Are You Suffocating With Student Loan Debt? I Have Good (And Bad) News For You On That
Do you have student loans? One independent non-profit (The Project on Student Debt) reports: “Seven in 10 college seniors (71%) who graduated last year had student loan debt, with an average of $29,400 per borrower.” If you are aged 22-40, chances are you are carrying some amount of student debt. Unless, you know, you really worked it super austerely.
Just about all forms of debt can be forgiven or re-negotiated if you’re up a creek, unable to afford a paddle. If you find yourself underwater financially, you can file for bankruptcy, you can re-negotiate with creditors (i.e. credit card companies) and other places where you may owe money (medical bills, utilities, etc.). Most of us prefer to never need to use these options, but still, they are options.
Not so, student loans. Discharge (forgiveness of debt) of federal loans is, according to the Department of Education, “rare” in bankruptcy filings. Even worse, if your parents (or anyone else) co-signed on private student loans and you die, they still have to pay your loans with no help via bankruptcy.
And what can you do about that? Alas, not much. If you are a connoisseur of money management advice targeted to younger people, maybe you’re familiar with some of the major cuts we are advised to make, beyond lifestyle austerity measures. These include: re-financing a mortgage to get a lower rate (or moving to a cheaper apartment/area if you’re renting), calling up credit card companies to ask for a lower rate (or taking advantage of low-rate balance transfers), checking with utilities for cheaper packages/pricing, only purchasing the most essential level of insurance with high deductibles (health, life, auto, home, etc.), trading in your car for something cheaper (or no car at all).
With most of our debt, even after we’ve taken the money, we have some control over the repayment; we can improve the re-payment terms. Again, not so, student loans. You can’t re-negotiate your rate. You can get small breaks for setting up automatic withdrawals (irony alert: hands up, those of you who don’t take advantage of this option because you are living close enough to the wire that one ill-timed automatic withdrawal could really wreak havoc on your cash flow). You can consolidate your loans (to freeze your interest rate) but it has downsides, so you need to check it out before you try that one.
This is why student loan reform is so important. For many of us, our only shot at any real help is in reforming student loan law, regulation and policy. First, let’s talk about the problem (because, sadly, a good lot of writing on this topic tries to tell us there is no problem).
If you are a data nerd (as I am), this chart tells the story. In the 1970s, it was possible to work your way through college and graduate debt-free. Even if you wanted to attend as an out-of-state student, you could pay off your loans in half the time. As an added bonus, fewer people graduated from college in the 1970s, so your degree actually set you apart from your peers (In 2009, roughly 30% of people aged 25-34 have at least a Bachelor’s degree compared to ~12% in the mid-1970s).
Ah, you say, “but back then people didn’t save for college and now they do.” OK. Let’s assume an incoming public university student has $50,000 saved up (that’s a pretty big assumption – I definitely did not have $50,000 when I started school) or will get at least that much in grants, scholarships, other financial aid, etc. (another pretty big “if”). It’s still pretty bleak. An in-state student’s monthly payment drops to $389.43/month (20 years; $35,092 paid in interest) and an out-of-state student’s monthly payment drops to $804.54 (20 years; $72,497 paid in interest).
What’s the impact? Well, the average starting salary for a 2013 college grad is $45,327. (Yeah, you can do better in some jobs, but you can also do worse). In 1976 dollars, that’s $10,821. Let’s say you are an in-state student using the data above. In 1976, you can either pay $8.43/month for 20 years (0.93% of your pre-tax take-home pay) or $48/month for 2.3 years (5.3% of your pre-tax take-home pay). In today’s economy, your monthly payment of $562.43 represents 14.8% of your pre-tax take-home pay. Here’s what that looks like:
This means you are less likely to be able to afford to save to purchase a home, contribute to a retirement account, or spend money on consumer goods and services. It reduces the overall diversity of your spending; if more of your money is going to one place (loan servicers), then less of it is going to all other businesses vying for your spending.
The problem is worse than a generation who might not be able to buy a home, who have a negative savings rate and the stress of living paycheck-to-paycheck. The problem is that major parts of our economy are breaking down because we can’t spend like we have in the past to keep businesses (and jobs) going. It means layoffs, plant closings, downsizing. It means less opportunity for all job-seekers, degreed and not.
Is anyone doing anything? What’s happening? The most recent major progress came in 2010 with The Health Care and Education Reconciliation Act, passed by Congress and signed into law by the President on March 30, 2010. Highlights include: moving federal loans back exclusively to the Department of Education (previously private banks received significant payment for playing middleman on administering federal loans while not particularly adding any value to student lenders), increases in Pell Grants, easier access to PLUS loans for parents and increased funding to community colleges.
However, the big win is what has become known as “Pay As You Earn.” Anyone borrowing starting in 2014 will be able to limit their monthly payments to 10% of their discretionary income, and after making on-time payments for 20 years, any balance is forgiven. It was great news for anyone starting college this fall, but left us old folks behind. Also, there are other rules; eligibility can be hard to understand. For example, I spent a solid few hours tracking down paperwork and filling out surveys to see if I was eligible, only to get a letter a month later telling me that I wasn’t.
Then, in June 2014, President Obama issued an executive order (if you read my last article you already know about those!) to expand the help to the rest of us who’ve already graduated - almost 5 million of us. Previously, you were only eligible to apply for Pay As You Earn if you had no debt prior to 2007. This order removes the 2007 restriction. It also says that if your loan is forgiven, it won’t be considered taxable income in the year it’s forgiven –- something not many people think about as they jump up and down with relief over loan forgiveness.
And, last, perhaps less-sexy sounding but totally important, the order caps interest capitalization. Say what? When you are paying a debt, if you don’t pay at least the interest that has accrued, the extra is tacked on to the amount you borrowed and you are charged interest on that new, larger amount. That’s how it’s possible to borrow $50,000 for school and ultimately pay back $300,000. The order places a 50% cap on interest capitalization. Exciting, yes? YES! But don’t get out your party horns and champagne just yet because all of this is part of the 2015 budget proposal so the earliest any of us could apply is December, 2015.
And, of course there are a couple of downsides to know about. If you have “high debt” (more than $57,000), you get loan forgiveness at 25 years, not 20. If you are counting on Public Service Loan Forgiveness, your forgiveness is capped at $57,000. Also, only payments made on an income-based repayment (IBR) plan will count toward the 10-year PSLF clock. If you’re already In a PSLF program, you may be grandfathered in but it’s not certain. Last, being married could hurt. Right now if one of you makes more than the other you can file as “married filing separately” to calculate an income-based repayment, the new order doesn’t allow you to do this – both of your incomes will be considered in calculating a monthly payment.
Elizabeth Warren is another champion for student loan debt reform. Last year, she created quite a ruckus when she introduced a bill that would have charged students with federal loans the same interest rate that the Federal Reserve charges financial institutions (less than 1%). This was largely for show as students carry debt for long terms and the banks are borrowing overnight. It wasn’t apples-to-apples but she made her point and got a decent amount of much-needed attention.
She has since sponsored another bill (S. 2292) that would allow students carrying debt to re-finance at the current rates (as you would do with a mortgage). It has many co-sponsors, and the support of all Senate Democrats and Independents but most Republicans have tried to block it from coming up for a vote. This is good news for those of us who won’t qualify for Pay As You Earn. If we can’t cap monthly payments and limit our repayment to 20 years, at least we can get a lower interest rate.
What can we do? What’s next? Take action. Senator Warren’s modest bill (S. 2292) to allow us to re-finance our student loans comes up for a vote again in September. Call, write and otherwise pester your elected officials to support it. While you’re on the phone, tell these folks that you also want to: eliminate the $57,000 cap on PSLF and make sure all PSLF payments count (or at least grandfather people in), remove the marriage penalty, and increase funding to public universities and community colleges (so maybe they won’t be, you know, 3X as expensive as they were in the 70s). Talk to people about why student loan reform is important. Vote! Vote for candidates who are committed to affordable education –- and not just in Presidential elections, in every election, no matter how small.
** Data Sources:
Current pricing: http://www.umass.edu/bursar/sites/default/files/Fall%202014-Spring%202015%20ugrad%20full%20time%20fee%20sheet_3.pdf
Note: To keep comparisons as close as possible room and board are based on the same options (average room price and 14-meal boarding plan)
Current student loan interest rates: http://www.direct.ed.gov/calc.html
Inflation Calculator: http://www.bls.gov/data/inflation_calculator.htm
Minimum Wage History: http://www.dol.gov/whd/minwage/chart.htm
Notes: I calculated the job contribution amount using minimum wage ($2-$2.20 in the 1970s, $7.25 current) for 830 work hours (11 full-time weeks in summer, 39 part-time weeks of 10 hours/week, 2 weeks not working) over 4 years. I picked 5.13% as the interest rate as it is the median of the current undergraduate loan rates even though the repayment calculator defaulted to a higher rate of 6.28%. I didn’t include the cost of books and materials, as that’s a pretty big variable and my goal was to not skew the numbers.