An Imperfect Solution to Toppling Student Loans
If you commit to a public service salary for 10 years, the government will forgive your student loans.
In May, Jenny Cooke graduated from the George Washington University (the most expensive university in the nation) with a degree in nonprofit management and a job at the Association of Air Medical Services, where she had interned as an undergraduate. Although 75 percent of her college education was funded by grants, she still was $39,000 in debt.
Today, she budgets about $300 a month to repay her loan, about an eighth of her monthly income. Jenny can afford to make these payments; many others in public service jobs, however, cannot.
Taylor Orr also works at a nonprofit. She also graduated this year, and she also is about $40,000 in debt.
Orr did not attend the most expensive university in the country, and she did not accumulate these loans over four years. She received need-based financial aid for 100 percent of her education expenses her first two years at the University of California, Santa Barbara, but due to an error on her father's tax returns in 2007, she was ineligible for aid her junior and senior years.
Even after her father corrected the error, the university refused to award her any aid. So Orr took out student loans. "I would have had to drop out of school if I didn't take out any loans," she says. She begins repayment of her loans in January 2010. Although her monthly payments are only 5 percent of her income, "I feel an incredible weight on my shoulders whenever I think about my financial situation. I hope I am successful in paying these loans off in a timely manner."
As tuition costs rise and unemployment remains high, more students are shouldering the burden of their educational expenses. Many graduates with student debt cannot afford to work in the public sector, and so they take jobs in the private sector for more lucrative employment to help them repay their loans. This problem is particularly pronounced for law school graduates interested in public interest law, but affects all graduates with high educational debt who hope to work in low-income public sector jobs like teaching, social work and nonprofit management.
To address these twin issues, an income-based repayment plan for student loans began in July as part of 2007's federal College Cost Reduction and Access Act. While most loans base repayment on the total amount borrowed, income-based repayment caps borrowers' loan payments at a percentage of their discretionary income, based on their income and family size. The monthly payment is adjusted annually, based on changes in income and family size. And to encourage careers in public service, it offers debt forgiveness after 10 years of both on-time payments and public or nonprofit sector work.
Borrowers who didn't take public service careers but who made payments faithfully for 25 years will have any remaining debt forgiven. This forgiven debt would be treated like income, so that year, a borrower will pay taxes on the amount discharged. The estimated cost to the Treasury of the income-based repayment plan is $1.2 billion between its enactment and 2012.
A technical glitch may be the most formidable obstacle to enrollment. The Department of Education account-repayment Web site does not list IBR as an option on its pull-down menu and does not plan to add the program until March, citing a lack of resources and the possibility that Congress will soon switch all federal loans to the Direct Loans program.
Students hoping to sign up must download a form from the department's Web site and mail it in, a process that consumer advocates argue will decrease participation.
It should be noted that the program only applies to government-subsidized educational loans, and essentially only to new or very recent loans. Private loans, which account for 23 percent of student debt, usually have much higher interest rates and limited deferment and repayment options.
For graduates who can't find full-time jobs, income-based repayment may seem like a blessing. The program has no minimum payment, so recent grads living near or below the poverty line pay nothing … yet.
As Zac Bissonette at Walletpop.com puts it, IBR "won't keep you out of the poor house. It will just leave enough room for a few mocha lattes on the way there."
Philip Schrag, a professor at Georgetown Law and the author of a law review article exploring the income-based repayment plan and public service loan forgiveness, cautions that for students who are unsure of their future plans, IBR may not be their best bet. "If the borrower does not perform 10 years of public service, the borrower will end up paying more in interest than he or she would under a plan for more rapid debt repayment."
For graduates who do work in the public sector, like Cooke and Orr, the public service loan forgiveness program Schrag refers to should offer significant relief. And unlike the 25-year plan, any debt discharged under public service loan forgiveness is tax-free.
In theory, all of this should remove a significant roadblock in pursuing a career in public service.
Yet many borrowers see this as a less-than-perfect solution. Robert Applebaum, the founder of the "Forgive Student Loan Debt to Stimulate the Economy" Facebook group, which as of this writing boasts 244,143 members, is one of them.
Applebaum graduated law school with more than $80,000 in student loan debt, a figure that increased to $100,000 when he put his loans in forbearance while working at a low-paying job at the Brooklyn District Attorney's Office. He found that he was unable to afford a career in public interest law, and after five years took a job in the private sector.
Although he sees the income-based repayment program as a smart first step in the restructuring of student loans, he points to the problem of having to work at a job and make payments at the same time, which is "still going to hurt more" on a public service salary.
Recent grad Orr also sees shortcomings. "I like the idea, but having to work in the public sector for 10 years before qualifying for forgiveness is absurd to me. I feel like public service, teaching and nonprofit jobs are low paying, and the government is offering little sympathy in helping to pay loans. It seems more like a public relations move than anything else."
While she is currently eligible for the plan, Cooke isn't tempted by the slightly-lower monthly payments or promise of forgiveness. "If you're still making payments after 10 years," she says, "you must have had even more debt than I did."
The amount students take out in loans to finance their college educations is increasing. The Project on Student Debt in a December 2009 report estimates the average debt of a 2008 college graduate was $23,200. The unemployment rate for college graduates aged 20-24 was 10.6 percent in the first quarter of the year, the highest on record.
Mike Miller, the acting executive director of the financial aid office at the University of California, Santa Barbara, says he has seen close to a 15 percent increase in student applications for financial aid in the past year. The majority of these applications were from continuing students, whose parents, he believes, had been paying for their educations in cash.
Of the 15,500 total financial aid applications received by UCSB, approximately 7,500 students took out loans, an overwhelming majority through the federal Stafford Loan program (which falls under the income-based repayment plan). Miller says his office discourages students from taking out private loans except as a last resort; it only processes about 400 to 500 alternative or private loans each year.
"A lot of students are apprehensive about taking out loans. We have to tell them that student loans are, to an extent, OK. It's really the best investment you can make."
Cooke thinks that many students are not aware of the obligations that student loans carry. "For a lot of people, their parents just say ‘sign here' and they have no idea what it means. There was no education gap for me because I had to take out the loans myself. I knew that every dollar I took out had to be paid back."
Miller believes that UCSB students, at least, have shown an interest in financial education. His office holds personal finance sessions twice a year to educate students on the importance of paying off loans and credit cards; 600 RSVP'd for the last one. "It's information that students want and need," he says. "Financial planning is not optional, especially in this economy."
Relative to other universities, UCSB has a relatively low default rate on student loans, perhaps because of these education programs. For the fiscal year 2007, the national student loan default rate was 6.7 percent, a 29 percent increase from the 2006 rate of 5.2 percent. If an economic recovery lags, this figure is likely to rise.
The Department of Education estimates that outstanding student loan debt totals $556 billion. To put this number into perspective, the total amount of credit card debt in the United States in 2008 was estimated at $972.73 billion.
Applebaum believes that the student loan bubble is about to pop. As more and more graduates are unable to find jobs before entering repayment on their student debt, he says, more loans will go into default.
"Without a job, you have to prioritize your income, and student loan payments are not a priority. This doesn't only apply to recent graduates; it also applies to people who graduated 10 years ago and have lost their jobs," he asserts.
Even though he originally advocated student loan forgiveness as part of the stimulus package passed in February, Applebaum thinks it would be a valid policy option in the event of a double-dip recession. Asked how student loan forgiveness could be justified to those who didn't pursue higher education due to the cost, he answered, "I don't know that it has to be justified any more than the trillions of dollars handed over to the banks. I recognize that it's unfair, but life is unfair. It's targeted at a specific demographic, but this demographic is likely to have the greatest influence on consumer spending, and if it works, it benefits everybody."
Orr believes the solution to the student debt problem is funding higher education through taxes, as is done at public universities in European countries like Germany and France, which charge no registration or tuition fees. "I think it is ridiculous that students have to take out loans with gargantuan sums in order to receive an education. It speaks to the inadequacies and inefficiencies of the U.S. federal aid system. How is this generation of college-educated people expected to give back to their communities when they are so focused on taking care of their own debt? I would gladly pay higher taxes in exchange for the stress taking out loans has created for me and my family."
Although she hopes to attend graduate school, Orr plans to work full-time to pay off her loans before taking on any additional debt.
For many students who are unemployed or underemployed, beginning repayment may seem overwhelming. Miller stresses the importance of avoiding default if at all possible. "One thing I would definitely recommend is staying in touch with your lender. Communication is key. Lenders will work with students. The worst possible thing you can do is ignore them."
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