The college class of 2010 now has a dubious distinction. Its graduates who had student loans owed a record-high average of $25,250, up 5.2 percent from the previous year, according to a new report from the Project on Student Debt, a nonprofit advocacy group.
Last month, President Obama announced a plan to make it a little easier for 1.6 million college graduates to repay their government loans, recognizing the drag that $1 trillion in student debt is placing on the economy.
In the early 1990s, most college students did not need to take out loans. But in 2009-10, 56 percent of full-time undergraduates at public colleges were borrowers. At private nonprofit schools, 65 percent had loans. For the first time in our history, student loan debt has exceeded credit card debt. One reason is that over the last 25 years, tuition has risen four times faster than the Consumer Price Index. In California, public universities enacted the highest average tuition increase, 21 percent, of any state last year, according to the College Board. With states putting up less money to subsidize higher education, more of the cost burden has shifted to students.
The federal government is trying to accommodate the demand, pouring $104 billion into loans last year. At the same time, students are becoming less able to repay. The percentage of borrowers defaulting (and thus ruining their credit) rose 25 percent last year. High debt loads affect career choices and cause many graduates to defer getting married, buying homes and having children.
Starting with next year's graduating class, Obama wants to reduce payments to 10 percent of discretionary income for graduates who apply to the government's income-based repayment plan. That is an immediate reduction from the 15 percent that is in effect today. But that only accelerates the phase-in of repayment terms that would have gone into effect in 2014 anyway. Under Obama's plan, after 20 years of payments, the rest of the loan, if any is still unpaid, would be forgiven. Today, graduates are expected to pay for a maximum of 25 years. The administration also is offering minor changes in repayment terms for those who graduated earlier.
This is welcome. But it doesn't go far enough. The president should be talking about the effect of student loan debt on the economy as he campaigns for his jobs agenda. Even more important, he should take advantage of the pressure from the Occupy Wall Street protests for relief on this debt and send Congress legislation that offers a much bolder, systemic and long-term solution: income-contingent loan repayment.
Under such a proposal, loans would be offered at a single interest rate for all borrowers; payments would be automatically withheld from the borrowers' paychecks by their employers and would be managed by the IRS, just as income taxes are collected. As in the president's proposal, 10 percent of a borrower's earnings would go toward their student loans. The more they earn, the faster they would repay their debt. Such a system would not only help graduates manage their student loans, it would save the government money because it would drastically reduce delinquencies and be far easier and less expensive to administer.
Right now when students need to borrow, they and their parents have to navigate a maze of financing options and an alphanumeric soup of loan types, limits and interest rates. Once students graduate, they face an equally baffling range of repayment options that involve various private sector "servicers" such as Sallie Mae. The income-based repayment option that Obama wants to accelerate was a step in the right direction. But it requires borrowers to apply every year and write one or more checks every month. Only 450,000 of 36 million borrowers take advantage of that program.
In contrast, income-contingent loans would be universal and automatic. Everyone who took out a student loan would be put into the program and, because their loans would be tied to their Social Security numbers, the repayments would come out of their paychecks, just as their income, Social Security and Medicaid taxes are withheld.
Australia and Britain have had great success with their income-contingent loan programs. In Britain, more than 98 percent of loans are repaid.
This idea is not entirely foreign to the United States. Child support payments are routinely withheld by the IRS. Two decades ago Rep. Tom Petri (R-Wis.) remarked in a congressional hearing that an income-contingent loan repayment system would be "far simpler for schools and the government to administer, far simpler for students at application, and more manageable and supremely flexible during repayment, at the same time virtually eliminating the default problem and saving immense amounts of money."
Back then, the IRS was just moving to electronic processing of tax payments and wasn't interested in taking on the new challenge of collecting on student loans. Now, however, the technological barriers are gone and, with the large increases in student debt burden, the political climate for reform is ripe.
There is a moral hazard, however. Income-contingent loans could encourage money-hungry colleges to boost tuition even further, so Congress should also provide incentives to colleges to keep costs down. Loans awarded by colleges that didn't keep tuition hikes within limits could be barred from the income-contingent loan program, which could drive students away.
At a recent congressional hearing, Republicans and Democrats alike expressed great concern over student debt load and default rates. Petri, still a member of the House Education and the Workforce Committee, proposed revisiting his 2-decades-old income-contingent loan idea.
Obama's proposal is certainly a step in the right direction, but we need Congress to go further. With nearly $1 trillion in student debt on the line, the country can't afford not to act.
This commentary first appeared in the Los Angeles Times, November 10, 2011.
Follow Richard Lee Colvin on Twitter: www.twitter.com/R_Colvin
Curtis Arnold: Premium Credit Cards: Golden Goose or Golden Noose?
Californians are reeling from 19% unemployment (includes: those forced to work part time; those no longer searching), Faculty wages must reflect California's ability to pay, not what others are paid.
Current pay increases for generously paid University of California Faculty is arrogance. Instate tuition consumes 14% of Ca. Median Family Income!
Paying more is not a better education. UC Berkeley(# 70 Forbes) tuition increases exceed the national average rate of increases. Chancellor Birgeneau has molded Cal. into the most expensive public university.
UC President Yudof, Cal. Chancellor Birgeneau($450,000 salary) dismissed many much needed cost-cutting options. They did not consider freezing vacant faculty positions, increasing class size, requiring faculty to teach more classes, doubling the time between sabbaticals, cutting & freezing pay & benefits for chancellors & reforming pensions & the health benefits.
They said such faculty reforms “would not be healthy for UC”. Exodus of faculty, administrators? Who can afford them and where would they go?
We agree it is far from the ideal situation, but it is in the best interests of the university system & the state to stop cost increases. UC cannot expect to do business as usual: raising tuition; granting pay raises & huge bonuses during a weak economy that has sapped state revenues & individual Californians’ income.
Opinions? Email the UC Board of Regents marsha.kelman@ucop.edu
Tuition has increased 439% from 1982 to 2007. In the last year alone it has increased an average 8.3%. Colvin appears to believe the solution is throwing more money at the problem then having the government simply forgive the individual debt.
I would like a detailed explanation why my highly affordable education became highly unaffordable for my children at the same institution. Why have community colleges' fees kept pace with inflation but four year universities gone off the deep end?
As long as students can continue to borrow ever increasing amounts which they know will never have to be completely paid back, universities have no impetus for cost containment. The same can be said about the health care industry. As long as someone else foots the bill, the recipient of the service has no motive to comparison shop.
If the most popular option became attending community college and living at home for the first two years rather than moving into a dorm hundreds of miles away, you better believe universities would start paring their bottom lines to the bone to attract students.
Banks issue loans to universities who are happy to take the money for construction, corporate projects, management, and teaching. The money mostly doesn't go to teachers, so there needs to be more criticism of top administration at top universities. They lead US education policy.
Banks issue loans on a fractional reserve basis so they can electronically add ten, twenty, thirty times their money base to an account assigned to a student. These loans are guaranteed by the government so they are risk-free. Banks repackage the loans into bonds, sell them, and make profit before a single cent is paid on the underlying loan. The student is basically a vehicle for the bond.
The higher the tuition and living costs, the more government-guaranteed money for corporate university projects and for paper profits on bonds.
It's not "supply and demand". Yes, there is increased demand since real wages have been falling for decades, so many go to university to get higher wages, but debt soaks up every wage increase. We're at the point when the entire wage for some people is assumed to go toward debt payment. Of course, banks and universities have already made their profit.
The answer is to fund public higher education, expose the government subsidies, and cut out the banking middleman.
We are debt slaves. What's the real answer?
My son's education was paid for by the US Navy. My daughter lived at home and went to the local community college for the first two years and then transferred to the local campus of the state university--still living at home. She paid half the tuition not covered by scholarships through working. The other half was highly affordable for us to pay as it was billed.
Did both of them want to go to a big U in a major metropolitan area? Of course. However, we held firm. No debt. Period. Unless your child wants to work for a big name law firm in New York or LA or do brain surgery at Johns Hopkins the local U is probably a far better option.
Not to mention, at a smaller local institution students get far more individual attention than they would in a big school where they are just one more anonymous face in a classroom of hundreds.
1) Your experience of no debt is a testament to the value of public higher education. Your family already had public primary and secondary education so there's no reason that they shouldn't have the same for their final tertiary education. Both military and state schools are paid by the government and that has been good to your family. Now your children can contribute to society and help themselves without the burden of debt.
2) Some fields, such as brain surgery, are not necessarily taught in the schools that you mentioned. To make the education system completely fair to the lower and middle classes, i.e. the majority of people, it is only right to make those fields available to everyone. That's why a systemic solution has to be found, not just an individual solution.
Most likely, some of that solution must include taxing the rich more and taxing the middle and lower classes less. Taxes on the rich have only gone down since the 1950s but their income and assets have exploded in value. Unfortunately, both major political parties protect the rich and expect the lower and middle classes to make up the difference. We're living the result of those policy disasters.
By the way, a market based variant of this idea was suggested by Milton Friedman several decades ago.
"The federal government is trying to accommodate the demand, pouring $104 billion into loans last year."
Who is making interest off these loans. I already know the answer, it is Sallie Mae and Nelnet. Take the middle man out of the equation because they have no business being there. Give that 104 Billion to the schools and universities and make education free like it is in Europe. This country is so morally bankrupt when it insists on bankrupting it's youth and citizens for education which should be a right, not a privilege.
SS/Medicare withdrawal 9.5%
Student loan withdrawal 10.0%
Fed Income tax hold 15.0%
State Income tax hold 3.0%
So, students will actually begin earning from their own labor about the last hour of Tuesday every week. Of course, that doesn't include sales tax, property tax, fuel tax, oops, that pushes labor freedom into late Wednesday.
More than half a week working for free before the student earns a cent to call his own. Why would anyone work at all in this environment you have pictured for us?
And what the hell is 'Executive Director of the Education Sector' anyway? What qualifications do you have to recommend that a vibrant freedom loving people be reduced to slavery for half of every week?
Frankly, the Universities themselves have nonprofit status and huge endowment funds - as a price for participation in the federal student loan program, make the universities loan half of the tuition bill from their own funds. In this way you create a self-correcting system -- colleges who create a lot of graduates that can't find jobs and repay their loans will cost the college money.
Part of why he owes so little is that it is a state run university.
And what field does a Philosophy major go into?