One of the moments every parent looks forward to is the day their child is accepted into college. All the years of hard work and effort by both student and parent seem to have finally paid off.
But has it? Or is the real payment only starting? Despite hours spent filling out their FAFSA application to see what federal student aid is available, many students, even low-income students, are disillusioned when the financial aid office informs them that the amount of financial aid available in the form of “gift money” is not nearly enough to cover the cost of their education. The rest is covered in a laundry list of direct subsidized loans, direct unsubsidized loans, and federal student loans. Even then, students typically still face a balance that must be covered either through a parent plus loan or through private student loans. Making matters worse, because most students exiting high school lack a credit history, private loans will almost always require a cosigner. However, students in low-income families may not be able to use their parents as cosigners.
The canary in the coal mine, or the fat lady singing?
However the problem is defined, there is no denying the student loan debt problem in our country. Americans owe over $1.5 trillion in student loan debt. It is estimated that approximately 1.9 million students received their bachelor’s degree in 2019. However, 70% of those students – and a disproportionate amount of them being female students – will graduate with student debt that they will be paying off for decades. The burden of student loans is causing a generation of students putting off getting married, buying a house, having children, and saving for retirement.
But the recent crop of college graduates is not the canary in the coal mine. The problem has been shouting its arrival for many years, which is reflected in higher default rates and the average amount of student debt is growing. The problem is well defined. The solutions are less clear.
Rethinking the if and where of a college degree
There is some good news that is coming from the student debt crisis. The rising cost of college tuition is causing many students to reconsider whether a four-year college is right for them. Enrollment in community colleges and trade schools is on the rise which is showing that many students are realizing that there are other, less expensive, paths to achieve their goal of higher education.
Students and parents are also becoming better consumers. There is an increasing movement of students turning away from the prestige of “brand name” schools and finding that they can find more affordable options at smaller “under the radar” schools. These schools, not surprisingly, can also offer more generous financial aid including the grants and scholarships that do not require repayment upon graduation.
But the more things change, the more they stay the same
However, for the vast majority of students, a bachelor’s degree is required to break into their desired career field. Not only that, but students with a bachelor’s degree can earn 84% more over the course of their career. Colleges know this and that’s why – even as they offer more financial aid – tuition costs continue to rise. The problem is that many of the students that are taking on this debt come from middle-class families that are already facing the problem of stagnating wage growth that makes student loans the only viable option for sending their student to college.
Financial education is not a panacea
One of the solutions being bantered about is that student and parents need to have more financial literacy. The reality is that many students are receiving more education and advice about the real cost of student loans in high school. However as stated above, for many students the choice is either delaying college altogether or extending the time it takes to get a degree (which with the rising cost of tuition can actually make the degree more expensive). In fact, many students understand that the master promissory note they sign when accepting subsidized and unsubsidized loans means they will have to repay the loan. But they know they are caught between a rock and a hard place. Taking on student loans seems like the least bad option at the moment.
How can lenders make loans easier to repay?
Of course, addressing students taking on debt in the first place doesn’t solve the problem of the trillions of dollars of outstanding student loan debt, some of which is already in default. Greater forbearance, more flexible repayment option including income-based repayment (i.e. capping the amount of loan repayment to 10% of discretionary income) are all being discussed. This would have an immediate impact on many borrowers. However, it still creates a situation in which paying back a student loan could take as long as paying off a mortgage. It solves one problem but creates others.
Debt forgiveness and free college
As the 2020 Presidential campaign kicks off, the issue of student loan debt is taking center stage as a campaign issue. From Senator Bernie Sanders proposing free public college to Senator Elizabeth Warren proposing a plan to cancel at least a portion of student debt, there is no shortage of ideas for “fixing the problem” (or maybe pandering for votes). However, experts are divided on whether or not loan forgiveness is the answer, and some believe that making loans easier to repay may be a more effective way to deal with the problem.
Allowing employers to treat repayment of student loans as an educational expense.
One of the more promising solutions involves Congress changing the language in the tax code which would allow employers to treat the repayment of student debt under the same definition as qualified educational expenses. Currently, employers can pay an employee up to $5,250 each year, tax-free. As an incentive to lure high-quality talent, approximately four percent of companies are making contributions to employees’ student loan debt for as long as the employee is at the company. Many other companies have expressed an interest in providing a similar benefit if the dollars they applied could be considered an educational expense. While closing this loophole would help ensure repayment of federal student loans, it is unclear if Congress would approve this for student loans taken out through private lenders.
The student loan crisis is not going to go away anytime soon. And it’s not going to be solved by half-measures that either stigmatizes high achieving students from low-income families or trap graduates with repayment terms that will increase the cost of their debt in the long run. It is a crisis that lacks easy solutions.