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Student Loan Wars: A New Hope

July 11, 2014
Benjamin Franklin once declared, “An investment in knowledge pays the best interest.” The problem with this assertion is that it does not seem to specify to whom that interest will be paid. In the middle of a seemingly endless stream of crises before the American people, there is one that will not go away – literally. Student loan debt is non-dischargeable, even in bankruptcies, unless there are significant and unlikely hardships held by the debtor.

Author: Nick Buchta, C’17

Benjamin Franklin once declared, “An investment in knowledge pays the best interest.” The problem with this assertion is that it does not seem to specify to whom that interest will be paid. In the middle of a seemingly endless stream of crises before the American people, there is one that will not go away – literally. Student loan debt is non-dischargeable, even in bankruptcies, unless there are significant and unlikely hardships held by the debtor.

This is not a problem faced by a small segment of the population. Not only are there 20 million Americans enrolled in college in a given year, but 60% of those students take on some kind of debt in the process. That leaves 37.1 million Americans with some kind of outstanding debt from their education, totaling between $902 billion and $1 trillion (“Statistics”). This all is occurring as the costs of college increase far and above both the normal inflation rate and the rate of increase in household incomes. Perhaps owing to that, the average debt increased from $15,000 to $24,700 (in real 2009 dollars) between 1992 and 2008. More and more, students have to pay a greater share of their monthly income toward servicing this debt – up to 31% in 2009 from 22% in 1994 (“Degrees” 4).


Source: www.whitehouse.gov/share/college-affordability

 

This problem is further compounded as students continue to go beyond the traditional four-year window for a bachelor’s degree. Only 38.6% of enrolled students actually complete their degree in that time frame, with 58.8% finishing by the end of six years (“Integrated”). Although college planning largely looks at a four-year period for which to prepare financially, that does not reflect the eventual reality for most college students. The picture is even bleaker for those attending a two-year college, with only 30% graduating within three years (“Typical”). As students spend more time in school, there is a cost. The tuition, and subsequently, the debt, piles up, and interest continues to accumulate.

But there is one other aspect of this problem that is not often addressed: the students themselves. As the job markets have changed, more Americans have considered the role of a college education in their lives. Not only are students a few years removed from high school making the decision to further their education, but there is also a growing number of adults with decades of experience in the work force going back to school. In fact, around 15% of college students are over the age of 25 (“Older”). Paying for college is no longer about simply putting a mortgage on a clouded future.


Source: www.whitehouse.gov/share/college-affordability

While the crisis for current debtors is one that will require sizeable overhaul and attention in the coming years, it is also important to look at the driving forces behind these debts. In particular, it is prescient to examine the ways in which loans are structured to find the best method of disbursing funds for all involved.

An increasing number of states have begun to look outside the box, and even the federal government has experimented. The result is a growing amount of attention being given to the plan often called “Pay Forward, Pay Back” (PFPB). Instead of taking on loans in the traditional sense where the debtor receives money to cover his family’s expected tuition contribution and then pays back a fixed amount with interest over a period of years, this program is instead paid back based upon income. PFPB does not require the student to pay a specific amount back, but instead requires the student to pay a fixed percentage of their income toward the “loan” over a set number of years.

While the federal government does indeed have a form of PFPB, called an Income-Based Repayment plan, this system deviates from the foundation of PFPB. With an Income-Based Repayment play, the debtor is more often than not simply restructuring the way in which he or she pays back loans already doled out. What makes PFPB distinct is that it requires no up-front payment for college on the part of the student. In exchange for the necessary funding for school, a student instead agrees to commit a specified percentage of their future income toward repayment, regardless of what that future income may be (“What is”).

There are reasonable concerns over students earning more than expected and paying more than they would have to with a normal loan. Others wonder if such a top-heavy system would be sustainable. It would take years for students to begin to pay back the loaning organization, but with no guarantee as to how much money they would actually be paying back. Part of the problem in answering these questions is that there is no real answer yet. By the end of 2013, only 19 states had even introduced PFPB legislation and the only one to pass anything, Oregon, merely passed a bill beginning studies into the potential effectiveness of the system (“What is”).

Yes, there would be some students who end up paying more. But that would also work to offset those that pay less. The inherent virtue in a plan such as this is that it attempts to ensure that students are only on the hook for what they can reasonably afford to pay as the move beyond college. It is a system that naturally adapts as a young adult moves through the professional ranks and begins to make a more substantive living. The cost-effectiveness is still being debated and has yet to be entirely established. Oregonian lawmakers will make a decision on whether or not to start allowing students enrolling in college to utilize PFPB, but that won’t happen until 2015 at the earliest. The primary holdup is that policymakers are awaiting the results of studies into cost-effectiveness. But the states may not be alone in their endeavors, as Senator Jeff Merkley (D-OR) introduced legislation last November to allow states to use funds for federal student loans toward PFPB programs (“Can”).

It’s too early to say whether or not this is the right solution, but PFPB would undoubtedly be a step in the right direction. It would free future students from the non-dischargeable debt and make repayment manageable. It would open up colleges to students who previously would not have received sufficient loans or aid to attend a more prestigious university. Regardless, something must be done. In an era where every issue is treated like a five-alarm fire, it has become difficult to call attention to the problems that truly do need it. In the case of student loans, the government is finally waking up. Although there is a lot that needs to be done to help those already struggling with debt, Pay Forward, Pay Back plans offer a golden opportunity to save upcoming students from similar burdens.

 

References:

 

 

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