Economy turning student-loan problem into a crisis
THE OLYMPIAN • Published November 03, 2011
Student-loan debt is on pace to reach $1 trillion in the United States this year and it topped credit-card debt for the first time last year.
More than two-thirds of all college students borrow money to attend college and up to 20 percent of them have loan payments that exceed 10 percent of their gross income after they leave college and the loans come due.
The student-loan debt crisis is deepening as college graduates face difficulty finding good-paying jobs and the cost of a college education continues to climb, more than 538 percent in the past 30 years.
It hurts students, families and society in general when borrowers become delinquent or default on their loans. The consequences can last a lifetime in terms of poor credit. Despite the dire results, about 41 percent of borrowers who reached the repayment phase of their loan in 2005 defaulted or became delinquent in their payments within five years.
Programs to help students and parents better manage and pay off student loan debt are needed more than ever, especially when the average total parent and student debt for this year’s graduates is estimated at $34,400, more than double what it was less than 10 years ago.
President Barack Obama unveiled a plan last week to provide some relief for students with federal loans. It’s a start, but it provides no help for students with loans from private financial institutions, which make up about 20 percent of the outstanding education loans.
Key provisions of the Obama plan include:
• A cap on student-loan repayments at 10 percent of a borrower’s discretionary income, beginning in January 2012. This could benefit up to 1.6 million student borrowers with federal loans, reducing payments on average by a couple of hundred dollars per month. If someone is still carrying student-loan debt 20 years after starting a repayment plan, the remainder would be forgiven. That’s five years sooner than current law allows.
It’s important to note that a program has been in place since 2007 to cap federal student-loan repayment at 15 percent of discretionary income for those already in the workplace. Unfortunately, only 450,000 of the nation’s 36 million former students with federal loans are taking advantage of the program.
• Allowing those with student-loan debt to consolidate their federal loans into one monthly payment that could reduce the interest rate on certain loans by 0.5 percent.
• Creating a new financial aid disclosure form that colleges and universities would use to compare financial aid packages and better understand the debt burden students will face at graduation.
The costs and risks of student loans need to be known up front, before students and parents sign on the dotted line.
Too often, students and parents receive financial-aid-award letters lacking in such basic information as interest rates and monthly loan payments. Some don’t even use the word “loan,” lulling some into thinking they are applying for a grant.
Another new program forgives federal student loans for borrowers with public service jobs they spend 10 years at, working full time.
For those who think bankruptcy is an option – forget about it. In 2008, student-loan borrowers filing for bankruptcy were successful getting their loans dismissed only 0.04 percent of the time.
The next generation of college students is going to have to be a lot smarter about how much debt they take on to go to school. Some may have to reset their sights on less expensive colleges or spend their first two years at a community college.
High school counselors need to do a better job explaining the pros and cons of college choices and financial aid packages. The stakes are too high for anything other than full financial disclosure.
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