The cost of college poses a significant threat to the health of the United States economy. The debt that students acquire through student loans is estimated to be a total of $1 trillion, 14 times more than in 1997, and is currently more than total domestic credit card debt. William E. Brewer Jr., the president of the National Association of Consumer Bankruptcy Attorneys, said, “take it from those of us on the frontlines of economic distress in America, this could very well be the next debt bomb for the U.S. economy.” College tuition has increased at approximately 8% a year since 1950, meaning that the price of college doubles every nine years. The cost of a year’s education at many private universities is almost $50,000, which includes housing and a meal plan. If tuition continues to double every nine years, the cost of a private college education for a child born today would be more than $200,000 a year, a staggering amount to say the least. In order to fully pay for college at that price, parents would have to save at least $17,018 a year and have that money earn a return of 10% a year, an almost impossible task.
The affects of high student debt can already be seen in the graduating class of 2005. 15% of this class, who began student loan payments upon graduation, have defaulted on their student loans and 25% have been delinquent at some point. Missing a payment hurts the borrower’s credit score, which makes it difficult to receive future financing. After nine months of delinquency, the borrower is considered in default. When this happens the full amount of the loan is due immediately. Not even bankruptcy can help you avoid paying student loans, and the government has the right to seize a portion of a borrower’s wages, tax refund, or Social Security benefits to ensure they get their money.
Another troublesome aspect of college tuition prices is the dramatic increase in parents taking out loans to fund their child’s education. These loans mainly come in the form of Parental Loans for Undergraduate Students (PLUS). The housing market decline has left many families without the option of taking out a second mortgage because the equity they accumulated in their homes has vanished. PLUS loans are government issued and have a fixed interest rate near 8%. A credit check is required, but collateral is not. PLUS loans have increased volume by 75% since the 2005-2006 school year. This is a concerning statistic, considering parents should be shedding liabilities before retirement instead of adding debt that has to be paid off when they are no longer earning a steady income.
What can be done to ensure that student loan debt does not harm the future of graduating students or rob parents of their retirement?
The most controversial suggestion proposes that there should be a discharge of student loan debt for borrowers in default. The reason people go into bankruptcy is to obtain a fresh start, and student loan debt prevents these borrowers from moving on because these debts are not forgiven in bankruptcy. There are already bankruptcy protection laws in place that will prevent borrowers from intentionally gaming the system; because of this, there is no reason for student loans to be treated differently than other unsecured debt.
Congress should make all borrowers eligible for an income-based repayment plan. Currently, only 10% of borrowers are eligible for the initiative, with only 2.25% of all student loan borrowers actually participating. However, Congress should make every student and parent loan borrower immediately eligible for the income-based repayment plan. The Obama Administration’s proposed “Pay as You Earn” plan will enable 1.6 million students to take advantage of a new option to cap student loan repayments at 10% of their monthly income as soon as this year. This is a good start, but this option should be available for everyone.
Another suggestion is to double the amount of the Pell Grant, federal government aid for college that does not have to be repaid. This would be a bit of a stretch, considering the rapidly expanding United States debt. The Obama administration has raised the maximum Pell Grant to $5,635 for the 2012-2013 school year, a $905 increase since 2008, but a far cry from making a significant difference in the out of pocket expenses families have to take to attend college. The maximum Pell Grant 25 years ago would have covered approximately one third the cost of college tuition. Doubling the grant will provide eligible students with an equivalent benefit to those students who received the funds 25 years ago.
One part of President Obama’s plan that we agree with is the creation of a College Scorecard that will make it easier for students and families to choose a college that is best suited to their needs. College is great, but that does not mean it’s for everyone. Our society has placed huge amounts of pressure on our youth to go to college after high school, even when it might not be in the best interests of the individual. Having schools be more transparent will give potential students a greater chance to pick the right school, or none at all. This scorecard will also aid the government in determining how each institution is performing for funding purposes.
How much will tuition prices have to rise until there is a backlash and the demand for higher education tapers off? If the statistics from 2005 graduates are any indication, our youth will be at risk of either bearing an unsustainable amount of student loan debt that cannot be forgiven or pursuing different forms of higher education. In the meantime, students should realize it was their choice to take out excessive student loans, know the terms associated and work hard on a plan to pay them back before it is too late.
By: Joe Cunningham & Chris Bekel