We hear more and more about the student debt crisis. A few politicians argue that there is no student debt crisis though most others say there is. Whether this is a crisis or not, one thing can’t be argued. There is now more than $1 trillion outstanding in student debt. That makes student debt larger even than credit card debt. And it’s not going to get any better in the future, as the graduating class of 2013 owed an average of nearly $30,000
The real problem
The people that say there is not a student debt crisis point to the fact that most people will repay their debts though it may take them 10 to 20 years to do it. The real problem, these people believe is the escalating rate of default on student loans.
The US Department of Education recently released a report that the national two-year cohort default rate on student loans increased from 9.1% for FY 2010 to 10% for FY 2011 and that the three-year default rate increased from 13.4% in FY 2009 to 14.7% for FY 2110. Even worse, the average default per borrower was $16,697 and the total of outstanding loans in default as of the third quarter of this year is $95.9 billion. This, some experts contend, is the true crisis in that this is money that likely will never be repaid and it’s us, the taxpayers, that are on the hook for it.
Who’s to blame?
The easiest people to blame for these problems are, of course, the students. After all they are the ones that took out the loans. However, it’s not quite that simple. We here in the US have basically adopted the idea that everyone should have a college education. As a result, the vast majority of our high schools are dedicated to getting their students prepared for a college education whether they should have one or not. Forty-six percent of those that start college dropout before graduating and one of .the major reasons for this is undoubtedly the fact many of them shouldn’t have been in college in the first place.
Another part of the problem is that most 18-year-olds are not prepared to choose the right majors. Many choose majors that align with their passions such as film and video arts, pre-school education, psychology, anthropology, archaeology, fine arts and music that might be fun and rewarding but that don’t lead to well-paying careers. For that matter, many of the young people who choose these types of careers won’t even be able to find jobs. In fact, as of March 2012, 60% of college graduates were unable to find work in their fields of study.
The colleges and universities
Colleges and universities are also at least partially to blame for the student debt problem, especially the for-profit schools. They are in a competitive business and it’s clear that some of them have enticed students to take out loans they really couldn’t afford. As an example of this, students that borrow similar amounts to pay for their schooling end up defaulting at a much higher rate at for-profit institutions. In fact, 26% of for-profit students that took out loans between $5000 in $10,000 ended up defaulting versus the 10% of students at community colleges that defaulted and the 7% at four-year schools. Private schools are not immune to this either. They, too, must compete for students. The more aid they can offer prospective students, the more they are will attract. This puts pressure on them to accept “marginal” students and for their financial aid offices to promote federal student loans as a way to pay for their educations.
The federal government
It’s also clear that the federal government itself has played a part in creating the student debt crisis. It has not only helped fuel the idea that everyone should have a college education, it’s also made it very easy to get student loans. Every year high school seniors are encouraged by their guidance counselors to fill out and submit the Free Application for Federal Student Aid (FAFSA). This form not only goes to the Department of Education (Ed) it goes to every school for which a student has applied. The process then becomes automatic and sometime in late spring each student receives a notice of the federal financial aid it will receive based on its family’s financial situation. In most cases a large part of this aid will be in the form of federal student loans, which the average family will have a very difficult time not taking.
Not even a chapter 7 bankruptcy can help
If you were to run up $30,000 in credit card and medical debts you would be able to get them discharged through a chapter 7 bankruptcy. In fact, this form of bankruptcy can get almost all unsecured debts discharged except for alimony, spousal support, child support and… student loan debts. That’s right. Our Congress rewrote the law several years ago making student debts “bankruptcy proof.” If you have $30,000 in student loan debts, you have only two choices – to default on the loans or to repay them. And defaulting on federal student loans is a very bad idea. Student loan debt collectors have powers that conventional debt collectors can only envy. They can garnish your wages without going to court, seize your income tax refunds or a part of your federal benefits, deny you eligibility for new loans or grants – or even put liens on your property and bank accounts.
While you can’t get student loan debts discharged through a chapter 7 bankruptcy, the federal government does offer the equivalent of a chapter 13 bankruptcy. If you’re not familiar with this type of bankruptcy its purpose is one of reorganization – to give you time to reorganize your finances and pay off your debtors. The federal government’s equivalent of this are its increasingly liberal loan-modification plans. For example, one of these programs is called Pay As You Earn. You may have read about this program earlier this year when Pres. Obama signed an executive order making as many as 1.4 million more borrowers eligible. This plan permits borrowers who are financially distressed to cap monthly payments at just 10% of their discretionary income and gives them as many as 20 years to repay their loans. Unfortunately, many people who would be eligible for this program are unaware that it’s available to them. In addition, some are not eligible because of technicalities in the program such as past-due payments or loans that started into repayment mode too many years ago. In addition, the companies that service student loans have been less than forthright about discussing these options with their customers. And if you have private loans they are precluded from this program.
Determining your eligibility
If you’re carrying a load of federal student debt, don’t be turned off by the phrase “financially distressed.” What this really amounts to is that your payments will be based on 150% of the federal poverty guideline and your family size. In addition, you must have gotten your first federal student loan after October 1, 2007 and you need to have gotten a Direct Loan or Direct Consolidation Loan after October 1, 2011. Note: If you’re wondering whether or not you would qualify for this program, the government has a Pay-As-You-Earn calculator you could use to determine your eligibility.
If you are not eligible
If you determine you are not eligible for Pay As You Earn, there are two other income-driven programs available that could make it easier for you to repay your student loans. One of these, Income-based Repayment, would cap your monthly payments at 15% of your discretionary income and Income-contingent Repayment caps it at 20%. There is more information on these income-driven repayment programs available on the Federal Student Aid website.
It doesn’t have to be a personal crisis
While student debt may or may not be a crisis, it doesn’t have to be a crisis for you. As you have read, there are increasingly liberal loan modification programs available that could make it much easier for you to manage and pay off those burdensome student loans.