How to Solve the Student Loan Crisis

FT Contributor
A woman ripping a piece of paper in half that has the words "student debt" written on it.
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In 2019, the U.S. had accumulated $1.5 trillion in student debt from 44 million borrowers. This makes student loans a leading cause of debt for the U.S., with 65% of students assuming some form of debt to pursue their college education. The class of 2018 graduated with an average student loan debt of $29,200.

As interest continues to accumulate each day, the matter only grows that much more dire. There are a number of solutions that have been recommended in order to solve this crisis. We explore them here.

Student Loan Crisis Causes

One of the primary causes of the student loan debacle is the need for young people to earn a college degree coupled with the high cost of college. A college degree can pay off for many college graduates with stable employment income. The U.S. Bureau of Labor Statistics shows that 72.3% of those employed over the age of 25 are college graduates with at least a bachelor’s degree. The average college graduate also earns an average of 3.7 times more than a high school dropout.

The high cost of tuition coupled with the need for stable employment is forcing more and more students into rising debt from student loans. Once they have these loans, however, their wages are not always enough to make ends meet.

The Bureau of Labor Statistics (BLS) confirms that the more education you have, the more money you make for full-time wage and salary workers 25 years of age and older. In 2017, someone with a bachelor’s degree made a median annual income of $56,304. Those same individuals were also facing an average total student debt balance of $26,900 for public four-year college grads and $32,600 for private four-year schools.

The College Board analyzed tuition data published from public, private, and two-year universities and colleges from 2009-2010 until 2019-2020. The total tuition, fees, room, and board showed an average increase of over 1.8% each year. By the 2019-2020 term, the average cost of college pricing had once again exceeded the rate of inflation.

Student Loan Crisis Effects

The impacts of student loan debt are far-reaching, and it starts right out of college. With loan payments immediately coming due after the six-month grace period, students don’t always have time to search for the right job. Instead, they end up taking a job that pays them far less than they are worth.

With student loans taking up the majority of their limited income, college graduates don’t have money to spend on the traditional trappings of the American dream. Some students are unable to make their monthly bills, much less save for retirement with a 401(k) plan.

Fewer students are buying houses and new cars, and are instead choosing to live at home with their parents or family. The Federal Reserve reports that for every 10% increase of student debt, a student’s chances of homeownership are reduced by up to 2%.

This has an enormous impact on the country, which typically relies on things like investments, home loans and car loans to stimulate the economy. The 2008 financial crisis bankrupted retirement dreams for many an American, and experts warn that it will happen again if something isn’t done to resolve the mounting debt.

Student Debt Crisis Solutions

There are a lot of ideas on how to resolve American student debt.

Encourage Enrollment at Vocational Schools

More and more teachers are encouraging students to start their college careers early through enrollment at vocational schools. By getting a jumpstart on their studies, they can take advantage of special assistance for high school students, while shortening their college career and getting to the workplace that much sooner.

The extra experience can also translate to higher earnings. The average cost of vocational school is only $33,000, so students graduate with far less debt than a traditional bachelor’s degree. They arrive in the workforce highly skilled and trained as mechanics, technicians, CDL drivers, nurses, or dental hygienists. These are all examples of high-paying trade school careers with training that is very desirable to employers. Those who successfully complete vocational school earn an average of $35,730 per year, which means that vocational school costs less than one year’s salary.

With less student debt, technical school graduates are able to keep more of their hard-earned income without having to worry about mounting student loans.  

Expand or Revise Income-Driven Repayment (IDR) Plans

The Congressional Budget Office estimates that 24% of undergraduate students and 39% of graduate students use income-driven repayment plans toward settling their student debt.

With an income-driven repayment plan, your monthly payment changes on an annual basis. Set by the U.S. Census Bureau each year, the federal poverty line is used as a baseline to calculate your discretionary income based on details like what you earn, where you live, and how many people are in your household. Together, this creates your total monthly loan payment.

It’s a complicated process that many students do not understand and cannot follow. These details must be updated annually, and the current certification process requires an online or paper form to be filed every year. Many students simply forget to pay student loans back, leading to steep penalties. If the Department of Education could introduce automatic recertification, it would reduce much of the confusion and delay surrounding the annual recalculation of monthly payments.

Unpaid interest also capitalizes, which means that when you miss payments, that interest is added to your total balance and also begins to accumulate additional interest. It would save borrowers thousands of dollars if IDR plans did away with capitalized interest.

Lower interest rates would also greatly reduce the total U.S. borrower debt, but income-driven repayment plans are designed to last longer and therefore accumulate more interest.

Expand or Revise Public Service Student Loan Forgiveness

The Public Service Loan Forgiveness (PSLF) program forgives certain student loan debt in exchange for 120 on-time student loan payments while working full time for a public service employer, including government agencies and nonprofit organizations. Currently, this just applies to direct loans and income-driven repayment plans.

Expanding the loan forgiveness program to consider additional factors could have an enormous impact on the total student debt. This is because only Direct Loans qualify, completely isolating students with FFEL loans and Perkins loans. By adding these loans to the loan forgiveness program, it could help 35.7 million borrowers and help reduce a combined $296 billion in outstanding student debt.

Instead, strict requirements mean that out of the over 1.1 million applications received, only 2,246 applications have been approved for loan forgiveness as of February 2020.

The Temporary Expanded Public Service Loan Forgiveness (TEPSLF) is Congress’s solution to a flawed system, designed to accept those who are denied by the PSLF program. Still, less than $27 million of the total $700 million has been used, and in 2019, 99% of applicants to TEPSLF were denied.

If the program were to allow for more types of loans and not just Direct Loans, more of these allocated funds could be used to forgive student debt and additional students could benefit, reducing the overall student debt in the U.S.

Expand Financial Aid for Students

Another option for solving the student debt crisis would be for the federal government to offer additional kinds of debt-free financial aid to students. The Free Application for Federal Student Aid (FAFSA) has long been known as the primary source of federal loan support for college tuition, and because of it, many students take on debt to pay for college.

Federal funding for additional kinds of student aid is lacking at just $120 billion, and there isn’t enough money to go around. The National Association of Independent Colleges and Universities and organizations like it work to expand federal, public, and private funding for a number of scholarships and grants. New legislation in the public sphere and more focus from private organizations is needed to increase the amount of non-loan funding for students struggling to afford college.

Make College Tuition Free

Many U.S. citizens are huge proponents of free college, viewing it as a one-size-fits-all solution that can jumpstart the economy overnight. Including scholarship aid and tax benefits, the average private school tuition tops $27,000 each year, while public schools cost an average of $15,400 for in-state tuition and two-year schools are $8,600; paying for this tuition would allow millions of impoverished students to become upwardly mobile.

However, experts estimate that the price tag of tuition and fees will exceed $79 billion each year, and many worry about where that money will come from and whether it will fall back on taxpayers.

Crack Down on For-Profit Institutions

Using data from the Department of Education under the Freedom of Information Act, The Century Foundation reports that 98.6% of the complaints it receives involve for-profit institutions; 47 for-profit institutions have generated more than 20 claims, compared to just five nonprofit institutions. Students who took a loan for a for-profit school are also 135% times more likely to file a fraud claim than those who attended a nonprofit institution.

It has long been maintained that for-profit colleges should face tighter regulations, and given these statistics, it’s hard to argue. Holding for-profit institutions accountable for greater funding to students would lessen the financial burden on lower-income families. If for-profit colleges provide their own financial aid programs, their students would not need to utilize the limited federal funds available.

Reduce Student Loan Interest Rates

Interest continues to be a problem for many students and graduates. The Federal Reserve Bank of New York reported that the rate of serious delinquencies on student loan payments rose to 11.42% by December 2018. That same month, Education Secretary Betsy DeVoss announced that less than a quarter of student loan borrowers are repaying the principal of their loans.

2019 was a positive sign for students and graduates across the country when federal student loan interest rates on Direct Subsidized Loans decreased from 5.05% in 2018 to 4.53% for the 2019-2020 school year. It showed significant improvement for the second time since 2013 when interest rates soared as high as 6.8%.

Another reduction of student loan interest rates would better help students make their loan payments and reduce the overall debt.  

Cancel All Student Debt

Canceling student debt has become a hot topic of debate. The U.S. government has already provided bailouts to several large lenders over the years, so many people believe that that same rationale should be extended to the borrowers themselves.

A study by The National Bureau of Economic Research shows that canceling private student debt resulted in an average increase of $3,000 in income over a three-year period. The Levy Economics Institute of Bard College in 2018 estimated that canceling student debt could bring up to $108 billion into the U.S. economy each year.

Perhaps the cancellation of student debt is the economic revitalization the U.S. has been waiting for, once and for all answering that lingering question of is college worth it now that there is no worry of student loans.

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