Death, Taxes and Student Loan Debt: No Easy Fix

By: CJMcKinney  //  Education, Money

by C.J. McKinney

Since 1978, the cost of going to college has jumped by 1,120 percent – a blow to the pocketbook that beats out even increases in healthcare.

With the average cost of a single year at a typical state university topping out at around $17,000, nearly every student in a higher education program must rely on financial aid to get through school. And after graduation, these students head into the workforce saddled with a debt load averaging $20,000 – a burden that saps not only earning and buying power but also stalls life choices such as marriage and having children.

An often-reported statistic reveals that by the end of 2013, the total US student loan debt topped $1 trillion – and that’s just counting the usual federal student loans. Add another $100 million from student loans serviced by private lenders and it’s clear that student loan debt also has the potential to cause serious economic damage.

Faced with a sluggish job market and low wages, many new college graduates have little hope of ever paying off their loans. And the outlook is even worse for students who took out loans to go to school but dropped out before completing their studies.

To help struggling student debtors and their families – and by extension the economy as a whole – a number of bills aimed at providing relief, and even outright forgiveness, of outstanding student loan debt have been proposed by both President Barack Obama and members of both houses.

But though these relief efforts offer ways for some student borrowers to reduce payments and even eliminate the debt, they don’t offer a quick fix – and not everyone qualifies for the help.

The problem with comprehensive student loan debt relief is that student loans take many forms. Most student loans are federal, an outgrowth of the assistance offered to veterans after the Second Word War so that they could attend college. Ever since that time, the government has been subsidizing the education of millions of students who can’t pay for college on their own.

Loans large and small pay for post secondary education including traditional four year and graduate studies, community college courses and vocational schools as well as some professional training programs. Some are paid directly to students; others are administered through their schools. Federal student loans generally have low interest rates and long payment plans.

But as cash strapped states have cut funding for education, and family incomes continue to decline, these loans don’t cover all the costs of college, leaving students struggling to fill the gap between their federal loans and the actual amount they need to finish their education.

Enter private lending. Banks and other kinds of lenders such s credit unions have made major inroads into the school loan market in the past decade with a variety of loan packages promising to help students get through school.  But private loans come with heavy price tags –higher interest rates, steep repayment schedules and terms that many students and their families may not really understand.

The increase in private lending for everything from an associates degree to a doctorate in math means that many students are leaving school with private loan debt that’s exempt from the safeguards of traditional federal loans, or a mixed bag of debt consisting of both federal and private loans.

What’s more, student loan debt is unique among the kinds of indebtedness most American face. It can’t be discharged in bankruptcy and federal aid such as Social Security can be garnished to recover federal loans in default. Those circumstances add a sense of urgency to calls for student debt relief – not just for federal loans but also loans from private lenders.

Calling the student loan problem a “crippling . . . debt on the backs of future generations,” Rep. Karen Bass (D-CA) has sponsored the 2013Student Loan Fairness Act. It’s a comprehensive measure that combines elements of several previous bills to address the issues faced by the majority of loan holders.

The cornerstone of the Fairness Act and similar legislation is the 10/10 plan for income based debt relief, which caps monthly payments at 10 percent of a borrower’s discretionary income and limits interest capitalization of 10 percent of the original amount. After 120 payments made under this arrangement, a loan could be forgiven.

For students in some circumstances, outright forgiveness of the loan is also possible – even though it may be a long time in coming. The Public Service Forgiveness Plan, for example, offers complete loan forgiveness to those who work full time in public service professions such as teaching, crisis intervention and social work.  But that only comes after ten years, or 120 on time payments.

Other loan forgiveness options have similar time frames. For students with massive debt and low incomes, who would probably never be able to actually repay the full amount, forgiveness can come after specified terms of regular payments – and many loans can now be refinanced with lower interest rates, or consolidated for better terms.

To death and taxes, add student loan debt. There’s no way to dodge repayment of student loans.  But for the millions of students carrying the burden of their college costs forward into the rest of their lives, government relief and forgiveness options may ease the load a little.

 

Image: Flickr/Twist Study

Sources:

Bahr, Anna. “ Obama’s Move to Help Students Is Not As Forgiving As It Seems.” The Upshot. theupshot.com. 23 July 2014

Bass, Karen. (Rep D-CA). “Rep. Karen Bass Introduces the Student Loan Fairness Act of 2013.” Representative Karen Bass.  bass.house.gov.  6 Oct 2014

Calmes, Jackie. Obama Plans Steps to Ease Student Debt.” New York Times. nytimes.com. 7 June 2014.

“Cost of College Degree in US Has Increased 1,120% in 20 Years, Report Says.” HuffPost College. The Huffington Post. 5 Oct 2014.

“Federal Student Loan Default Rates.” Federal Education Budget Projects. Te New America Foundation. newamerica.org. 6 Oct 2014.

HR1330: Student Loan Fairness Act.” Summary of Bill.    congress.gov.  6 Oct 2014