Have you paid off your student loan yet? If not, you’ve got lots of company. In 2012, total student debt in the United States reached $966 billion, a tripling over the previous eight years, according to the Federal Reserve Bank of New York. Current estimates put the figure even higher — more than $1 trillion. Over the past 35 years or so, the cost of college has also ballooned by a staggering 1,120 percent, so it’s no wonder that people are questioning whether higher education is really worth it.
The consensus, however, is yes. Going to college is still a good investment. You’ll earn more: On average, college graduates aged 25 to 34, who are employed full time, year round, make 50 percent more than their high-school-educated peers. Over a lifetime, that college diploma will earn you about $500,000 more on average, even after factoring in the cost of school.
And yet many graduates are withering under the weight of their student loans — a problem that could potentially negate any economic benefit of going to college in the first place. So, how do we ease the burden for students who need to borrow money to pay for their education? NationSwell convened a panel of experts to talk about how to fix the student loan system, as well as ways to help families spend their education dollars more wisely.
Read on for our experts’ thought-provoking ideas, and then join the conversation by leaving your own ideas in the comments box.
Fellow, Brown Center on Education Policy at the Brookings Institution
NationSwell: What can be done to fix our broken college loan system?
Beth Akers: I’m not sure it’s entirely broken, but there are two areas where we can make some improvements. First is on the front end. Students are going into college and blindly taking on debt without a lot of information about the investment they’re making or the amount they’re taking on. The [Obama] administration has taken the first step toward solving that problem with the college-ratings system, and [once they] incorporate earnings information into the data available to prospective students, that will help families make wiser decisions on the front end.
Second, on the back end, a lot of these debts are actually affordable. For the most part, students are making good investments in higher education that do pay off over the long run. In theory, it shouldn’t be problematic for the majority of students to repay these debts, if their repayment period is over a sufficient period. So, what we need to do is focus on creating a repayment program for federal loans that makes the process more painless for borrowers. One way is through income-based repayment. Right now, this program is available only to a certain set of students [with low incomes]. I don’t think it’s crazy to expand eligibility for that program to people with larger earnings so that on average, people are repaying their debts over a longer period of time.
Like everything in education, there are a lot of barriers to information. It’s a very complex — perhaps unnecessarily complex — system. The result of that is that people underutilize the benefits that are available to them. We see that in a lot of different ways. [For example], students are taking on private student-loan debts, when they’re still eligible for government loans at a much lower interest rate. There’s evidence that people are not utilizing the programs properly and that they don’t have the information necessary to make good choices.
NS: How can students and parents be smarter about spending college money?
BA: You have to make wise decisions about where you spend your money and how much you’re willing to spend. There are a lot of great institutions that provide a good return on investment for students. But there are others that do not. The government is not in the business of telling students where to go, and as a result, the responsibility falls on parents and students.
One thing [prospective students] should look at is if people are actually graduating from the school. Graduation rates across institutions vary widely, and that’s a great indicator to see if the institution is doing at least the minimum of what they should. If students aren’t graduating at a sufficiently high rate, then you might want to be skeptical about spending your money there.
In the future, it would be great to have employment information on the college scorecard, and that’s something that the administration is working on. Once it’s there, I would advise strongly that prospective students use this to make sure that they’re going to see a return that will justify taking on debt to go to college.
Choice is good, right? We have all these institutions, and students can pick a place that’s a perfect fit for them. That’s a really great environment to be in. Unfortunately, that also means that you have a lot of homework to do. There are so many options and the consequences are really very great for making the wrong decision.
Senior Policy Analyst, The Institute for College Access & Success
NS: What can be done to fix our broken college loan system?
Jessica Thompson: I think the No. 1 way is to reduce the need for students to borrow on the front end. That’s going to involve two things: First, increasing our investment in grant aid, especially the federal Pell Grant — which now covers the lowest share of costs at a four-year public institution than it has since the program started — as well as state grants and institutional grants. The other piece is to restore state funding to public higher education, which has played a large role in shifting costs of public higher education from the public to the students and families.
If students do need to borrow some money in order to get to and through college, we have made several recommendations for improving the loan system. First, the current system is far too difficult to manage and understand, and can lead to suboptimal decision-making. There are currently four different income-based repayment plans for loans, and several non-income-based plans. It’s difficult to figure out what you qualify for and how. We recommend streamlining the repayment process so there’s only one income-based repayment plan that any student can opt into, and a limited menu of traditional plans, so that it’s easier for students to understand. We are big proponents for income-based repayment. It’s a crucial safeguard for borrowers who end up being unable to manage their loan payments. However, we don’t support making it the automatic or default repayment plan, because it’s not the best plan for all borrowers.
Additionally, we need to improve student-loan counseling before, during and after college. This is a great opportunity for us to figure out what actually works to try to empower students to get the information they need in a way they can understand, enabling them to make good choices about borrowing and repayment.
Lastly, we have to educate people about private student loans and make sure that we are reducing the extent to which students and families are relying on them. These loans have variable interest rates, require co-signers, are not dischargeable in bankruptcy as of 2005, and don’t have repayment protection like income-based repayment, deferment and other options that federal student loans have. It’s the riskiest way to pay for college.
We found that over 40 percent of students who take private student loans have not maxed out their federal loan eligibility. Because of this, we support mandatory certification, which would require banks to go through higher ed institutions. In this case, the institution has the ability to counsel the students and tell them whether or not they still have federal student loans available. Currently, institutions don’t automatically package your maximum federal student loan availability in initial financial-aid offers. Many students just look at what the package offers and assume that anything beyond that, they’ll have to find another way to cover. In reality, they may have more federal loan eligibility.
NS: How can students and parents make wiser decisions about college?
JT: I don’t want to leave the impression that students and parents bear the sole responsibility for finding their way through this very complex and confusing process. But I think that actively seeking out as much information as possible to help make the best decisions for students on the front end — what types of schools to apply to and how many schools to apply to — can help maximize the benefits for the student.
Also, taking advantage of consumer tools like the net-price calculators, which all colleges now have on their websites, financial aid shopping sheets, which allow you to compare financial aid offers to one another, and the college scorecards, which give you basic metrics about each institution, can help arm students and families with information they need to make savvier decisions.
Students should also avoid private loans and certain types of institutions that data clearly show leave students worse off than before they started school. Frankly, the for-profit college sector has a poor track record in that regard. But also [families should] look at the repayment options and know that having to borrow some money is not a reason not to go. In the long run we still see that if you complete school and receive a quality education, this is an investment that will pay off. We want to make sure people aren’t scared away from higher education. It’s absolutely still worth it.
Policy Director, Assets and Education Initiative; Associate Professor of Practice, School of Social Welfare at the University of Kansas
NS: What can be done to fix our broken college loan system?
Melinda Lewis: A lot of the conversation is about how much people pay in interest rates or the sheer amount of debt that students are taking on. Those are valid points, but we don’t think that they’re going to lead us toward the policy changes that are needed. Instead, we start by asking if the current debt-dependent financial-aid system and the rise in borrowing to finance education are eroding the power of higher education to facilitate economic mobility and greater equity in society?
These are large sums that students are borrowing, and when you look at them in comparison to earnings differential between a student who doesn’t go to postsecondary education and one who does, then clearly this is an amount of debt that’s “worth it.” But is the student who goes to college and obtains a degree and finances that education with student debt getting the same return on his or her college education as a student who gets the same degree but is able to finance his or her education without debt? We believe the answer is no. Therefore, there is reason to believe that our reliance on student debt is making it more difficult for an entire generation to use higher education as a platform for greater economic mobility and prosperity. In fact, a study published in November found that households with outstanding student debt had 63 percent less net worth, 40 percent less home equity and 52 percent less retirement savings than those with equivalent education but no outstanding student debt.
If those are some of the effects of student loan debt, and student borrowing is going to be a part of the financial aid landscape, then what we need to do to fix the system is determine how to help post-college leavers — whether they’re graduates or not and we hope they are — accumulate assets even while they’re dealing with their debt obligations. Otherwise they will be hindered financially potentially decades into the future because of that student debt, particularly because it hits them at a critically important stage of their economic lives, when if they don’t build assets then, they’re going to be at a disadvantage in the future.
You know what every financial planner says, if you put a little bit of money away now, it’s better than trying to save a lot in the future. And that’s what a lot of these college leavers aren’t able to do because they’re diverting so much of their income to their debt maintenance. That means we’ve got to think about ideas like delays in repayment, so that individuals are able to purchase homes. Or maybe looking at more income-based repayment measures, where we divert some of those payments to an escrow account, so they’re simultaneously building assets. Quite honestly, we’re not spending enough time parsing out the different policy mechanisms that could help individuals and households build positive financial assets to compensate for the drain that the outstanding student debts represent.
Evidence about the inadequate accumulation of assets suggests that we could have a far bigger problem in the future. If we know that Americans across the board are not saving enough for retirement, and that’s a pretty well-accepted economic fact, and that households with student debt are saving 52 percent less that those that don’t have student debt, what are we going to see when this generation reaches retirement age? How can we expect this generation that is dealing with the effects of their own student debt to be adequately preparing for their own children’s college education?
NS: How can students and parents better prepare to pay for college?
ML: It’s really quite clear. We have a new paper coming out soon that looks at the ability of parental college savings to reduce student debt. It kind of sounds obvious, right? If your parents are saving for your college, you have to borrow less. But there hadn’t been any research done on it. Our analysis finds that students whose parents were saving for them have around $3,000 less in student debt. In this particular data set, what that suggests is that the way that students and parents need to prepare for higher education in this debt-dependent, financial-aid landscape, is to save.
This is difficult to do, not only because we have relatively low college savings across the board, but also because we don’t have adequate vehicles to facilitate college savings. There are not enough incentives, especially for those who are lower-income and don’t benefit equitably from the tax-based incentives that are a part of things like the state 529 college savings plans. But it’s going to be even more difficult if parents are paying their own student debt at a time when they should be saving for their children’s future education. It becomes very difficult to imagine how, without some significant policy changes, we can expect families to get out of this debt cycle.
That’s why we need to take a step back and look at what the debt effects are on multiple levels. We need to build structures to help families save. How can we link college savings opportunities with employers? How can we make our existing tax credits for higher education refundable so that low-income families can benefit equitably? How might we explore something like what they do in Canada and the United Kingdom, what some states — like Maine, North Dakota, Nevada — are doing, in making deposits in children’s college savings accounts? Governments are structuring this asset-based approach to financing college a little bit differently, but all with the same rationale: We can use the same net resources, timed differently and delivered on the front end, instead of as a guaranteed debt at the point of enrollment and get better outcomes not only in college, but also for those who leave college, therefore enabling higher education to play the role that it’s really designed to in our society and our economy.