October 26, 2011
With student loan debt in this country now surpassing credit card debt at nearly $1 trillion and growing at about twice the rate of inflation, President Obama today announced a plan to ease the burden of education-based debt for as many as 7.4 million recipients. His plan: Reduce the maximum required payment on federal student loans from 15 percent of annual discretionary income to 10 percent. All remaining debt would then be forgiven after 20 years – instead of the current 25. The plan would start in January 2012, two years before the cap was to go into effect under federal law.
In addition, the president wants to allow borrowers to combine loans from the Federal Family Education Loan Program and direct loans from the government. The new loan would have an interest rate of up to a half-percentage point lower than before. Education Secretary Arne Duncan said Tuesday the changes could save borrowers hundreds of dollars a month, with no additional costs to taxpayers.
Melody Barnes, Obama’s domestic policy advisor, said that the program would not cost taxpayers a dime because the administration plans to use savings from the elimination of loan subsidies to pay for the reduction on interest rates on loans that are consolidated.
Second Largest Source of Household Debt
The Obama plan comes at a time when student loans are second only to mortgages as the largest sources of household debt. In 2009, the average undergraduate student left school with $24,000 IOUs, and the Institute for College Access and Success calculates that about 0.5 percent of undergraduate students have accumulated $100,000 in loans or more.
“Every year things get worse and more students are graduating with excessive debt,” says Mark Kantrowitz, publisher of FinAid.org and Fastweb.com. “Every year college affordability goes down, and students have to borrow more. It’s like cooking a lobster. By the time you notice the water is boiling, you’re already cooked.
Will Christiansen, 22, is a case in point. Six months after receiving a Bachelor of Arts degree at the private digital arts college in California, Christiansen received his first student loan bill. The minimum monthly payment was $1,200. Making just $45,000 a year as a graphic designer at an advertising company in New York City — and taking home about $2,800 a month after taxes — he panicked. “There was no way I could make a $1,200 payment and still pay rent,” he says. “I would simply have to defer until I found a better job.”
Christiansen graduated with $107,000 in debt, and he’s part of a small, but growing group of students who graduate with extreme and unmanageable levels of debt — debt that could keep them in the red for the rest of their lives, and potentially be passed onto their children.
“All too often, the students
will sign whatever piece
of paper in front of them and
say, ‘oh I’ll figure out how to
pay it back after I graduate.’”
Financial advisors recommend students avoid taking out loans that might exceed their starting salary, but the future is unpredictable, and many graduates find a very different job market than when they started school four years earlier. For example, although veterinary school grads had a median debt of over $100,000, the median earnings of vets was just $79,050 in 2008, according to the Bureau of Labor Statistics. Even if a student $100k in debt snagged the elusive $100,000 starting-salary job, it doesn’t mean they’re living comfortably and in a position to start saving for the future.
“Growing student debt has an impact on decisions like home ownership, family formation, retirement saving, education savings and entrepreneurship,” says Lauren Asher, president of the Institute for College Access and Success. “These are all things that matter not only to individuals but our society and our economy as a whole.”
“Extreme Financial Difficulty”
How does one get to $100k as an undergraduate? It’s not through federal loans to attend a state school. The federal loan limit for dependent undergrads is $31,000 and $57,500 for independent students. After exceeding the limit, most students turn to private lenders, many of which don’t have caps on interest rates or fees, they’re not dischargeable in bankruptcy and may not even be discharged in death. Private loans represented about 25 percent of educational borrowing in 2008, but have declined since then due to the Ensuring Continued Access to Student Loans Act that raised federal loan borrowing limits.
“I get calls every day from students who are in extreme financial difficulty,” says Kantrowitz. “Unfortunately about half of them have steered towards the private loans and they’re out of luck. There’s not much that can be done. All too often, the students will sign whatever piece of paper in front of them and say, oh I’ll figure out how to pay it back after I graduate.”
Christiansen chose his private college, Cogswell Polytechnical, because it specialized in his chosen field of animation and says he couldn’t find a public school program of a similar caliber. It costs nearly $27,000 a year including room and board, and his parents were too well off to qualify for aid, though he says it was mainly from property ownership, and not available cash. He maxed out on his federal loans at $31,000, and took out $77,000 in private loans with four different loan providers, which all have separate interest rates and rules for deferment.
It’s only been in the last few years that the government has started to crack down on student loan lenders, requiring that private lenders disclose basic things like interest rates. In June, the Obama administration released regulations that will require college career programs, particularly at for-profit schools, to prove that at least 35 percent of former students are gainfully employed and repaying their loans, or risk losing access to Federal student aid. They’re also requiring that all colleges post an online net price calculator. In addition, Federal programs like Income-Based Repayment and Public Service Loan Forgiveness have cropped up to help students pay down Federal loans. But students like Christiansen, who graduated in 2006 with massive private loans, have few options to turn to.
Since graduating, Christiansen has jumped from contract job to contract job, averaging $65,000 a year. He had to file for unemployment in 2008 when his company went under, deferring his loans once again. The jobs in his field are highly competitive and although some professionals can make over six figures, starting salaries rarely do. “I always had in mind that after I graduated school I’d be able to make $80,000 a year, and everyone gave the impression that that would be the case.” Not once did someone sit down with him to crunch the numbers and explain the risks involved. “As an 18-year-old kid all I cared about was getting approved for the student loans,” he says. “The whole thing felt like free money.”
Students get little or no financial counseling when they enter college. And for students who do receive counseling after they’ve enrolled, rarely will the advisor tell them they simply can’t afford their current school. “Some students just don’t get it,” says Kantrowitz. “There’s nobody there to tell them you shouldn’t borrow that much. No one is saying you can’t afford this school; you have to go to a different school. They’ve heard that education debt is good debt. Well, too much a good thing can hurt you.”
After deferring his loans for nearly a year after graduation, and again when he was unemployed, the interest on Christiansen’s loans shot up over $10,000. Four years later, he’s now nearly back to the original amount of $107,000. “I don’t have any more deferments or forbearances allowed for the life of my loans, so if I ever hit hard times, I’d be completely screwed,” he says.
In January 2011, Christiansen was hired as a contract animator making just over six figures, and for the first time has been able to increase his loan payments, put money into a savings account, and open a Roth IRA. “It’s never going to be super comfortable, but I actually have enough now to save money.”
This article originally ran on June 10, 2011, and was updated on October 26, 2011.