A college degree is supposed to pave the way to a better life. It didn’t work out that way for Judith Tuck.
Tuck graduated from the University of Arizona in 1996 with a master’s degree in rehabilitation counseling and $44,000 in student loans. She had every intention of keeping up with her loan payments, but after a series of low-wage jobs in her field, her debt began to snowball. Tuck, a 73-year-old widow, now owes more than $136,000. Her wages have been garnished and she faces losing everything, including her home.
“The only good thing about student loans is that the day I die my children will not have to pay for them,” she says.
Outstanding student loans topped $1 trillion last year, exceeding the total amount of credit card debt. Thousands of borrowers are postponing getting married, buying a home or having children until their debts are paid off. Defaults are rising, which typically leads to larger loan balances. And the problem isn’t limited to young adults. Some borrowers are older adults who went back to school. Others are parents who co-signed loans for their children.
There’s widespread agreement that student debt is a problem, but there’s little consensus on how to solve it. Here’s a look at five proposals to provide relief for existing borrowers or prevent the crisis from getting worse:
1. Bankruptcy reform
For more than a century, the U.S. bankruptcy code has offered financially distressed individuals and businesses an opportunity to expunge their debts and start over. But this “fresh start” isn’t an option for most borrowers with student loans.
In 1998, Congress enacted legislation that prohibits borrowers from discharging federal student loans in bankruptcy unless they could prove “undue hardship.” In 2005, it extended the standard to private student loans. Bankruptcy attorneys say this standard is almost impossible to meet.
Rep. Steve Cohen, D-Tenn., has sponsored a bill that would undo the 2005 change in the bankruptcy code that prohibits private student loan debt from being erased. Sen. Dick Durbin, D-Ill., has introduced a similar bill in the Senate.
Critics have warned that loosening the bankruptcy rules would make private loans more expensive and harder to get. But Sallie Mae, the USA’s largest private student lender, has said it’s in favor of changes in the bankruptcy code, provided certain conditions are met. Sallie Mae says it supports letting private and federal student loans be in bankruptcy as long as borrowers having financial difficulties have made a good-faith effort to repay their student loans over a five- to seven-year period.
While there’s growing support among lawmakers for changes to the bankruptcy code, congressional gridlock has prevented the bill from moving forward, says Mark Kantrowitz, founder of FinAid.org.
2. Loan forgiveness
Under limited circumstances, some borrowers may qualify to have their student loans forgiven. Borrowers who enter the income-based repayment program, which reduces monthly payments for graduates experiencing financial difficulties, are eligible for loan forgiveness after 25 years. Starting next year, graduates will be eligible for forgiveness after 20 years of income-based repayments.
Meanwhile, graduates who enter public-service professions qualify for loan forgiveness after 10 years of full-time employment in a public-service job.
Rep. Hansen Clarke, D-Mich., has introduced the Student Loan Forgiveness Act, which would forgive federal student loans after 10 years of income-based repayments. Borrowers who work in public-service jobs would be eligible in five years.
Under Hansen’s proposal, borrowers who are behind on their payments because of financial setbacks would be eligible to enroll in the loan-forgiveness programs. Existing loan-forgiveness programs are restricted to borrowers who are current on their payments.
“I want to give virtually every student loan borrower a second chance to pay off their debt,” Hansen says.
The bill would also let borrowers convert private loans to federal student loans.
An online petition in support of the bill has received nearly 1 million signatures, says Robert Applebaum, founder of ForgiveStudentLoanDebt.com. Applebaum says many of the borrowers who have signed the petition are behind on their loans because they’re out of work or aren’t making enough money to afford payments. “Times are very different than they were just 10 years ago,” he says.
It’s unclear how Congress would cover the cost of this loan relief, as is required under the House of Representatives’ pay-as-you-go rules, Kantrowitz says. Hansen argues that if Congress does nothing, loan defaults will skyrocket, which would be far more costly than loan forgiveness.
3. Increase Pell grants
Federal Pell grants are the largest source of financial aid for low-income families, yet the grants haven’t kept pace with inflation, let alone increases in tuition, Kantrowitz says. And the situation is about to get worse: For the upcoming academic year, Congress reduced the income threshold for the maximum Pell grant. To qualify for the full grant of $5,550, families must have income of $23,000 or less, down from the previous cutoff of $32,000.
Many low-income students will make up the difference by borrowing more, Kantrowitz says. If lawmakers were serious about reducing student debt, they would increase Pell grants, not reduce them, he says.
In this period of fiscal austerity, an increase in Pell grants seems unlikely, but Kantrowitz argues that the investment pays for itself many times over. Graduates with a bachelor’s degree earn an average of 70% more income than those with a high school diploma, and pay more than twice as much in income taxes, he says. Cutting student aid “is incredibly shortsighted,” he says.
4. Link aid to affordability
In the past five years — a period when many families saw their household income stagnate or decline — the average published cost of tuition and fees at a four-year, public college or university rose more than 33%. This relentless increase in college costs, critics say, has forced students to take on ever-increasing levels of debt.
In his State of the Union address, President Obama proposed reducing federal aid, such as Perkins loans and work-study jobs, to colleges that fail to rein in tuition increases. Colleges that keep tuition affordable and serve needy students would receive more aid under the president’s proposal.
“Let me put colleges and universities on notice,” Obama said. “If you can’t stop tuition from going up, the funding you get from taxpayers will go down.”
College administrators say the proposal fails to recognize the factors that contribute to increases in tuition. Cutbacks in state funding, for example, are a major reason schools are forced to raise tuition, says Terry Hartle, senior vice president of the American Council on Education.
In addition, the proposal will do little to help current borrowers, Hartle says. “Formula changes to any federal program are very complex and controversial and take forever,” he says. “Even if Congress were to approve it, it’s not going to provide much relief in the short run.”
5. Educate borrowers
Payments on most student loans are deferred until six months after the borrower graduates or leaves school. This allows borrowers to postpone payments until they have jobs, but it can also prevent them from understanding the consequences of debt, Kantrowitz says. Many grads “are surprised by how much debt they owe and how much interest they’ve accrued,” he says.
The situation is exacerbated by financial aid award letters that fail to make a clear distinction between loans and grants, Kantrowitz says. Unlike mortgages, credit cards, car loans and 401(k) plans, there are no mandatory disclosure rules for financial aid award letters, he says.
The Consumer Financial Protection Bureau has developed a draft of a uniform financial aid letter that would allow students and families to compare offers. Use of the format is voluntary. However, Obama recently signed an executive order requiring colleges and universities to provide the CFPB’s financial aid form when they recruit students who are eligible for federal aid under the GI bill.
The order is designed to prevent educational institutions from using fraudulent marketing to target members of the military and their families. The measure could lead colleges and universities to adopt the format for all their aid offers, Kantrowitz says.
“I doubt any college will want to maintain two different award letters,” he says.
Better disclosure could help incoming students and their families, but it will come too late for David Ingham, a disabled Vietnam veteran who co-signed for his son Shannon’s college loans from Sallie Mae. Ingham’s son has been unable to find a job since October 2009 and is in default on his loans. Sallie Mae has placed a lien on the Inghams’ condo, which has prevented them from moving or refinancing the mortgage.
“This situation seems very bleak to us,” Ingham says. “We are very worried about our future.”