TO: Arne Duncan, Secretary, U.S. Department of Education

POLICYOPTIONS BRIEF

TO: Arne Duncan, Secretary, U.S. Department of Education

FROM: Danny Lundy, Jocelyn Rodman, Kayla Johnson, Graduate Students, Baruch College School of Public Affairs

RE: Student Debt Crisis

Date: October 08, 2015

Part I-Problem: Student Debt Crisis

College enrollment rates at degree-granting institutions has been trending upwards for decades at this point. From 1992 to 2002, enrollment increased by 15 percent overall; between 2002 and 2012, the rate increased by 24 percent, with the number of students rising from 16.6 million to 20.6 million (U.S. Department of Education). This is certainly driven by the belief amongst parents across the nation that a college education is the key to financial, professional and personal success in the future. It’s a belief that’s buttressed by data: generally speaking, available data shows that those who graduate college fare better than those who only have a high school degree (Holland).

Surely, college graduates may overall be better prepared for success in the professional world, but obtaining a bachelor’s degree, let alone any postgraduate degree, has come at an ever-increasing cost, something that is threatening to undo the positive aspects of going through school and put those who have done so at a major disadvantage that may last a lifetime.

Consider, for a moment, these numbers: The current total amount of outstanding student loan debt stands at $1.2 trillion. All of this is owed by approximately 40 million borrowers, each holding a balance of $29,000 (Holland). To break things down further, by the end of last year (2014), about 15 million of those holding student debt were under the age of 30, with each holding an average balance of $21,402. Adding to that, there are about 10.9 million borrowers who are between the ages of 30 to 39, with each of these people owing an average of $29,300, more than that owed by those under 30. Two-thirds of those holding debt are over the age of 29, and the debt loads rise with each age cohort. Currently, only 37 percent of total borrowers are making regular payments to deal with their balances, and 17 percent are behind on their payments or are defaulting on their debt obligations (Quinton).

Understand what the above means: A large share of the nation’s population is saddled with massive debt obligations, obligations that are exceedingly difficult, if not impossible, to discharge in bankruptcy (Michon). This is debt that appears to be following people throughout significant portions of their lives, still sticking around with them as they get older. On top of all of that, only a fraction of all borrowers are making any progress on paying back their obligations, something that is important to keep in mind considering that a large share of the nation’s total student debt is owed to the government, or, more specifically, taxpayers. This, by the way, is all for something (education) that society regards as fundamentally important, not only for individuals to get ahead professionally and financially, but also for the United States as a whole to be able to better compete against other nations in the global economy.

But how has things gotten to this point? How has it gotten to this situation where so many people are shouldering such a massive burden for the sake of education? Namely, it is the rising cost of attending college that is driving the increase in debt. Tuition at colleges and universities across the nation has surged upwards unabated, going up faster than the rate of inflation. The latest numbers show that the average tuition for one year at a private institution is $31,231, a large increase from the $1,832 average that students paid annually back around 1971-1972. At public institutions, the average price stands at $9,139, up from $500 in current U.S. dollars. Looking at the long-term trend, tuition has been outpacing the rate inflation by six percent (Schoen).

There are several factors to consider when it comes to the increasing rate of tuition. For one thing, American colleges and universities have been outdoing each other in competing for more students. That means piling on more luxurious and expensive amenities (such as rock climbing walls and scenic additions like “lazy rivers”) and creating and bolstering collegiate sports programs. Another thing to consider is the growing amount of non-teaching administrative jobs at our nation’s institutions, something that people question when it comes to necessity. One overriding factor that researchers and experts have centered upon, however, is the shrinking funding for higher education by state governments, both in regards to support for public colleges and universities, and to subsidies for attending private institutions. This was particularly the case in the aftermath of the recent late 2000’s-early 2010’s recession and the rush by state governments at the time to cut and balance their budgets. The result of this is that the rising cost of attending college has been shifted upon the backs of students and their families (Schoen).

That is not to mention other costs related to attending college, such as textbooks. Since the 1970s, the rate of college textbook prices has risen astronomically, negatively impacting students’ education. There has been an 812 percent increase in the price of textbooks since 1978 (Kingkade). The Economistreported that, “indeed, the nominal price of textbooks has risen more than fifteenfold since 1970, three times the rate of inflation,” (“Why Textbooks Cost So Much”). According to a review of the Bureau of Labor Statistics’ (BLS) data, as done by NBC, “textbooks prices have risen over three times the rate of inflation from January 1977 to June 2015, a 1.041 percent increase,” (Popken).

An average student in the United States spends thousands of dollars on textbooks each year. According to an article on CNBC, the average student in this country will spend around $1,200 a year just on books and supplies with a single book costing up to $200 (Weisbaum). Likewise, the National Association of College Stores (NACS) also found that the average student would spend around $655 dollars each year on textbooks (Kingkade). However, with a single textbook that can easily cost, as much as $300 dollars, the total each student spends on just textbooks is much higher than $655 dollars a year. Students are captive consumers, meaning they have no choice but to purchase the textbooks.

Now, despite all of the information mentioned above, going to college stills seems to be something that is generally pushed and encouraged by society. Many look at the rising educational debt levels and still feel that one is better off taking on such an obligation for the sake of education, looking upon that debt as an investment that will pay off in the future. So, there may be people who may feel that this is not as serious an issue as it is being made out to be.

Except, when one thinks about the facts along with the resulting ramifications involved, it turns out that the United States’ student debt is indeed a serious issue that should be addressed as soon as possible. Again, consider, as stated earlier, that the burden currently stands at $1.2 trillion, with only a fraction of the roughly 40 million borrowers making any progress on paying back the loans, and 17 percent of the borrowers actually falling behind and even defaulting on their obligations. Consider that a large portion of this debt is owed to the Federal Government, meaning that taxpayers are very much involved in this issue and will be the ones who lose big if the student debt issue is allowed to fester on unabated.

Consider, also, the major economic and social ramifications for our nation if we don’t deal with this issue. Having the burden of debt on the shoulders of our nation’s future workers and leaders will impact how they approach significant milestones and financial decisions in their lives, something which will surely prove to put the U.S. at a significant economic disadvantage going forward.

For example, there’s the decreasing rates of homeownership amongst younger adults. The percentage of those under the age of 35 owning a home has dropped from 43.3 percent in the first quarter of 2005 to 34.6 percent in the first quarter of 2015. A recent survey from the National Association of Realtors has shown that 23 percent of first-time buyers claimed to have had difficulty in saving for a down payment, with 57 percent of that group saying that student loans was impeding their ability to save, a figure that is up from 54 percent the previous year. Student debt is one of a host of things that mortgage lenders look at, and that can cause potential homeowners to lower housing expectations, accept loans of a lower amount than intended, or even forego homeownership altogether for the time being (Holland).

There’s also the fact of twenty-somethings putting off families. For years, the median age for first births has been increasing, and now currently stands at 26. The birth rate for women between the ages of 20 to 29 has now reached a record low, and is a number that has been declining since 2008 (Holland). Keeping in mind the fact that raising a family is a significant financial decision (a particularly costly one at that), along with our nation’s rising student debt obligations, one can see how a person who has to fork over large portions of their paychecks every month to pay back their loans (if they are able) may not be too keen on taking on the added expense of a child.

Then there’s the effect that these loans are having on the career choices of college graduates. With the increasing burdens, those emerging from our institutions of learning are opting more and more to go into high-paying fields such as finance and technology, hoping to make it big and be able to quickly pay off their obligations. In turn, they overlook careers in fields of service like health-care, social work and early childhood education, fields that offer low pay but are critical for society (Holland).

Finally, there’s the effect of student loans on entrepreneurship and innovation in our country. Entrepreneurship and innovation have long been the major driving force in the American economy. They have put the United States at an advantageous place amongst other nations in terms of competing in the world economy. Yet, as researchers from the Federal Reserve Bank of Philadelphia and Pennsylvania State have observed, there is a negative relationship between rising student debt and entrepreneurship. According to them, the more student debt there is, the lower the number of small business there are that are being formed (Holland). There can be no doubt that this is something that puts our nation at a competitive disadvantage economically speaking.

Part II- Policy Options:

Option 1: The Obama Student Loan Forgiveness Program

As far as potential solution are concerned, one to look at is the William D. Ford Direct Loan program, more commonly known as the “Obama Student Loan Forgiveness program.” The program received its name in 2009, after President Obama reformed a portion of the Direct Loan program is his “Health Care and Education Reconciliation Actof 2010.” Under this act, one significant change is that the government will directly administer student loans, rather than give subsidies to private lenders for federally backed loans. This legislation will also help to expand repayment plans, making higher education more obtainable and affordable for students. However, this plan only applies to federal loans and will not benefit private loan borrowers.

The Obama Student Loan Forgiveness program allows graduates to consolidate multiple federal loans into one loan and select an affordable repayment plan that will work for them. The five repayment plans are as followed: standard repayment, graduated repayment, income contingent repayment plan (ICR), income-based repayment plan (IBR), and pay as you earn (PAYE). The standard repayment plan requires borrowers to pay a fixed amount of the loan (for its entirety), based on amount, interest rate, and life of the loan. The graduated repayment plan has graduates paying less than the standard plan; however, their rates will gradually increase every two years. Under ICR, payments are made based on the income, family size, loan balance, and interest rates of the borrowers. On the contrary, the IBR plan specifically looks at the income and family size of the individual. It also requires graduates to pay fifteen percent of their discretionary income, or earnings remaining after they pay for necessary items, such as rent and food. Lastly, the PAYE plan is for those facing “financial hardship,” it assist borrowers based on income and family size. However, it is difficult to qualify for, because it solely serves those living one hundred and fifty percent below the poverty line. If accepted, the plan requires ten percent of one’s discretionary income (Student Debt Relief).

Moreover, graduates who qualified as new borrowers, as of October 2007, can make loan payments under the PAYE plan or the ICR plan. However they enrolled in college too early to qualify for the income based plan. Under the PAYE plan, these borrowers must make regular payments for twenty years, before the remainder of their debt is forgiven. For ICR, these graduates are given the option to either pay twenty percent of their discretionary income or the standard repayment of their loan over a twelve year period, which ever amount is lower. For both the plans, the maximum repayment period is twenty five years, then the graduate’s balance is dissolved. Additionally, there is the Public Service Loan Forgiveness for program public service employees, such a government and nonprofit organizations, teachers and nurses. Under this program, their debt can be forgiven after one hundred and twenty qualifying payments, or ten years (Simpletuition.com).

As of July 2014, students enrolling in higher education, with federal student loans, will qualify to pay ten percent of their discretionary income. This is reduced from the prior rate of fifteen percent. According to Student Debt Relief, as cited from the White House, these new borrowers will qualify for student loan forgiveness after twenty years of regular payments, instead of the previous requirement of twenty-five years. After this time, all outstanding balances will be forgiven. The Obama Administration estimates that this legislation will provide the United States with an additional $68 billion for college affordability and reduce the student loan deficit within the next eleven years (Student Debt Relief). Likewise, the program aims to provide funding, through Pell Grants, to more African American and Hispanic students as well as invest funds in more educational institutions that serve low income minority students. Again, this is in an effort to make higher education more accessible and affordable for students.

Option 2: Refinancing Student Loans

Another option for reducing student loan debt is refinancing student loans. Senator Elizabeth Warren has long been a strong advocate for affordable college tuitions. She introduced several bills that aimed to make colleges more affordable. Her first bill, Bank on Student Loans Fairness Act,aimed to give students the same low interest rates on loans that banks. However, that also meant raising tax rates to almost 30 percent on individuals who makes over $1 million. Since her first bill, different versions of the same bill were introduced including the latest one, which allow students to refinance their loans (Dash).

As reported by an article, “Student Loan Refinancing: A New Option For Borrowers”, written in Forbes, refinancing student loan have the potential to lower borrower’s payments as well as make student loan payments affordable after graduation. Based on Senator Warren’s plan, students will be able to refinance their current interest rates set by the government to a much lower rate (Farrington). For example, students will be able to refinance their interest rates from 6.8 percent to 3.86 percent. The significant reduction will decrease some of the economic burdens many of the borrowers carry.

According to a hypothetical calculation by Generation Progress, if a borrower’s loan was $36,000 plus the additional 6.8 percent interest rate, the total amount the borrower will have to pay back is $63,500 over x years. Refinancing the interest rate from 6.8 percentto 3.84 percent will decrease the total amount by at least $20,000. Not only this, they also predicted that monthly payments would be lowered, thus, making monthly payments more affordable to borrowers (Generation Progress).

Moreover, this plan can also help borrowers who are experiencingany economic setbacks to create an affordable payment plan. Assuming that with lower interest rates and lower monthly payments, borrowers now might be able to afford the monthly payments without jeopardizing their daily life in any way. Lastly, students who borrowed before the introduction of the new interest rate will now also be able to refinance their loan debt. This will give prior borrowers an opportunity to receive the same benefits that recent borrowers enjoy.