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Student Loans
Student Loans Are Good Debt
The current amount of outstanding student loans is approximately $1.7 trillion; meanwhile, the total outstanding credit card debt stands at $922 billion. As you can see below, student debt has risen continuously over the past decade and a half, continuing a trend over the previous four decades.
Borrowing money for a college education is an investment. In 2020, the average annual salary of a high school graduate in the United States was $37,000 while the average annual salary of a college graduate was $61,000. Those with a college degree will earn at least 60% more money for over their lifetime. In addition, a college degree is more likely to lead to career advancement. Considering a cost/benefit analysis of college degrees, we can calculate a return on investment (ROI) for a college degree. In 2019, the College Board reported that a moderate college budget for a four-year in-state public college averaged $26,590 while a moderate budget at a private college averaged $53,980. Thus, the return on investment would look like this:
The ROI for a private college can be calculated the same way:
In comparison, the stock market has an average annual return of 10%. This also does not include any cost of living increases or other raises. However, this assumes that you graduate from college, as the higher salaries above are for college graduates.
Student debt has been driven higher by the relentless cost of a college education, having grown 145% since 1971:
Student Debt Abuse by Educational Organizations
For-profit colleges (like University of Phoenix, Corinthian Colleges, and Strayer University) and for-profit training schools (like ITT Technical Institute and Education Management Corporation) are some of the biggest culprits of student debt abuse. These organizations accounted for about 40% of all student loan defaults while only representing about 11% of all loans. According to a 2014 report by The Institute for College Access and Success, a student is three times as likely to default at a for-profit school than at a 4-year public or non-profit college; further, they are almost four times as likely to default than at a community college (see reports on ticas.org). One-third of college students drop out entirely. More than half of the students enrolled in college take more than 6 years to graduate.
For-profit colleges have abysmal graduation rates. Sixty-seven percent of students at not-for-profits have graduated after six years, while the same is true for only 23% of students at for-profit schools. Dropouts are then saddled with student debt but still stuck at the same salary level as before going to college. Because these schools are motivated by profit, they admit less qualified students and offer less support. Beginning in the 1980’s, government student loans led to a massive expansion of for-profit educational institutions. However, the Obama administration cracked down on for-profit schools with the worst graduation rates, denying them the ability to qualify for federal student loans. As a result, their revenue declined precipitously. For example, the University of Phoenix revenue declined 70%, and Corinthian College declared bankruptcy.
The Rules of Student Debt
The government will pay the interest on federal loans if you qualify based on income while you are in school. When you stop going to school, you must start paying back the loan. There are four types of student loans from the U.S. Department of Education:
Direct Subsidized Loans are loans made to eligible undergraduate students who demonstrate financial need to help cover the costs of higher education at a college or career school. (Maximum loan is $12,500 per year of schooling)
Direct Unsubsidized Loans are loans made to eligible undergraduate, graduate, and professional students, but eligibility is not based on financial need. (Maximum loan is $12,500 per year of schooling)
Direct PLUS Loans are loans made to graduate or professional students and parents of dependent undergraduate students to help pay for education expenses not covered by other financial aid. Eligibility is not based on financial need, but a credit check is required. Borrowers who have an adverse credit history must meet additional requirements to qualify. (Maximum loan is $20,500 per year of schooling)
Direct Consolidation Loans allow you to combine all eligible federal student loans into a single loan with a single servicer.
Below, you can find interest rates for each type of loan. All interest rates shown are fixed rates that will not change for the life of the loan. More information on government-sponsored student loans can be found at studentaid.gov.
| Undergraduate Borrowers | Graduate or Professional Borrowers | Parents and Graduate or Professional Students |
|---|---|---|
| 2.75% | 4.30% | 5.30% |
| Direct Subsidized Loans and Direct Unsubsidized Loans | Direct Unsubsidized Loans | Direct PLUS Loans |
Paying Back Student Debt
While you are in school, the interest on your loan must either be paid, covered by the government (if you qualify), or accrue on the loan. Leaving school is defined as dropping to less than a half-time class load. After you leave, you get a six-month grace period before you must begin paying back the loan. There are a number of payment plans you can qualify for. See the Department of Education’s website.
Government versus Private Lenders for Student Debt?
Government loans are always better for student debt. They have lower interest rates and more flexibility than student loans from financial institutions.
Defaulting on Student Debt
If you do not have the ability to make your loan payments, you must contact your loan servicer. The Department of Education uses for-profit companies to service student loans. These companies collect the payments and keep records for the Department of Education. Since their job is to take payments, they are not very forgiving. Bear in mind that they are for-profit companies, and they want to keep their lucrative contracts.
Below, you can see the rate of defaults on student loans is increasing. It is now about 12%, which leads me to believe that there is a serious problem with the student loan program.
If you default, most creditors must first sue you in court and get a money judgment to start garnishing your wages. Federal student loans, however, get special status and does not have to get a court judgment before attempting to garnish your wages. It also depends on the local state laws. In Pennsylvania, for example, creditors cannot garnish your wages. Moreover, the interest keeps growing, adding to the total loan amount.
Federal law allows the loan holder to garnish up to 15% of your disposable pay. You will get a 30-day notice that explains the U.S. Department of Education’s intention to garnish your wages. This will include an explanation of the nature and amount of your debt, your opportunity to inspect and copy records, your right to object to garnishment, and your option to avoid garnishment by voluntary repayment.
If you are struggling to make payments, you need to talk to the servicer. There are programs that could help.
Problems With Student Debt
Remember that student debt is not forgiven in personal bankruptcy, whether you have a government or private loan. When Congress enabled student loans, they put in the provision that they would not be discharged in bankruptcy, and bank lobbyists got them to add private loans to this exception. A 2018 Philadelphia Inquirer article notes that some students can leave school burdened by “crushing debt.” Since this debt is considered when applying for other loans, outstanding student loans have substantially depressed homeownership and new business formation according to the Inquirer. Most experts blame the skyrocketing cost of college education for this explosion of student debt. College education costs have increased 400% over the last 30 years. In addition, public universities have seen their state support decline by double digits.
Debt Forgiveness for the Helping Professions
The federal government established the Public Student Loan Forgiveness program in 2017 for students who would end up working in helping professions (teaching, healthcare, etc.). There were two main requirements:
The borrower works in a public service profession
The borrower has made loan payments for ten years
Public Student Loan Forgiveness can be great for those who plan to or already work in any public sector. However, many people do not qualify. According to the Department of Education, only 96 people received loan forgiveness in 2017, the year the first round of applicants became eligible. As of September, 2019, 1,216 people have received loan forgiveness under the program. This is a huge improvement from the original 96. However, 100,835 applications were still rejected.
How Much Debt Should I Take On?
According to the Association of Public and Land Grant Universities,the average debtof a student who borrowswhen they graduate from a four-year public college is $25,921, or $6,480 for per year. Among all public university graduates, including those who did not borrow, the average debt at graduation is $16,300. According to the College Board, the average cumulative student debt balance in 2017 was $26,900 for graduates of public four-year schools and $32,600 for graduates of private nonprofit four-year schools. If you end up with debt around the average, you should be able to handle the payments. It is the people who begin college and do not finish that have serious problems with their student debts.
What Majors Are Worth Taking on Student Debt
When you are deciding what you want to major in, keep in mind the kind of salary you will potentially earn, as well as the demand for employees in your field. Dozens of websites can give you this data so you can make an informed decision, such as the Federal Reserve Bank of New York. The Department of Labor also has extensive employment projections of what fields will be in demand over the next ten years. You should choose a field you will enjoy working in; however, it is worth taking a close look at the employment potential and salary in your chosen field, before deciding.