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The Broken Student Loan Debacle


The Broken Student Loan Debacle

For generations, grants were used by those wishing to attend college, but whose families couldn’t afford to send them. It worked and it worked well. Public support was always right where it needed to be and frankly, problems were rare. This week, President Obama made proposals for fixing the worsening student loan debacle.

Student Loan Debacle

It’s like a vicious cycle – with nearly every state cutting funding for education, the cost of tuition has steadily increased over the past decade. In fact, as recently as 1995, students were using grants and part time jobs to cover their educations and taking on new debt wasn’t an option for middle class families. As a result, many families or the students themselves have relied on credit cards to bridge the differences.

They may not be using credit cards to cover tuition, but they’re using them to offset the shortage of money after having paid a semester’s tuition. That, of course, means not only are they facing student loan debt for many years, but they’re also looking at credit card debt that they now carry because of it. And by the way – there are no guarantees that a college graduate will actually find a position that matches his degree.

End the Debt to Diploma System?

Some, including Heather McGhee, Vice President of Policy and Outreach for Demos, believes it’s time to end the debt for diploma system. There are more than 100,000 low income college students who are kept from enrolling in college because there is no funding and they can’t qualify for student loans. That, along with the realization that a college graduate loses 20 percent of his wealth over his lifetime simply because of having to pay student loans, is unacceptable.

If you’re wondering just how bad things have become, one look at the annual statistics shows the alarming truth. Student loan debt was $240 billion in 2003. Today, it’s surpassed $1 trillion and as of August 1, it’s at $1.2 trillion. By the time we roll into 2025, and unless something’s changed, that number will have surpassed the $2 trillion mark. Also, in terms of debt at graduation, that number’s increased by a whopping 41 percent.

Public Investment

There’s another factor that plays into the bottom line. Public investment is down 25 percent and those who are no longer involved in investments such as these cite state policy decisions as the reason for backing out.

McGhee also points out other realities in the Demos At What Cost report. Among those findings, college students lose four times the loss in debt when they graduate with student loans. Those loses are taken from things like retirement contributions and lower home equities. In other words, the total student loan debt in the U.S. is more than $1 trillion, but $4 trillion will ultimately be repaid. And we know who’s raking in that other $3 trillion.

Meanwhile, the Consumer Financial Protection Bureau took a look at both the Federal Direct Loan and the Federal Family Educational Loan (FFEL) Programs. It found that of the current outstanding balance for student loans, the repayment statuses play out like this:

Direct

For those in the Direct program, 24 percent are making payments, 13 percent have deferments and 5 percent have no repayment activity at all and are in default. That means 2.1 million student loans are in a default status.

FFEL

Meanwhile, the FFEL program includes 3 percent who are making payments as college students, 11 percent have deferments and 14 percent (4.4 million) are in default.

Remember too that 66 percent of college students have student loans. The median interest rate for student loans is 4.9 percent.

Deeper Analysis

But let’s take it a step further:

The median household income for households with student loan debt is $80,300 while those households with no student loans have median incomes of $75,222. In terms of mortgage interest, those with student loans average 5.1 percent in interest while their college debt free counterparts enjoy an average mortgage rate of 4.75 percent. This is indicative of long term effects student loans can have on one’s credit. Then you see this statistic: the median home equity for those who also are repaying student loans is $10,000 while households with no student loan debt have $20,000 in equity. The home debt figures are a bit closer, at $155,000 for those with student loans and $160,000 for those without student loans.

The Demos report makes it clear that its position is that a shift away from student loans and more focus on grants and part time jobs would best benefit everyone – including the economy. With grants making up the majority of student aid, it would empower college graduates as they go about the business of building their careers. Plus, it could open doors for federal investments on the state level. It could mean the president’s American Graduate Initiative, which is what he spoke about this week, would have a better chance of success.

It would also result in a fairer playing field for low and middle income households who want better for their own children. It’s always ideal for graduating seniors to leave with an education, not a lifetime of debt; unfortunately, some have forgotten that mindset and as a result, we’re setting these kids up for failure before they ever even walk across the field on graduation day.

Will it ultimately work or are there other options? No one knows for sure, but there’s one thing that’s clear: the dynamics in place now are doomed for failure. This is one of those situations that require a complete revamp, not a quick band aid. Let’s face it, this is a fast moving train that needs to be stopped now. Otherwise, we can expect massive problems over the next decade and in fact, for many generations to come.

What are your thoughts? Should we revert back to a more grant-focused effort? And what about credit card debt? Think it might help overcome some of those problems? Let us know what you think.

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