By executive order, President Obama has made a few minor changes to the student loan industry designed to help students and former students with unmanageable student loan debt. Anyone who began their undergraduate studies in 2006 probably did so with the reasonable assumption that they’d have a job after graduation. By the time these students graduated with bachelors’ degrees, the economic situation offered a different reality. The unemployment rate for Americans between the ages of 20 and 24 as of September 2011 was 14.7% according to the Bureau of Labor Statistics.
Last year, the total amount of student loan debt surpassed credit card debt for the first time. Student loans and the value of an education is now such a popular debate that it sparked a discussion at dinner last night with several colleagues. With tuition costs rising much faster than inflation, the only financially responsible path to take is for a family to carefully consider whether the expense of college is worth the benefit. If the only benefit is perceived in terms of financial return on investment (ROI), it can be very difficult in many cases to justify private school tuition.
One liberal arts graduate at the table pointed out that there is more to gain from education than immediate high salaries, and this is something that I’ve discussed recently in terms of building human capital. The expense of higher education is subject to Maslow’s Hierarchy of Needs. While citizens of the United States often consider higher education as a right, it is a privilege. While everyone should go to college, or at least have the opportunity to do so, being able to afford a school that matches any student’s skills and desires can be beyond financial reach.
It is possible to earn a degree without going into debt, but when part of the American dream is providing every opportunity for our children to succeed without barriers, finances often don’t stand in the way. To make those dreams happen, someone often needs to sacrifice the future. Today, former students are sacrificing their financial well-being for the opportunity to have completed their degree at their preferred institution.
Last year, Congress agreed to some changes to the student loan industry to help students and former students struggling with student loan debt, and Obama’s “Pay As You Earn” plan expands on these benefits for students with federal student loans, not private loans, with at least one loan borrowed directly from the government and one borrowed from a bank.
- In 2012, borrowers will be able to reduce their monthly payments from 15% to 10% of their discretionary spending. The original law waited until 2014 to make this change.
- In 2012, borrowers will be able to forgive the balance of their loans after 20 years of faithful payments, up from 25 years. Last year’s law would have put this into effect in 2014.
- Student loan consolidation will return, allowing current and recent students to save up to 50 basis points on their loans.
The student loan industry is dysfunctional. The availability of student loans makes it possible for colleges and universities to raise tuition without significantly affecting demand. By not solving the problem of rising tuition prices, the government gives a boost to the organizations, both semi-public and private, that finance and underwrite student loans. Furthermore, student loan debt is not forgivable in bankruptcy, unlike almost all other forms of debt. In a volatile job market, it’s riskier to have a student loan than it is to have credit card debt.
I’d like to have children at some point, and I’d like for them to have the opportunity to attend college. I would not like for them to need to sacrifice a significant portion of their future in order for them to receive the education that’s best for them. At this rate in two decades, a college education at a private school will be unaffordable for middle class families without student loan debt that requires a lifetime of servitude.
Photo: JoshBerglund19
Bureau of Labor Statistics, CBS News, New York Times
Published or updated October 27, 2011.
{ 11 comments… read them below or add one }
while the unemployment rate for americans between the age of 20-24 is 14%, it’s much lower for those with a college degree. It’s still better to have a college degree than not having one. My issue with this student loan plan is that I’m not sure how much of an impact it’s going to make. It seems like it’s too little too late.
If you want college to stop being so expensive, you have to stop giving away unlimited credit. It’s not complicated.
Government providing essentially unlimited credit for houses thanks to community reinvestment act = housing bubble
Government providing essentially unlimited health care for elderly, disabled and low income (combined with a private insurance system that doesn’t encourage users to shop for the lowest price or live a healthy life) = absurd rise in health care costs every year
Government providing essentially unlimited credit for going to school = education bubble
The only way to make something more affordable is to get government out of it. If the government does not stop providing student loans to anyone who wants one, then college will be unaffordable without those loans for your children.
Govt. subsidized loans are limited. Max total debt for Stafford loans for a dependent undergrad is $31,000. Grad and professional loans have higher limits.
Private student loans need more regulation. It may be time for the government to stop guaranteeing those or giving private lenders bankruptcy protection.
College tuition increases faster than inflation! When my children were in collge, I saw tuition increase nearly 300% from my daughter’s freshman year ($1,800 per year)to her junior year ($4,200). Yet the graduates before my daughter started college saw no increas for four years. This was the University of California (state school).
College is getting too expensive for most people and there does not seem to be any slow down in the increases..
I agree with these changes and I consider myself very conservative. I donot agree with the protestors at Occupy Wall Street who have remarked that there should be student loan forgiveness or the ability to claim student loans on your bankruptcy. In the event of the bankruptcy what is to stop the students from going to school for four years or longer and then start bankruptcy proceedings? Of course, by then they have been indoctrined by all the credit card offers on campus and have a few of those to throw into the mix. I DO NOT and never will agree to forgiveness not only because I worked and paid off my loans, few that they were but because what type of message does that send? You are never responsible for your actions??? Defer them in the individual in unemployed through no fault of their own or been on unemployement for two years defer after the second year. I was pleasantly surprised that I felt that President Obama got it right this time.
Student loans are like a slow-growing cancer.
People really need to take a hard look at whether a 4-year university is right for their kids or themselves.
We also need to get the stigma off trade and tech schools, because traditional college isn’t for everyone. (Although trade and tech schools can be just as expensive)
This is going to make all the difference in the world to my debt repayment plan. Under these new repayment terms my new payment will be exactly what it is currently. I’m going to save soooooooo much now.
Was that good or do i need to add more sarcasm to my statement???
It’s a good thing.
I have seen the transition in the past five years in Florida. When my son was born, I purchased a four-year university pre-paid tuition plan for him form the state because this was one of the few states that back their program completely. It was around $350/month for five years. My daughter was born earlier this year, and they have now tiered the pre-paid college tuition plans into four tiers, and to purchase my daughter the same plan as I bought my son would cost me almost $1,000/month. I think this may be the time to start a 529 plan, but for how much? It is insane and unreasonable to expect to plan accordingly.
While student loan growth is out of control, a large portion of this problem is due to the recession. Yes, unemployment for recent college graduates is high, but this is a temporary problem. As we come out of this recession, and as the aging baby boomer population retires (which arguably may happen later due to retirement income constraints), job demand will increase and generations X and Y will need to fill them.
In terms of student loan repayment, this article discusses the standard repayment plan. However, there are several other options that allow significantly lower repayment schedules (some allow $0 monthly payment if income is extremely limited). Additionally, for public service employment, student loans are forgiven after 10 years of employment, different than the 20 year for private sector employment discussed in this article.
Currently in discussion in the House of Representatives is the Student Loan Forgiveness Act of 2012. Looks to make all loans forgiven after 120 payments. It also changes student loan forgiveness to not count as taxable income.