education Sciences, n.d. http://nces.ed.gov/fastfacts/display.asp?id=76. 5 June 2012.
[ii] Dell, Kristina. “I Owe U”. Time 178 Oct. 2011: 41-44. Print.
[iii] Dell, Kristina. “I Owe U”. Time 178 Oct. 2011: 41-44. Print.
[iv] Sotonoff, Jamie. “Schooled In Debt (and no way to refinance)”. Daily Herald 30 April 2012. A1. Print.
Kantrowitz, Mark. “Historical Interest Rates”. FinAid! FinAid, 2012. http://www.finaid.org/loans/historicalrates.phtml. 5 June 2012.
[v] “Mortgage Rates”. Mortgage News Daily. Mortgage News Daily, n.d. http://www.mortgagenewsdaily.com/mortgage_rates/. http://www.mortgagenewsdaily.com/mortgage_rates/charts.asp?Y=2000&M=5. 7 June 2012.
[vi] “ Chase Auto Loan Rates”. Chase. JPMorgan Chase, 2012. https://www.chase.com/online/auto-loan/auto-loan-rates-compare.htm. 7 June 2012.
[vii] “Government Collection Tools”. Student Loan Borrower Assistance. Student Loan Borrower Assistance, n.d. http://www.studentloanborrowerassistance.org/collections/government-collection-tools/. 15 June 2012.
[viii] Dell, Kristina. “I Owe U”. Time 178 Oct. 2011: 41-44. Print.
[ix] Dell, Kristina. “I Owe U”. Time 178 Oct. 2011: 41-44. Print.
[x] Dell, Kristina. “I Owe U”. Time 178 Oct. 2011: 41-44. Print.
