Whether Student Debt Is $100K or $5K, We Still Need Reform

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Recent new reports have placed student loan debt under a microscope as President Barack Obama addresses the issue with the expansion of programs like “Pay As You Earn,” which caps loan payments at 10 percent of monthly earnings for some borrowers.

Over the past few years, we’ve heard several reports of students who are unable to find employment while they owe $50,000 to $100,000 in student debt. Accounts of waitresses, bartenders or retailer clerks with bachelor’s degrees and hefty student loans became fairly common during the recession, as the unemployment rate among recent college graduates hit 12.6 percent in 2011.

Upon hearing the stories and having some personal experience with the issue, either directly or indirectly, many Americans have come to agree that student loans are a cause for concern. The Washington Post published campaign polling results that indicate 87 percent of Democrats and 84 percent of Republicans are in favor of lowering student loan interest rates. While most people acknowledge the issue, a recent study attempts to downplay its severity.

Brookings Institution report

The Brookings Institution in June released a report analyzing the individual household’s student loan debt. The group based its report findings on data gathered from Survey of Consumer Finances (SCF) data, which analyze the finances of U.S. families every three years.

In the report, the Brookings Institution said: “College tuition and student debt levels have been increasing at a fast pace for at least two decades. These well-documented trends, coupled with an economy weakened by a major recession, have raised serious questions about whether the market for student debt is headed for a crisis, with many borrowers unable to repay their loans and taxpayers being forced to foot the bill. … Our analysis of more than two decades of data on the financial well-being of American households suggests that the reality of student loans may not be as dire as many commentators fear.”

The organization claims these reported debt levels of more than $100,000 are the exception rather than the rule, as only 4 percent of balances exceeded this mark in 2012. The report also claims the increase in student debtors’ income levels and total debt between 1992 and 2010 are such that the income increase could repay the debt in 2.4 years. The Institution used this and an abundance of other data to back its assertions, with the overall message remaining the same: The student loan crisis is not as serious as we think.

Using data from the Brookings report, the College Board, the Department of Labor, and other supplemental reports, we intend to provide an alternate point of view — that regardless of the level of individual debt, reform is still necessary.

Source: Thinkstock

The student borrower

What is the profile of the average student borrower? Many college students are young. Around 41 percent of all higher education students are between the ages of 18 and 24, and a large portion of students begin college immediately after high school, at age 18 or 19. Just reaching adulthood, these students likely have little experience managing finances, understanding and interpreting a loan contract, or grasping the ramifications of a 10-year-long financial commitment.

Many college students are unemployed during their schooling, but some work. Generally, around half of college students are employed at a given time, and the majority of them work part-time. An American Association of University Professors publication found the most common arrangement you’ll see is “ten to fifteen hours per week, on campus” arrangements. These positions pay anywhere between minimum wage and upwards of $13 per hour, depending on the position and the school, according to Payscale.

Considering a young student who earns anywhere between zero and roughly $1,100 per month, the debt-to-income ratio based on that person’s current income and a future payment of $280 (around the average) could be as high as 100 percent. This is without taking any other financial obligations into consideration.

With such a low income and a lack of credit history (as most 18- and 19-year-olds have), few, if any, lenders would allow borrowing under these conditions. However, because the loan is secured and the student could possibly earn a degree in the future, everyone just bets the student’s income will increase to a level where he or she can afford student loan payments. In reality, no one knows exactly what the job market will look like, what the student’s situation will be, or if he or she will be able to repay.

Student borrowers have to meet such lenient eligibility requirements that virtually anyone can obtain these loans. Factors such as credit history, employment history, and debt-to-income are not considered in the same manner in which they are with other types of loans.

Source: College Board

Historical data

Tuition rates have increased rapidly over the past decade. According to the College Board, from 2003-2004 to 2008-2009, the tuition rate at public four-year colleges increased 19 percent beyond the rate of inflation, and then from 2008-2009 to this past academic year, rates increased by another 27 percent (beyond inflation).

The demand for a college education continues to increase despite rising tuition costs as students continue to have easy access to loans that will fund their education. Enrollment in degree-granting institutions rose by 11 percent from 1991 to 2001, and by another 32 percent between 2001 and 2011 (from around 16 million to 21 million), according to the National Center for Education Statistics. Most of those enrolling are not paying for their degrees upfront — they are borrowing. Around 60 percent of students borrow to help pay for college, and in some states, this percentage is even higher. In Minnesota, for instance, 71 percent of students had loans, borrowing an average of $29,100.

Given the increased enrollment levels coupled with higher tuition costs, student loan debt is also increasing rapidly. The Federal Reserve Bank of New York finds it to be the only form of debt that has grown since the peak of consumer debt in 2008, during the Great Recession. From 2005 to today, total student loan debt has just about tripled from an overall $363 million in loan debt to more than $1 trillion.

In 2005, less than 10 percent of borrowers were 90 days or more delinquent on their loans, and the average loan balance among the roughly 23 million borrowers was just over $15,500. More recent estimates indicate that 41 percent of borrowers are delinquent on their loans at some point during the first five years, and the three-year cohort default rates have been reported as high as 21.8 percent.

Source: Thinkstock

The bottom line

Student loans are absolutely a problem in America. This is a problem that is much deeper than the average household student loan debt. Sometimes media outlets dramatize stories in efforts to draw attention to relevant issues like the student loan crisis, but this does not render this issue any less relevant.

We are not simply talking about a handful of individuals who are having trouble repaying these loans. Those who are delinquent or delay moving out on their own to be able to afford their monthly payments are not representations of a few data anomalies. Repayment is a real problem for millions of borrowers, regardless of whether their balance is $50,000 or $10,000.

Student borrowers begin their life and career in debt, with a monthly payment obligation. This is a burden they must repay, or it will negatively impact their credit, which will, in turn, have a negative influence on their employment prospects and their ability to purchase a home or a car. All in all, it effects their ability to earn and help flow money through the economy. For this reason, among others, we need reform.

This reform may come in many shapes, such as increased financial education for student borrowers, lower rates or more lenient financial hardship programs for borrowers who are attempting to repay. If our tax dollars can pay for bank bailouts and election research, it can certainly help pay for student loan reform.

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