The Student Debt Crisis

August 7th, 2013

A Growing Burden

Student loans are supposed to make getting a higher education easier, but too much debt can be a crushing burden. “It’s like carrying a big backpack filled with bricks all over the place, and I can’t ever let it go,” says Amy Diede. “It’s always there. I may get rid of a few bricks, but there’s always going to be more. I don’t see the student loans going away.” Amy and her husband, Christian, owe more than $82,000 in student loans. Instead of owning a home, they live in a 400-square-foot RV. They were on food stamps for a time after Amy received her master’s degree in psychology. Writing in The Guardian, Cryn Johannsen echoes similar hardships: “Here’s a painful reality: student loans put millions of Americans in a precarious situation—if they lose their jobs, become sick, or have a sudden emergency that leads to time off work, any of these things can lead to total financial ruin.”

Student loan debt is growing rapidly. From late 2007 until early 2013, student indebtedness grew from $550 billion to nearly $1 trillion, according to a report from Congress. The Joint Economic Committee reports that two thirds of recent college graduates have student loans, with an average balance of over $27,000. The average debt for recent graduates is 60 percent of their annual income. “The rise in the amount of student loans could harm the economy because individuals who shoulder heavier debts could delay purchasing a home, car and saving for retirement,” writes Adolfo Flores in the Los Angeles Times. “The roughly two-thirds of U.S. students who take out loans to finance their college education can end up in a situation most resembling the historical concept of indenture,” writes David Dayen in an article at “Colonial indentures would trade years of labor for the opportunity of transportation to the New World. The indentured could not alter the terms of the contract, no matter their circumstances. One way or another, the debt would get paid. This is basically how student loans work,” Dayen explains.

Recent college graduates had the misfortune of entering the job market during the Great Recession and the slow economic recovery in the years following. Many have found it difficult to find work in their field of study. And for those who dropped out before graduating? “Student loans aren’t extinguished for those who don’t finish college,” Dayen writes. “Instead, the debt becomes a burdensome reminder of this early mistake in life.”

Even some people who are well-connected are racking up student debt. In testimony before Congress, Federal Reserve chairman Ben Bernanke said that his son will likely graduate medical school with $400,000 in student loan debt. Bernanke told Congress that regulators need to give “careful oversight” to the rapid growth of student loan debt.

Increasing Defaults

Not only is the total amount of student loan debt growing, so is the number of people defaulting on their student loans. In fiscal year 2011, 9.1 percent of borrowers defaulted on their student loans within two years of their first payment, according to the US Department of Education, up from 8.8 percent the previous year. A student loan is considered in default if the borrower has not made a payment for 270 consecutive days.

Default rates have steadily increased since 2007, a trend that is tied to the downturn in the economy, according to Justin Draeger, president of the National Association of Student Financial Aid Administrators. “Clearly those with a college education are better able to get jobs than those without one,” says Draeger; but even so, the unemployment rate for college graduates remains high. “People say ‘I don’t have a job, how am I ever going to be able to make payments?’ ”

For-Profit Struggles

A congressional investigation found that for-profit colleges have the worst default rates. The three-year default rate for private, non-profit colleges is 7.5 percent; public colleges, 11 percent; and for-profit colleges, a staggering 22.7 percent. For-profit institutions are more expensive than public colleges, with bachelor’s programs costing 20 percent more and associate’s degree programs costing four times more. In addition, 54 percent of students at for-profit schools drop out before completing a degree. For-profit colleges also have the highest student borrowing rates.

Some for-profit colleges artificially keep their default rates low so they can continue receiving taxpayer funding. Some schools routinely put delinquent borrowers in forbearance, which is not reflected in the default rate. Even borrowers who may be better off seeking other payment plans are automatically put in forbearance. While payments are postponed when a loan is in forbearance, interest continues to accrue and is added to the loan balance. “Internal documents and investor communications spell out how some companies are using forbearance to delay defaults until the school is off the hook while leaving borrowers even more likely to default,” says Debbie Cochrane, research director at the Institute for College Access & Success. Cochrane adds that such tactics “put both students and taxpayers in harm’s way.”

Available Help

Those who are struggling to make their student loan payments can get help. Income-Based Repayment (IBR) can lower the monthly federal student loan payments. This plan is an option for borrowers who have what is referred to as a “partial financial hardship.” Most types of federal student loans are eligible for the IBR plan; private education loans and PLUS loans made to parents are not eligible. Under the IBR plan, monthly payments are based on income and family size, the modified plan is adjusted annually if there are changes to income and/or family size, and the payments are never more than under the standard ten-year repayment plan and usually lower than other plans. The payments are made over 25 years instead of the usual ten years. Any balance remaining after making payments under this plan for 25 years may be forgiven. Also, those working full-time for a public service organization may be eligible for loan forgiveness after making 120 on-time monthly payments (or ten years of payments) under the IBR plan. There are some disadvantages to the IBR plan. While the monthly payments are reduced, repaying the loan takes longer; so borrowers may wind up paying more interest over the life of the loan than under other repayment plans. Borrowers must submit annual documentation in order to set the payment each year. Also, borrowers may have to pay taxes on the amount of the loan that is forgiven after 25 years. Borrowers interested in the IBR plan should contact their loan servicer. Even if IBR is not the right option for a borrower, the loan servicer can discuss other repayment options, including loan consolidation or stretching out the payments over a longer period. But many who are struggling don’t seek help. Some are so stressed and focused on finding work or earning enough to make their student loan payments that they fail to look at options that might help them. “It’s [often] someone who has student loan debt who didn’t complete school and falls off the face of the earth or puts their head in the sand and doesn’t deal with any of the payments,” says Justin Draeger. Ignoring the problem is a big mistake, according to Draeger. Unlike other debt, federal student loans cannot be discharged in bankruptcy; the debt doesn’t go away. When a borrower defaults, the fees add up and can ruin that person’s credit. Betsy Mayotte of the nonprofit organization American Student Assistance offers advice to those struggling to repay their student loans: “Pick up the phone and call and find out what options are available to you. And don’t just think about the next couple months. Try to come up with a plan––such as income-based repayment or public-service loan forgiveness, or graduated repayment––that will actually work with you over the next 10 years and grow with your lifestyle.”

How Can Churches Help?

As Christians, we are called to care for one another and to find ways to lighten burdens. Do you have college students in your church? Do you know their stories? Have you thought of offering grants or scholarships to help with student loan debt? Do you have ideas about other ways you can offer encouragement and support? Your church may want to consider some of the options offered through the various programs mentioned in “Helpful Links.”

Be sure to check out FaithLink, a weekly downloadable discussion guide for classes and small groups. FaithLink motivates Christians to consider their personal views on important contemporary issues, and it also encourages them to act on their beliefs.

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