Student Debt Crisis

1.7 Trillion of Outstanding Student Loan Debt 

Many people are still feeling the magnitude of the 2008 recession.  A recession that could have been avoided if we’d gotten control of the subprime lending issues that ultimately caused massive job losses, devaluing of retirement savings, and families losing their homes.  Unfortunately, those in charge ignored the problems and the American public were the ones that suffered. 

 

Student loans are now the second-largest category of U.S. household debt with nearly $1.7 trillion owed. This debt stops people from experiencing the American dream and will eventually collapse our economy. Just like in 2008, most people are unaware of the cliff we are headed towards. Our current student debt crisis is spiraling out of control and is pushing our economy to its collapse. Here are just a few of the top concerns that we must deal with: 

 

1. College tuition has more than doubled since the 1980s.

 

2. More than 3 million senior citizens in the US are still paying off their student loans.

3. As many as 40% of borrowers could default on their student loans by 2023.

4. Some have drawn parallels between the student-debt crisis and the subprime-mortgage 

disaster.

5. Nearly 50% of millennials who have or had student-loan debt think college wasn't worthwhile.

6. Student loan debt has seen a growth of almost 157% since the Great Recession and is the fastest-growing portion of the total household debt in the U.S. 

7. There are 44 million student loan borrowers in this country.

65% of college seniors who graduated from nonprofit colleges in 2017 had student loan debt.

We’re seeing an average of $35,000 in student loan debt per student by the time of graduation.

8. As of 2018, roughly 1 out of 10 people with student loans were late with (or completely missed) their payments. That’s the highest 90-day delinquency rate of all household debt—outranking auto loans, credit card debt, and mortgages! 


 

What Is the U.S. Department of Education? 

The U.S. Department of Education administers and coordinates most federal assistance to education. It assists the president in executing his education policies and implementing laws enacted by Congress. The Department's mission is to serve America's students-to to promote student achievement and preparation for global competitiveness by fostering educational excellence and ensuring equal access.

 When Congress created the Department in 1979, it declared these purposes: 

1. to strengthen the Federal commitment to ensuring access to equal educational opportunity for every individual.

2. to supplement and complement the efforts of States, the local school systems and other instrumentalities of the States, the private sector, public and private educational institutions, public and private nonprofit educational research institutions, community-based organizations, parents, and students to improve the quality of education.

3. to encourage the increased involvement of the public, parents, and students in Federal education programs.

4. to promote improvements in the quality and usefulness of education through federally supported research, evaluation, and sharing of information.

5. to improve the coordination of Federal education programs.

6. to improve the management and efficiency of Federal education activities, especially with respect to the process, procedures, and administrative structures for the dispersal of Federal funds, as well as the reduction of unnecessary and duplicative burdens and constraints, including unnecessary paperwork, on the recipients of Federal funds; and

7. to increase the accountability of Federal education programs to the President, the Congress, and the public. (Section 102, Public Law 96-88)

When one evaluates the role of the Department of Education, it can be broken down into four areas. Higher Education, Primary and Secondary Education, Equal access, and opportunities for all and educational research.

 

In the 1860s, a budget of $15,000 and four employees handled education fact-finding. By 1965, the Office of Education had more than 2,100 employees and a budget of $1.5 billion. Fifteen years later when the Department of Education was created, it had a budget of $14 billion. The 2018 appropriation for Education was over $100 billion dollars and 3,672 employees. This is down over 10 percent from when Trump took office.

 

When you look at the original $14 billion-dollar budget in 1980 and adjust for inflation, the Department budget should be $46 billion dollars. The current budget is well over two times the inflation rate. Since President Trump has taken office, he has cut nearly 20 percent of the budget. 

 

Who is served?

Student loans serve a wide variety of students, from recent high school graduates seeking college degrees to students at the bachelor and postgraduate levels. They may be trying to either learn a trade at technical schools or further their education and learn new job skills. The simple fact is that once a prospective student completes a FAFSA, (Free Application for Federal Student Aid), they almost automatically become eligible for a student loan. When they receive a loan, it can be used for tuition, fees, books, and/or living expenses.

 

The Rise of Student Loan Borrowing

For the past decade, the average student loan debt has been on a significant rise. A combination of factors attributes to this rise in debt. Due to economic conditions, students were encouraged to stay in school. The lending principals for graduate school were even more lenient than they were for undergrads. Because of the recession and lackluster economy of the past decade, students found it easier to go on to advanced degrees rather than seek employment upon graduation.

 

In the 1970s, students were expected to complete a four-year degree in four years. Today over half of the students complete a four-year degree in six years, further increasing student loan borrowing and the debt. The official four-year graduation rate for students attending public colleges and universities is 33.3% and the six-year rate is 57.6%. At private colleges and universities, the four-year graduation rate is 52.8%, and 65.4% earn a degree in six years.

 

History

The role of the federal government in higher education dates back to the Civil War when the 1862 Morrell Act established “land grant” colleges, where every state had at least one college that focused on agriculture and engineering. Many states had two, and other states, with native American tribe universities, had several. To help support these land grant colleges, the federal government pledged research grants and federal dollars to become a source of funding for these institutions.

 

Since the end of WWII and the GI Bill, federal support for higher education has steadily grown. With the passage of the National Defense Education Act in 1958, and the National Higher Education Act of 1965, colleges and universities have found new sources of federally subsidized funding for higher education. These sources include Pell Grants and Direct Student Loans. Today, these federal sources that include grants, loans, and research grants make up 47% of the revenue for colleges and universities.

 

Grants and Loans  

Pell Grants are given to lower-income individuals and generally do not have to be repaid by the recipients. In 1975, a Pell Grant covered 79 percent of the cost of tuition, fees, and room and board at a four-year public college. An economically disadvantaged student with a 1975 Pell Grant could easily supplement the additional 20 percent of tuition fees with work-study programs at a university. Today, a Pell Grant only covers 29 percent of those same costs. That student must now rely on loans to make up a significant part of the balance. These economically disadvantaged students make up the highest percentage groups who are defaulting on their direct student loans. 

 

Current State 

Between 1988 and 2018, tuition rose more than 200% at four-year public colleges and almost 130% at private nonprofit colleges. There is a big difference, however, in the shockingly high sticker prices and the actual amount most students end up paying. After accounting for scholarships and grants, the average student in 2017 only paid about 58 percent of the sticker cost of tuition. Since the mid-1980s, the level of state appropriations for public higher education has fallen by about 30%. This is the driving force of increased college costs for the American student. That cost difference has been paid for generally by student loans, and Congress has responded by increasing the number of dollars students and parents may borrow to make up this difference. However, Congress has not increased the accountability of colleges and universities for the graduates they produce. Along with the cost of college, the cost of living has also been rising, while family income has stayed flat since the late 1990s. So for many students who want to get an advanced degree, their only option is to borrow more money.

 

College Debt – The Graduate

Some make the argument – such as the New York Federal Reserve Bank – that college tuition increases are fueled by the federal student loan policy. They know that families and students can get government loans, either a Direct Student Loan, or Direct Plus Loan, and colleges are not forced to keep tuition costs in check. This allows students to leave our colleges and universities with a bachelor’s degree and an average of $23,000 in Direct Student Loan debt. Those seeking post-graduate degrees see an even higher average debt. The typical graduate with a master’s degree incurs an additional $66,000. That adds up to $90,000 in debt.

 

So, when one does an analysis of student debt to projected first-year earnings, what are students actually getting? For a person with a bachelor’s degree, their starting salary of $32,000 gets them an income to loan ratio of 1:4. Historically the ratio of income to the loan has remained constant since the 1970s. However, for someone with a master’s degree, today’s starting salary of $50,000 gets them an income to loan ratio of .55, which is a significant burden on non-professional master’s degree graduates.
 

College Debt – The Nation

The total student debt in the United States stands at over $1.5 trillion dollars and the economic impact of this debt is felt in numerous areas nationwide. Business Insider published an article in October 2019 citing 11 reasons why the Student Debt issue could become a national crisis. These student debt articles cite that wages have increased only 67 percent since the late 1970s but college tuition has increased by over 200 percent. Additionally, in the late ’70s, student loan debt was not counted toward creditworthiness when making major purchases such as autos, appliances, and houses. Congress's reaction to the crisis has been to simply raise the level of permitted annual debt by students, and declare the issue solved. 

It’s clear that the economic impact of student loan debt on millennials is a complex problem. Its potential impact on the overall U.S. Economy may be felt for years, as millennials continue to delay entering the housing market, and the associated stimulus spending that homeownership generates in the economy. Realistic steps must be taken not to forgive this debt, but to help this generation manage it, without adding to unmanageable debt in the future as Congress has so happily done in the past.

 

College Debt – Default

The most alarming finding by the Brookings Institute on college debt default was that African Americans with a bachelor’s degree default on their student loans at five times higher than the rates of white students with a bachelor’s degree. According to the Brookings study, once a graduate is in a payment program, default rates begin to climb after 12 years. While only 11 percent of student debt is delinquent, nearly half of all student debt is in forbearance, deferment, or still in grace periods. The highest group of student loan borrowers in default, are those who do not attain graduation, from a technical school, community college, or a four-year program. 

 

Defaulting on a federal student loan has significant repercussions. First, a person no longer qualifies for a federal student loan. Second, the federal government is authorized to take your federal tax refund. Third, they may garnish up to fifteen percent of your wages. 

 

College Debt – Loan Forgiveness

There are four main paths for receiving loan forgiveness: working in Public Service, becoming a Teacher, having a Disability, and going into Nursing. Apart from disability, forgiveness is only given on the remaining balance of your loans after 10 years. What this system encourages is creating a payment plan that pays the lowest possible amount per month, which may mean that the interest accumulates faster than the payments. If you do not complete the 10-year period, you are left with significantly higher debt.

 

College Debt – Government Bailout

Some politicians are advocating canceling all student debt. Moody's Investor Service predicts that wiping out student debt, as some 2020 presidential candidates have suggested, would yield a stimulus to an economic activity like tax cuts in the near term. Over the longer term, it could also increase homeownership and the number of small businesses. This would allow student borrowers to have money to pay for other necessary economic items. Note that such a plan would add an additional trillion dollars to the national debt. Some feel this is a marginal amount.

 

Final Thoughts

Higher education as driven by the Federal Government is a highly complex problem. A major component of the funds going to colleges and universities is from student loans. Failure to perform in repaying those loans creates heavy costs for the borrowers. No one is questioning the requirement to perform on the part of the primary beneficiary of the loans, colleges, and universities. Because federal loan money is handed out with little scrutiny as to the student’s ability to pay it back, colleges have had free reign to raise prices at levels often double the inflation rate. 

 

Flush with all that money, their first spending priority often isn’t the classroom but the bureaucracy. From 1987 to 2012, America’s higher education system added more than half a million administrators, doubling the number of administrators relative to the number of faculty. To pay for these ever-increasing costs, students are borrowing more money and taking on more and more debt. 

 

Most of the loan default is from students that haven’t finished college.  Students who begin college but don’t graduate are three times more likely to default than students who have graduated, even if they graduated with more debt.  The more debt a borrower has, the more likely it is that they won’t default. It’s expected that someone with more debt finished their degree and has the income boost that comes with it.  This could have been avoided if these borrowers knew what they were getting into when applying to college instead of just attending and falling in debt.

 

For starters, although median earnings are demonstrably higher for those with bachelor’s degrees than for those without, half – by definition– earn less than the median. Moreover, Vedder found that more than one-third (37 percent) of college graduates are in jobs that only require a high school degree or less. 13 million recent college graduates had jobs that did not require a college degree and still accumulated student loan debt to get there.

 

Then there are those who enroll in college but never graduate. Many of them have also taken out student loans along the way, leaving them saddled with the burdensome debt at the onset of their working lives.

 

Not all the blame for foolish borrowing can be cast on the student. Schools, guidance counselors, parents, and popular media constantly reinforce the “necessity” of going to college. Employers largely follow suit, not because they feel college graduates are more productive, but because college graduates are ubiquitous. When everyone has a bachelor’s degree, employers tend to question what is wrong with the person who didn’t acquire one.

 

Enter the sheepskin effect – the idea that a bachelor’s degree is an expensive signaling device rather than an indicator of acquired skills and knowledge.

 

This shift in what Americans and employers believe is required has been underwritten in dramatic fashion by federal taxpayers. And that subsidization has itself greatly exacerbated the problem.

 

The easy money flowing out of Washington, D.C. in the form of federal student loans and grants has enabled and encouraged colleges to raise their prices recklessly. A 2015 report from the Federal Reserve Bank of New York found that for every dollar in subsidized student loans, universities raised their tuition 60 percent. Open-ended federal subsidies have also led to a facility's arms race, where climbing walls, tiger grottoes, and lazy rivers have come to be expected as campus amenities.

 

Apart from the 1944 G.I Bill, the federal government had very limited involvement in higher education prior to 1965. But when President Lyndon B. Johnson signed the Higher Education Act of 1965 into law as part of his “War on Poverty,” he opened the floodgates for federal student aid, making the first federally guaranteed student loans available to the general public.

 

Federal taxpayers now underwrite more than $150 billion annually in federal student loans and grants, and college costs are higher than ever before. Federal higher education subsidies have not made college more affordable.

 

Higher education as it is currently structured – through a federally-backed accreditation regime and an open-ended federal subsidy system – is a drain on the economy. Innovative models, such as income share agreements and micro-degrees, are beginning to provide some needed alternatives on the margin.

 

But until the federal government steps aside and makes space for the private lending market to return, and for these innovative options to flourish, this academic albatross will continue to hang around the necks of millions of Americans. Dramatically reducing federal subsidies is the first step to relief.

 

Student loans have become an “entitlement” for those seeking training and/or college education. There is no underwriting of student loans, and thus current and future ability to pay the debt is not assessed on the front end of the loan. Furthermore, there remains no incentive on the part of the lenders or the institutions who ultimately receive the dollars to properly counsel the students.

 

One thing has become increasingly clear: solutions to the high cost of higher education and the student loan crisis will not come from the higher education establishment. Our colleges and universities, their presidents, boards of trustees, state higher education systems, and the dozen or higher education associations in Washington, D.C., have serious conflicts of interest on this issue and will not be the source of cost-cutting reforms. 

 

 

Solutions

No longer can we afford to ignore the student debt crisis.  We must have a multifaceted approach, focusing not just on those already in debt, but also stopping this problem from continuing. We also need to focus not only on the borrower but increasing accountability among colleges, universities, trade schools, etc. that push student to borrow more.  

 

Transparency and Accountability  

Federal Student Loans offer colleges and universities excessive funds that enable them to raise their tuition without fear of losing customers. Instead, Americans should be holding colleges and universities accountable by tightening the purse strings coming from Washington.

 

  • Increase accountability of colleges and universities accepting federal loan dollars.  A ranking system based on full transparency and a return on investment would provide the student borrower with much-needed information when deciding on which school to attend.  Knowing how well graduates are paying off their loans and how well colleges are helping to reduce the time students stay in college are just a few ways to help the borrower make an informed decision.    

 

  • Establish systems to incentivize students for finishing college in less time.  The Federal Student Loan Program for undergraduate should be limited to four academic years. This will promote colleges to design programs that serve a student’s need to finish in a timely manner. The national average to complete college is now over 5 years with many students taking even more time. This increased time only benefits the schools, as a means of increasing their revenue, not those going into debt to pay for it.  More time in school = more tuition for the colleges. It’s sad that these institutions only have the bottom line in mind and not the harmful impact debt causes to students long term. 

  • Federal loans can only be applied toward tuition, books, and room and board. They may not be used for general living expenses. The loans are to be provided directly to the institution that will hold the funds for the students. Excess funds may be held over for future academic years. At graduation or withdraw from the institution, excess funds are to be returned to the lender. Many people work and go to school, others have found it easier to borrow money to live, the long-term repercussions outweigh the short-term benefits.  Students can certainly still get loans from private institutions to pay for living expenses, but the private loan market standards will ensure the students repay the loans better than current standards set by the Federal government. 

 

  • Increase mandatory education for borrowers.  Require a mandatory pre-loan education of potential students and parents on the purpose and responsibilities of student loans. This needs to be completed prior to any award of the federal student loan amount. The course would explain debt repayment, various repayment programs, and repercussions of default. The course could also include general principles of debt students frequently have issues with over the course of their college careers. Students would learn valuable information about how much they are going to have to pay back after graduating from University. It is important that students and their parents understand the Return on Investment that certain degrees will provide, and may impact their decision of what institutions can fulfill their educational needs for the cost of tuition and loans provided.


 

Federal Programs

  • Increase the Pell Grant coverage for disadvantaged students to 79%.  Education is proven to reduce poverty, decrease the need for government handouts, and increase economic growth and income. Pell Grants were established to assist economically disadvantaged students. Pell Grant recipients also had priority for work-study programs to make up the difference in the cost of their education. Today, those standards have been relaxed and more students qualify for the program with the result that the grants now only cover about 29% of the cost of college, and students are forced to utilize federal loan programs. We must make sure that the disadvantaged students of Tennessee can again afford college as was the promise of the program. 

 

This will require reestablishing strict standards for awarding Pell Grants. It may also mean a further commitment by the Federal Government to make sure proper funding is there for these students.


 

  • End Death and Disability Penalties.  At present, even the death of a borrower does not discharge student debt.  Cosigners and spouses can still be held to repaying debt even though the beneficiary is permanently disabled or deceased.  Federal student loan repayment programs need to include disability and death insurance plans. The cost of these plans is minimal, and cosigners and spouses are not burdened with the debt. 

 

  • Release private student loan cosigners.  After a student loan borrower makes 36 consecutive payments on their loans, the cosigners will be released of further responsibility. The student borrower has established their own creditworthiness and their debt responsibilities need to placed solely on them. Parents and even grandparents are often forced to co-sign for student loan debt. When a borrower defaults, financial institutions call the notes on the Co-signers and often require much higher terms for repayment. Parents and grandparents, now trying to prepare for retirement, are faced with using their savings to cover these bad loans.

 

Legislation

  • Enact S. 2347 - Student Loan Repayment Acceleration Act.  Senator Cory Gardner (R-CO) sponsored a well-reasoned bill that amends the Internal Revenue Code to exclude from the gross income of an employee up to $10,000 per year in student loan payments made by an employer. The loan payments are also exempt from certain payroll taxes.  The last action on this bill was in the Senate Finance committee on 7/31/2019.  

 

  • Increase Transparency in Lending.  Enact H.R. 63, S.234 and S. 887.  H.R. 63 Student Loan Disclosure Modernization Act sponsored by Rep. Jim Banks (R-IN) is stuck in the House Education and Labor Committee. If enacted this bill would require loan disclosure forms for federal student loans to be written in plain language, thus enabling borrowers to understand loan terms, total costs of loans, and estimated monthly repayments. Borrowers must acknowledge in writing that they have read the form before the loans are issued.  S. 887 - Know Before you Owe Federal Student Loan Act, was sponsored by Senator Chuck Grassley (R-IA). This bill revises counseling requirements for certain borrowers of student loans, and for other purposes. S. 234 - Transparency in Student Lending Act was sponsored by Senator Michael Enzi (R-WY) and would require an institution of higher education to disclose, prior to disbursement, the annual percentage rate applicable to a federal student loan

 

  • Enact S. 3055 - Student Loan Repayment Freedom Act.   Senator Lisa Murkowski (R-AK) sponsored this bill to amend the Higher Education Act of 1965 to permit a Federal student loan borrower to elect to terminate repayment pursuant to income-based repayment and repay such loan under any other repayment plan for which the borrower is otherwise eligible.

 
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