There are approximately 19.9 million people expected to attend college in the fall of 2019, and a large proportion of those people will take out loans to finance their education. Indeed, about 69 percent of students from the Class of 2018 took out student loans, and graduated with the average balance of $29,800, according to a study by Student Loan Hero. Around 44 million people owe money toward a student loan, and two million people have defaulted on their student loans in the last six years. Around one-third of adults under the age of 30 have a student loan, and student debt has become the main way in which people finance their education. As the cost of tuition increases, more people are taking on student loans to pay their college education — many also depend on private loans, as they have exhausted their federal options.
The Rising Student Debt Crisis
Tuition increases over the last few decades have resulted in many students taking out debt which they can no longer afford to repay. College tuition has increased by 1,375 percent since 1978, more than four times the overall rate of inflation, according to the Department of Labor. The U.S. spends around $30,000 per student — more than any other developed country, excluding Luxembourg. These tuition increases have been the result of higher spending by universities, and lower state funding which has made colleges more dependent on their tuition income to finance their offerings. Student debt has become a national issue, with policymakers making many proposals from free college to holding colleges more accountable in order to help mitigate the crisis. As discussions over reauthorizing the Higher Education Act continue, policymakers should look toward helping students repay their student loans easier.
A recent analysis by Bloomberg Businessweek found that U.S. student loan borrowers are paying down around 1 percent of their federal student loans each year. Therefore, the average student who graduates with $30,000 in debt is only reducing the balance of their debt at a rate of $300 annually. The conclusion from Bloomberg’s analysis was that it would take almost a century for all student loans currently outstanding to pay off their debt. Indeed, many borrowers will pay back their loans quicker, and rising wages in the future will make it easier to do so. However, the low rate of paying down student loans demonstrates how much of a burden student loans can be for borrowers. This also disproportionately affects minorities who typically command lower salaries due to existing inequalities in the labor market.
Helping Students Repay Their Loans
The federal student loan system was never intended to finance so many loans, and the system has failed to keep up with tuition increases and more students who need to take out a loan to pay for their education. Most student loans are now originated by the federal government and a variety of different plans exist to help borrowers access the money they need to pay for college. The system therefore is the result of patchwork legislation — incremental changes made over time to address growing dependence on the federal student loan system. However, as more students are depending on student loans and struggling to make payments, it has become clear that reforms are necessary to make it easier for people to pay back their student loans.
Consolidate Federal Programs
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There are a few ways in which the federal government could make repayment easier. Firstly, the federal government should aim to consolidate all of the federal student loan programs into a smaller number of options. The federal government offers students dozens of different plans that they can use to cover their education. A borrower can choose from five Income-Based Repayment options, or standard, extended, or graduated variations of monthly payments. Students may also be eligible for plans such as the Public Service Loan Forgiveness program, where their debt will be forgiven after 120 full payments have been made toward their loans.
This large number of options makes it very difficult for people to understand which one is best for them, and all of them come with different eligibility requirements and expected monthly payments. Senator Lamar Alexander, Chairman of the Senate Health, Education, Labor, and Pensions Committee proposed in a New York Times op-ed earlier this year a repayment system with two plans. Each plan would include automatic payment deductions from an employees’ paycheck.
There are a few benefits to this model. Income-driven repayment plans are also typically more manageable for students — they pay a percentage of their income relative to their income — which would increase the likelihood that students could repay their loans. Automatically deducting money from an employees’ paycheck will also mean that students will not have to navigate the complex process of making and managing payments — their employers will do that for them. This will further increase the likelihood that a student makes consistent payments toward their loans, and will reduce the chances that a student enters a period of default on their loans — only 54 percent of student borrowers make consistent payments toward their loans. A consolidated federal student loan program would also make it easier for students to understand how much they are expected to pay back as only a few plans would exist for them to evaluate.
Students also should not be able to take out loans that they cannot afford to repay. Graduate PLUS loans — offered to students attending graduate school — are capped at the total price of attendance, which includes all living expenses. Although these loans require a credit check, they are available without regard to income to students. Therefore, students who attend an expensive school may end up taking out a loan that they cannot afford — this is an even bigger problem among schools that have lower graduation and student success rates. Parent PLUS loans have also realized a similar problem, and 11 percent of borrowers as of September 2015 had gone at least a year without making a payment toward their loan. The federal government should only issue loans to students if they will be able to repay those loans. This would need to be done carefully — to ensure that minorities are not disproportionately denied aid — but if the Education Department were to take into account graduation rates and salary outcomes when issuing loans, this goal would be manageable.
Invest in Financial Literacy Education
In addition to changing payment plans and implementing new requirements around being able to repay a student loan, state governments should also help increase access to financial advice for people interested in going to college. The Council for Economic Education, an organization that promotes financial instruction, reported in 2018 that 17 states require high school students to complete a course in personal finance — the same amount as when the last version of the report was published two years earlier.
State governments should spend more resources on providing access to financial literacy courses in high school. These courses should cover topics such as student loans, Income Share Agreements, federal aid, and other key terms mentioned in discussions about college financing. Offering access to more financial literacy education will increase the likelihood that students will calculate how much they will need to pay back before they take out a loan, which will make them more likely to make consistent repayments — for context, 51 percent of student loan holders in 2018 did not estimate monthly payments before taking out a loan. In addition, financial literacy courses will also make students more aware of what options are available to them, so they can make more informed decisions about how they should finance their education. Iowa and Kentucky have recently passed laws to expand access to financial literacy programs for high school students; Rhode Island and Florida are also considering similar proposals.
The Troubling State of the Federal Loan Portfolio
Making it easier to repay student loans will not only help borrowers make more consistent payments, but will also assist the federal government. Student loans in a period of default have surpassed all other forms of household debt that are classified as “severely derogatory”, according to a recent report from the New York Federal Reserve. Further, around 10 percent of the $1.6 trillion federal student loan portfolio is 30 days or more past due. Borrowers are taking out loans that they cannot repay, which leaves the government with a large amount of debt which is not likely to be repaid. In a recent article for Bloomberg, Secretary of Education Betsy DeVos’ spokeswoman, Elizabeth Hill, said the secretary “is very concerned about the ballooning student loan portfolio and the implications for students and taxpayers.” If the government invests more resources in making student loan payments easier to understand, perhaps the debt burden on the federal government would not be as much of a problem — students would be more likely to make payments toward their loans.
A significant portion of outstanding student loans will not be paid back anyway, due to the rise of income-driven repayment plans. Around 30 percent of borrowers are enrolled in an income-driven repayment program which means that they will make payments as a portion of their income — typically 10 percent or 15 percent of a students’ monthly discretionary income. After students have made payments for 20 years, though, the remaining balance on their loan will be forgiven if they have not already paid it off. The Public Service Loan Forgiveness program makes loans held by teachers, police officers, and other public service workers eligible for forgiveness after 10 years.
More students opting into income-driven repayment plans has also made student borrowers liable to make payments for a longer period of time. The average borrower who enrolled in an income-based program avoided making payments of $327 per month on $50,640 on debt. Income-driven repayment has resulted in lower delinquency and default rates among borrowers, but have also contributed toward rising student loan balances as students are taking longer to pay off their loans. Because payments are made as a percentage of a students’ income, if they are earning a low salary, their payment may not cover their balance and the interest that has accrued, which means the balance of their loan will continue to grow. For the first time, a majority of borrowers who had made payments for two years ended the second year owing more than they borrowed, which can be attributed, in large part, to the growth of income-driven repayment plans. This further emphasizes the importance of making it easier to repay student loans — students are making payments for longer.
The Future of Student Loan Repayment
Making it easier to repay student loans is not a “silver bullet” solution to solving the student debt crisis. The student debt crisis is an amalgamation of many different problems, ranging from the lack of accountability in higher education to the lack of consistency among federal student loan programs. However, making student loans easier to understand is in the best interests of both borrowers and the federal government. If borrowers can better understand how to make repayments, they will be more likely to pay on time, and so interest will not accrue past an affordable level for students. Further, the government would not have to worry about holding a student loan portfolio which would take a century to pay back. Indeed, other reforms are necessary to mitigate the student debt crisis — making colleges accountable for tuition increases is high on the list — but making student loan repayments easier to understand is a good first step. As legislators continue to discuss what should be included in the Higher Education Act’s reauthorization, measures such as consolidating federal student loan programs and increasing access to financial literacy education should be given adequate consideration.
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