For millions of Americans, the door to employment has been opened by college degrees, many of which have been financed by student loans. But these are now the largest form of unsecured household debt in our country.
When the subprime mortgage crisis sent the economy into a downward spiral, the national focus was aimed at trying to better protect our financial system and consumers. This sparked the creation of government agencies such as the Consumer Financial Protection Bureau (CFPB) that works to both inform and help change policy. Recently, there has been a new focus on student financial aid debt, which has grown to more than $1 trillion just this past year.
During the credit bubble, lending standards were loosened, even for private student loans. And because there were lenders who marketed directly to the student rather than through financial aid officers from schools, experts were unable to review borrowers’ financial needs. This resulted in many students taking out much more than what was needed for tuition with the assumption that their new jobs would help them pay the money back.
During the course of the past 10 years, wages for new college graduates have declined by 5.4 percent, and yet the cost to attend colleges and universities in our nation has risen.
According to the 2012 Annual Report on Wages Earned by Arizona University System Graduates, those who completed a degree were able to make more money than those who did not. The report showed their annual average wage was 15 percent higher – $51,327 compared to $44,490 – for all similar workers in Arizona. Of these total graduates, however, only 66 percent were able to actually find employment.
It is estimated that since 1979, the cost of fees and tuition has risen tenfold, which has dramatically outpaced wage growth, healthcare costs and inflation. Despite these numbers, the number of college students nationally has nearly doubled in the past 20 years, rising from 13.8 million to more than 21 million.
Student loans fall into two categories: federal and private. Federal student loans add up to some $850 billion in debt; whereas private student loans account for more than $150 billion. According to findings by the CFPB, the average student who graduated in 2010 left school with an estimated $28,000 in debt. Even public school students incurred as much as $22,000 in debt.
“In communities such as Flagstaff, Sedona and Winslow, teachers receive a mid-income salary but are coming in to their careers with a lot of debt,” explained CFPB student loan ombudsman Rohit Chopra.
Chopra spoke before Congress and delivered testimony to the Senate on his concerns regarding student financial aid debt. He continued to explain that although some dynamics are quite different between what took place with the subprime loan issues and financial aid, there are still some worrisome similarities and concerns.
“These individuals have to sacrifice in other parts of their household just to stay afloat. There are millions of graduates who are unable to put a down payment on a home, automobile or a business, which may be a drag on consumer business.”
He says the CFPB has a set of tools available online that can help, however these will only assist individuals who took out federal loans. “There are still $150 billion in private loans out there that need assistance.”
On the local level, students at Coconino Community College borrow an average of $5,250 while completing their undergraduate studies. The federal loan repayment on $5,250 during a 10-year period adds up to $60.42 a month. This loan amount is considered low compared to loans to attend private colleges and four-year universities.
CCC also has taken steps to reduce the debt students are taking on. In order to receive a student loan, CCC students must complete a budget worksheet that analyzes their projected earnings after college versus their anticipated consumer and student loan debt.
“In most cases, we find that this is the first time students have ever tried to build a budget for themselves,” said CCC Director of Student Financial Aid and Veteran Services Bob Voytek. “Our financial aid specialists assist students with their budgets so they can understand the reality of living under a budget and assuming loan debt. The budget worksheet ends up being a crash-course on financial literacy for many students.”
Additionally, CCC is among 17 colleges selected to participate in the U.S. Department of Education’s initiative to limit unsubsidized loan amounts. Schools that are participating in this experiment reduce the amount of unsubsidized (6.8 percent interest rate) loans that students receive by $2,000 or more. The goal of this initiative is to reduce the amount of loans students at low-cost colleges take out so they may have an easier time paying their debt in the future.
“CCC is at the cutting edge of helping to solve the national student loan debt issue,” said Voytek. “Last year, the national student loan debt hit $1 trillion, which is more than credit card and auto loan debt.”
“The increasing level of student loan debt has become part of the national dialogue about economic recovery and the value of a college education,” said Northern Arizona University Public Affairs Director Tom Bauer. “NAU strives to remain affordable and accessible, and remains an excellent value in the marketplace by keeping costs low and offering reduced tuition through its extended campuses and online options.”
NAU offers several programs to help students with both finances and information. For example, NAU’s Pledge Program sets tuition at a single rate for up to four years, allowing students and their parents to make long-term financial plans and giving students the opportunity to avoid tuition increases if they graduate on time.
Bauer also stressed that NAU offers an extensive number of scholarships, financial aid packages and student employment opportunities in order to reduce the overall financial commitment and provide multiple pathways to pay for college.
Although there are a variety of repayment plans, loan forgiveness outside federal loans is rare. In December, the Department of Education began the Pay As You Earn plan, helping struggling students repay their debt at a more manageable rate.
For those looking to work in public service, the U.S. government also offers a program that will forgive the balance of a borrower’s eligible loan after 120 qualifying payments have been made. It is rare, however, for a student to qualify for this because most will have paid off the loan by the time this program can begin.
“It is important that borrowers understand, including those who seek private student loans, what they are doing,” said Chopra.
As more programs become available, the CFPB continues to work to improve the private student loan market for students, schools and lenders. FBN