Student Debt Crisis —Part 1

This is Part One of a two-part series on the Student Debt Crisis now facing America. In this piece, we’ll look at how bad the problem really is and how we got here. In Part Two, we’ll look at proposed fixes and how with some good planning you can avoid or at least take steps to minimize becoming a student loan debt casualty.

When I packed up for my freshman year of college at Baylor University thirty-one years ago last month, I did so with a lot of gratitude. For years my mother reminded my twin sister and me that she would do everything she could to put us through school. She was a school teacher and a divorced, single parent for most of our childhood, but we always knew that one of her goals was to send us off into the world with a college education and no debt. She didn’t make much teaching, so there wasn’t much saved up when we graduated from high school. This meant loans, and I remember watching her sign all that student loan paperwork on our behalf, knowing that I owed it to her to do my best in college. It took a number of years after I graduated for her to pay off those school loans, but she did it. Thanks again, Mom.

Those loans were paid off more than 20 years ago, and a lot has changed since then in the higher education financing world.  Unfortunately, a whole lot of the change hasn’t been for the good. I don’t know the exact data on how many students from my generation borrowed for college, how much they borrowed, and what percent repaid their loans in full, but for students and their parents who have borrowed for college over the last decade, the data is bad – catastrophically bad, and the fallout from this student loan debt crisis may take a big toll on our economy.

It’s hard to imagine the student-loan industry and the burden of student debt getting any worse for taxpayers and borrowers than it is now. According to the Education Department, more than 40% of the 43 million Americans who have borrowed more than $1.3 trillion from the government’s main student-loan program aren’t presently making payments or are behind on more than $200 billion loaned to them. Almost 4 million, about 10%, of those borrowers, were in default as of July 1, 2016. “Default” is defined as having gone at least a year without making a payment. More than three million more of those borrowers were delinquent as of that date. “Delinquent” means being at least one month behind on payments. Additionally, another three million were in “forbearance” or “deferment”, meaning they received permission to temporarily halt payments due to a financial emergency, such as lacking the means to make payments due to being unemployed or not making enough at their present jobs. Bear in mind that these figures don’t include all of the student loan borrowers still in school and those with government-guaranteed private loans.

This explosion in unpaid student debt comes on the heels of a more than decade-long boom in student loan borrowing. Now the fear is that millions of these borrowers may never repay, possibly leaving the Federal government – aka the U.S. taxpayer – on the hook for what some estimate may be more than $500 billion. Sadly, the data shows that millions of these borrowers aren’t even trying to pay on their loans. According to Navient Corp., a major student loan servicer, 90% of borrowers they attempt to contact after falling behind never respond to their inquiries and more than half never make a single payment before defaulting. That might be a little more understandable if the attempted contacts were infrequent, but Navient claims they attempt to reach each borrower on average 230 to 300 times - through letters, emails, calls and text messages – over the first year that payments become due. Navient’s research also shows that some borrowers aren’t repaying their loans even when they can afford to do so. Borrowers seem to prioritize other bills - such as car loans, mortgages, and utilities - over paying on their student loans. Of course, many borrowers are truly unable to make payment on their student loans as they lack sufficient income, especially those who dropped out of school and never secured the degree that was supposed to get them that higher paying job in the first place. Surprisingly though, the average borrower in default owes relatively little—generally less than $9,000, but student advocates claim that even relatively low loan balances can seem huge to someone unemployed or in a low-paying job, and with other expenses to juggle.

So, how did we get here? The simplest answer is that about 15 years ago, the federal government decided to invest heavily in programs whose goal was to upgrade our nation’s workforce, and thus its economic productivity. Billions of dollars were spent financing the tuitions and other educational expenses for millions of student loan borrowers. Enrollment in U.S. colleges and graduate schools soared 24% between 2002 and 2012. Millions more attended trade schools that award career certificates. A large share of the federal dollars spent came through grants, low-interest loans and loan guarantees. Total outstanding student debt—almost all guaranteed or made directly by the federal government—quadrupled between 2000 and 2016.

Another contributing factor to the crisis began in 2010 when the Obama administration dispensed with the private intermediaries that had administered federal loans since the 1960s and replaced them with a new institution known as Direct Lending, to be administered directly by the Education Department. At the time, the Congressional Budget Office estimated that Direct Lending would save the government $62 billion between 2010 and 2020. However, the CBO’s estimate was hugely miscalculated as program advocates failed to anticipate how two other Obama-backed college affordability initiatives – “Income-Driven Repayment” and loan forgiveness - would create a cataclysmic hit to the federal student-loan program’s finances. There are several Income-Driven Repayment programs, but they all essentially work the same way. Qualifying student borrowers who are struggling financially are allowed to make reduced payments, or even defer payment on their loans altogether, for a period of time. While in the short term this can really help the borrower, over the long run it can actually make things worse because their loan balances continue growing due to accumulating interest. Today, more than 20 million borrowers find themselves in this predicament.

However, the most significant explosion in student debt might still be to come. In 2007 Congress passed the Public Service Loan Forgiveness Program, which allows borrowers who went to work for non-profit organizations or government agencies to have their loans forgiven after 10 years of service in those jobs. It’s foreseeable that tens of thousands of teachers, firefighters, social workers, police officers, doctors, and nurses who meet their employer’s definition of “full time” might qualify to have their loans forgiven. While this would be a great deal for those indebted student borrowers, it just means that much more debt that the federal government will have to assume, which ultimately ends up at the feet of the U.S. taxpayer.

So, as you can see, the problem is immense. Is there any way out of this mess? That’s what we’ll explore next month in Part Two of this series.