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.
Published or updated October 27, 2011.