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You’ve undoubtedly heard the phrase “the elephant in the room.” As you probably know it refers to the idea that it would be impossible to overlook an elephant in a room. So if there are people pretending there is no elephant there, it’s because they’ve chosen to avoid dealing with a big issue.
The elephant
While most of our concern about student debt has focused on undergraduates that take out loans to pay for the increasing cost of college, there’s one type of student debt that’s been overlooked and has become the elephant in the room. It’s loans taken out by graduate students and it’s one of the principal reasons why student loan debt is ballooning.
40% of outstanding student debt
According to the New America Foundation graduate students now account for as much as 40% of the estimated $1.2 trillion in outstanding student debts. This is despite the fact that they consist of only 14% of all university enrollments. Check that out again. Fourteen percent of all university enrollments accounts for 40% of the outstanding student loan debt.
Why graduate student loan debt is so different
Most undergraduate students have mom and dad behind them either paying for their educations or paying at least part of the cost, which decreases the amount of money that students need to borrow.
However, this is not so true for graduate students. In most cases they will be totally responsible for paying for their schooling. And, unfortunately, many graduate programs are going up in price and we mean way up. This has also allowed lawmakers to raise the interest rates on professional and graduate students so they are now paying tuition rates that are almost 50% more than those charged undergraduate students. In addition, two years ago Congress stopped subsidizing the interest that accumulates on graduate student federal loans while students are still in school and for six months afterwards. This means that graduate students must pay the interest on their loans while they’re still in school or it will be added to their unpaid balances so they will be paying interest on interest.
It gets even worse
Making things even worse for graduate students is that they are forced to borrow an average of almost three times more per year that undergraduate students. The average debt of undergraduate students has more than doubled since 1989, but it has more than quadrupled during that same period of time for graduate students. This means that a semester’s tuition for a graduate course in business management that cost $600 in 1989 now probably costs more than $2400.
Do you really need a graduate degree?
One question to ask yourself before you sign up for graduate school is do you really need that degree given what it will cost you. As an example of this about 16% of master’s degrees are in education and these people end up with a median debt of $50,879. Since the yearly salary for a public school teacher averages just $57,830 it becomes clear why graduating owing $50,879 is going to create a real burden. People that pursue advanced degrees with the idea that they are going to be able to make enough to pay back their loans may find this is not necessarily true.
Of course, a master’s degree will pay off in many areas. In fact, people with a master’s degree will earn on the average about 20% more than a person that has just a bachelor’s degree. And if you were to get a professional degree, you should be able to earn around 55% more.
Easing the burden
This past June Pres. Obama issued an executive order that expanded a program called Pay As You Earn so that about 3.1 million more borrowers are now eligible. The good news of this program is that it would limit your monthly federal loan payments to 10% of your discretionary income and any any remaining debt would be forgiven after 20 years.
Depending on the type of federal loans you have you might not be eligible for Pay As You Earn. Fortunately, there are two other types of income-driven repayment. They are Income-based and Income-contingent Repayment. Like Pay As You Earn these two programs are tied to your income and family size. Also like Pay As You Earn you must submit documentation every year regarding your income and family size so that your payments could go up or down accordingly.
If you were to choose Income-based Repayment you would see your payments capped at 15% of your discretionary income. With Income-contingent Repayment your payments would also be capped at 15% of your discretionary income. The major difference between these two programs is their eligibility requirements. Income-based Repayment works with only certain types of federal loans while you could have virtually any kind of federal student loan and still qualify for Income -contingent Repayment.
Note: Discretionary income is the difference between your adjusted gross income and 150% of the poverty guideline for your family size and your state of residence.
The dark side
The dark side of income-based repayment is that theoretically speaking you could borrow $500,000 to pay for a law degree or medical school and it wouldn’t make any difference because you would never have to repay the entire amount. Just make your monthly payments for 20 years and whoosh! You’d see thousands of dollars of debt vanish into thin air. The other downside of this is that it could encourage graduate students to borrow even more than they currently are borrowing because, what the heck! They’ll never have to pay back all that money anyway.
Paying off those student loans
Do you know the difference between a student loan and a personal loan? It’s simple. You can get rid of a personal loan by filing for bankruptcy. But not student loans. Like alimony, child support and spousal support they cannot be dismissed through a chapter 7 bankruptcy. Regardless of how much you owe on your student loans the best thing you can do is pay them off. Our federal government can get very ugly if you default on a student loan. It could be turned over to a debt collector that could garnish your wages without even taking it to court. You could see a percentage of your income tax refund seized and you could even be prohibited from getting a professional license. You could also see your debt grow because of additional interest, late fees, collection fees, court fees, attorney’s fees and any other costs associated with collecting your debt.
The options
One good thing about student loan debts is that there are a variety of repayment options available. If you’re in Standard 10-Year Repayment and are having a problem meeting your payments you could switch to, say, Graduated Repayment or Extended Repayment. Plus, as noted above, there are three “income-driven” programs where your payments would be tied to your discretionary income. Or you could get a Direct Federal Consolidation loan where you’d then have to make just one payment a month and it should be considerably less than the sum of the payments you are currently making. The interest on one of these loans should also be less than some of your current loans. The way it’s calculated is by taking the mean average of the interest payments you’re currently making and then rounding it up to the nearest 1/8th of a percent. This would be a fixed rate loan as the interest rate would never charge and you could have as many as 30 years to repay it.
