Getting Real with Student Loan Debt

Are borrowers all really as bad off as reports make it seem?

Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…

The interesting study

If you’re a student loan borrower who is NOT struggling, news today may make you wonder if you’re an exception to the norm, because reports often make it seem like everyone’s debt is out of control and practically unpayable.

With that in mind, The White House Council of Economic Advisors conducted an investigation to see if investment in higher education is worth the cost in today’s economy. The aim is to see if the cost of a college education is still worth the potential lifetime earnings, given today’s borrowing crisis.

The big result

Is there any relief in sight for student loan debt?

A college education, be it a 2-year associate’s degree or 4-year bachelor’s degree, is still shown to be worth the cost incurred upfront which is increasingly funded through student borrowing. In fact:

While outstanding student loan debt has grown to $1.3 trillion, that’s due in large part to a rise in enrollments and larger number of borrowers. Although average loan has also increase, the average undergraduate borrower only owes around $17,900 and 59% of all borrowers owe less than $20,000.

The fascinating details

Basically, the report finds that the highest concentration of high-volume borrowers really happen when you throw in graduate programs like degrees for lawyers and doctors that tend to come with really high price tags. In addition, bad repayment outcomes tend to be more common about borrowers who attend for-profit or community colleges, those who do not attend full-time and especially people who don’t finish their degree.

So, if you’re a 4-year undergrad who has graduated with a bachelor’s degree in the career field you chose, then it’s much more likely that you’re able to afford to repay what you owe than not. Given that the report also reconfirms that a 4-year bachelor degree holder can earn up to $1 million more during their career lifetime, while a 2-year associate degree holder earns about $360,000, it is fairly evident that college is still worth it even if the price tag seems hefty.

What’s more, the news about student loans in default tends to be overinflated too according to this White House report.

  • Loans of less than $10,000 account for nearly 2/3 of all defaults
  • Loans for less than $5,000 represent 35% of all defaults

Loans of this size are typically used by borrowers attending for-profit technical colleges, rather than traditional universities. The report concludes that debt levels and default rates have increased during the past few years. Many workers went back to school using seemingly cheaper and faster for-profit degree programs which often did not pan out as anticipated.

Finally, the report investigates the effectiveness of income-based repayment plans for federal loans, such as the President’s PayE plan. Of those who have taken advantage of this plan, 40% started out facing financial distress as shown by loans in default, deferment or forbearance. Average household income for this kind of program is $45,000, versus the $57,000 annual income of borrowers who use non-hardship repayment plans.

What you can do

If you’re already a student loan borrower… your first step should be to explore federal loan repayment plans. You have two basic options:

  1. Standard and graduated repayment plans aim to help you pay off your debt quickly and efficiently so you can get rid of your debt as soon as possible
  2. Income-based repayment plans aim to reduce your monthly payments so your debt is more affordable within your budget. This includes income-based (IBR), income-contingent (ICR), income-sensitive (ISR) and pay as you earn (PayE)

Whether you’re struggling to stay ahead of your payments or you’re not and you simply want your debt paid off as soon as possible, there’s a repayment plan that can help you accomplish that goal. Even better, if you work in a public service sector, enrolling in a hardship-based program makes you eligible for public service loan forgiveness (PSLF), which can erase your remaining balances without penalties after 10 years on the repayment plan.

If you’re thinking about going back to school… make sure to consider carefully the type of degree you want and research any institution carefully before you enroll.

Since for-profit schools are often the ones causing borrowers the most problems, you have to be careful signing up for “fast track” programs you see advertised on TV and radio. Just because you can graduate in less than 12 to 18 months, it doesn’t mean the certification you receive will be as good as a 4-year bachelor’s or master’s degree. If you’re not careful, you can get scammed by a company just trying to make a quick buck off your desire to advance your career.

When finding a school to attend, make sure to check:

  1. Total cost of degree program
  2. Graduation AND dropout rates
  3. Starting salary range of graduates in your chosen field
  4. Available career placement services
  5. Reputation of school, including reports of lawsuits over financial aid