A 21st Century Journalism Project

The Student Debt Crisis

In Defining The Problem on March 26, 2015 at 12:49 am

By: Jon Haag

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Student loan debt is crippling an entire generation. Millennials are spending their young adult lives studying and budgeting their way to a degree that won’t get them the job they worked for, only to spend the next 20 to 30 years paying it back. Over 40 million Americans find themselves facing the same situation. It’s a financial dilemma unlike any other; it can’t be sold like a house; it can’t be wiped away with bankruptcy like a mountain of credit card debt, and private lenders are preying on young adults looking for a way to finance their dream. If it sounds eerily similar to the subprime mortgage crisis of 2008, that’s because it is. The predatory practices of student loan servicers echo those of the subprime mortgage crisis that severely affected credit and kicked off a global recession.

Not only are recent graduates attempting to push their way into a highly competitive job market, they are also beginning to pay back four years of tuition fees while balancing all of the responsibilities that come with being an adult. Student loans are a large burden for most people entering the workforce. Entry-level wages, high unemployment rates, and a lack of real world experience are obstacles every recent graduate must face. With mounting global competition and a ‘college-equals-success’ philosophy, more and more people are turning towards education to gain entry into their career field of choice.

Borrowers are coming out of their education with debt which directly affects their ability to own a car, own a house, sign up for a loan, use a credit card, or even rent an apartment. With an entire generation of consumers on a budget, they will be more reluctant to put their own money back into the economy at large.

The average student graduates with $33,000 of debt, according to a study done by Edvisors, a newsletter committed to helping borrowers finance their education responsibly. That’s more than twice what students accrued 20 years ago. With an average monthly payment of $242 and a 4.66% interest rate, it will take a student more than 16 years to repay the debt they accumulated over just four years. It’s a disturbing trend that sees borrowers willing to bury themselves in debt for a shot at their dream job.

The Student Delinquency Rate accounts for students that have missed the 90 day delinquency period in payment are rising. The rate has now reached 11.3%. This is in stark contrast to the delinquency rates for credit cards, automobiles, and mortgage rates that have seen a dip in recent years with the economy in recovery.

There are a variety of ways to cut down on student debt before the loans begin to pile up. Arguably the most important step to paying off debt is to avoid accumulating it wherever possible. It’s easy to enjoy a refund check in college until the post-graduation grace period is over.

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The first step to relieving the financial burden of college is to fill out a Free Application for Student Aid (FAFSA) form. After a series of financial questions, an assessment of the student’s need for Federal Aid is given. This includes Stafford Loans, Perkins Loans, and PELL grants. Stafford loans are available in subsidized or unsubsidized form. PELL grants are awarded on a case-by-case basis, meaning that students from low-income households are given priority. State Grants are another helpful tool for students. In order to apply, the borrower must have filled out that year’s FAFSA. Funds are limited so the deadlines for applying are stricter than their federal counterparts. The amount of funds may vary by state. There are tax breaks offered for students and for families of students. The most important one is the American Opportunity Tax Credit. The AOTC was enacted in 2009 as an economic recovery package but has since been extended through 2017 with talks ongoing to make it permanent while other options for aiding borrowers are researched. However, the total yearly tax credit does not exceed $2,500.

Alex Zappia, a recent graduate from the Community College of Beaver County, recently joined the Air Force to reap the benefits provided by its various college programs. Even though he lives at home, he claims he would still have difficulties making payments on his federal and private loans.

“I am joining the Air Force because I need to repay those loans and also to continue my education through some of the benefits that they offer,” says Zappia. “Starting your adult life with 60-100k in debt is a huge hole to start in and will absolutely hurt the amount of money that can be put back into the market.”

The initiatives to forgive a borrower’s debt are few and far between. One of those is the Public Service Loan Forgiveness Program, which requires the borrower to work under an IRS approved entity.

“The student has to be able to make 120 payments on time, which most cannot,” said Chelsea Taylor, a licensed practical nurse returning to school to finish with a registered nurse certification.

With tuition on the rise, students are borrowing more and more money ever year. Cumulative student loan debt in the US has reached a staggering $1.6 trillion, eclipsing total credit card debt in 2010. This makes it one of the three biggest debts in the United States, right up there with mortgages and car loans. Experts have already found parallels between the student debt bubble and the subprime mortgage crisis. Robo signing, a shady practice that involves investors selling off a student’s debt to another collector without actually verifying the identity of the buyer, is giving borrowers trouble when they attempt to consolidate their student loan payments.

“The burden of student debt is jeopardizing the ability of young Americans to buy homes, start small businesses, and save for the future,” said Richard Cordray, director of the Consumer Financial Protection Bureau said. Cordray also went on to compare the student loan crisis to the mortgage crisis of 2008 which ultimately led to the biggest recession since the infamous stock market crash of 1929.

Unfortunately, even bankruptcy rarely helps with the mountain of debt accumulated over four or five years of studying, and with federal loans comes the ability to make a student pay in a way that private institutions cannot. After 270 days of delinquency, a loan will default. When the loan defaults, a student is obligated to pay back the entire balance immediately, and when that doesn’t happen, the federal government can take other actions. It can garnish wages and withhold tax refunds. This will adversely affect credit score, preventing borrowers from getting a mortgage or buying a car.

There is hope on the horizon, however. President Barack Obama recently proposed a plan to make community college federal and state-funded. The federal government would pick up 75 percent of the cost and states would be called upon to fill in the rest of the speculated $60 billion cost.

Student debt is a big talking point. Obama, who is on his way out of the White House, has addressed it several times. Not only is the President proposing free tuition at community colleges, he plans to implement the American Opportunity Tax Credit as a permanent part of the tax code, while simultaneously increasing the amount that can be refunded as part of the credit.

“I think his proposal is great, but where is that money coming from? It’s impossible to answer this without getting political. I don’t want to have to pay for everyone else’s college after I have fully paid mine off without any help,” said Derek Bortz, a recent graduate working in an electronics shop, “never mind paying for everyone else to have healthcare that I’ll probably never see either. All I would like to do is start to put away some money for the future, but these plans are making that a hard goal,” said Derek Bortz, a recent graduate.

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