When Brittany Jones told a group of senators five years ago about the $70,000 in debt she accumulated while earning her early childhood education degree, lawmakers already feared that a surge in student loans was reaching crisis proportions.
With $1.3 trillion outstanding, the debt load had the potential to keep graduates out of the housing markets for years, forestalling life milestones such as getting married and starting families and preventing them from opening new businesses, said Sen. Patty Murray, the Washington Democrat who chaired the Senate Budget Committee at the time.
“Crushing student debt isn’t just hurting borrowers,” she said. “There is mounting evidence that student debt is also holding back the economy.”
Five years later, the situation has only worsened.
Outstanding student loans totaled $1.6 trillion at the end of June, according to data compiled by the Federal Reserve, an amount more than triple the $340 billion at the start of the millennium.
The high balances have left new graduates chafing, with entry-level wages at the start of their careers leaving them little to live on after they make monthly payments that typically start within six months of leaving school, and drawn growing attention from lawmakers as the 2020 presidential campaign heats up.
Sen. Elizabeth Warren, a Massachusetts Democrat who is among her party’s top contenders to oppose President Trump’s re-election, proposed a bill canceling up to $50,000 in debt each for 42 million borrowers.
“My very first bill when I got to the Senate was legislation to tackle the growing student debt crisis because I was sick of Washington allowing the wealthy to pay less, while burying tens of millions of Americans in mountains of student loan debt,” the former Harvard law professor said when she joined House Majority Whip James Clyburn to introduce her bill in July.
Sen. Bernie Sanders, the Vermont independent fighting her for the nomination, has suggested wiping out student debt altogether, winning applause from beleaguered borrowers and worrying budget hawks who contend the U.S. government — which is responsible for 92% of the debt — is already spending more than it can afford.
Roughly one in five adults have a student loan, University of California, Irvine professor Dalié Jiménez told the House Antitrust Subcommittee during a late June hearing, and some 25% of them are delinquent — a higher rate than any other form of consumer debt.
“We have copious evidence that this debt is dragging down the economy and that people are suffering,” said Jiménez, who is co-leader of the university’s Student Loan Law Initiative, which fosters research on student debt. “Studies link student debt to lower levels of home ownership and car purchases, higher household financial distress, delayed marriage and lower probability of going to graduate school.”
In Jones’ case, the money she owed prompted her to delay a year of postgraduate study required for certification in Virginia rather than borrow $20,000 more. The jobs she was able to obtain in the interim as a preschool teacher, paying from $10 to $13 an hour, left her ill-equipped to make $600 student-loan payments while shelling out as much as $900 a month in rent and other expenses.
“Simple math,” she told lawmakers. “The numbers did not add up. I worked as many as three jobs at once, just to make my monthly payments.”
While graduates as a whole are more likely to miss payments on student loans than rent or cars— largely because their degrees can’t be repossessed— such debt doesn’t go away.
Not only does U.S. law prohibit discharging it in bankruptcy, the government has a variety of means for recouping taxpayer money: It may withhold income-tax refunds and federal benefits such as Social Security, as well as garnish money from borrower paychecks.
The bankruptcy provision is one Democratic lawmakers hope to alter through a bill co-sponsored by Rep. David Cicilline, the antitrust subcommittee’s chairman.
His proposal would eliminate a section of existing law that makes both private and federal student loans non-dischargeable, which would provide an out to borrowers crippled by aggregate debt that may reach $2.2 trillion by 2022.
“Congress has a responsibility to make it easier for people to pay off their debt and, when necessary, to use the bankruptcy system to get back on their feet,” he said.
Republicans, however, have cautioned against actions that would increase the U.S. tax burden.
“The amount of student debt has reached crisis level proportions for large numbers of the young Americans who are the future of our country,” said Rep. James Sensenbrenner. “I am willing to consider bankruptcy reform should allow them an easier chance to deal with substantial debt, but I must emphasize that since the great majority of new student loans are federal loans, we must do everything we can to make sure innocent taxpayers are not forced to pick up the tab.”
Monique Prince, who earned a master’s degree in her 40s to become a social worker, agrees that bankruptcy should be an option for borrowers. After graduating in 2011 with $60,000 in student loan debt, she quickly discovered that such loans aren’t handled like others, she told the Washington Examiner.
In term loans such as traditional mortgages, payments are split between interest and principal so that each payment reduces the amount actually borrowed.
Such payments typically can’t be adjusted without refinancing, however, unlike student loans. While the government allows deferral of loan payments while in school and allows them to be lowered to an affordable level based on income afterward, a practice known as forbearance, the unpaid interest during those periods is tacked onto the principal, or amount borrowed.
In Prince’s case, her $60,000 debt has ballooned to more than $100,000 over the past eight years. Today, she advises prospective students to consider their financing options carefully and avoid federal loans when possible.
Credit unions and online lenders offer loans to help pay for education that come with fewer of the drawbacks attached to government financing, she noted.
Some students can enroll in work-study programs that cover part of their tuition costs, Prince said, and others might be able to take one or two classes while working a full-time job to pay for their schooling.
Those options may offer more peace of mind than taking out tens of thousands of dollars in loans, then making income-based payments that don’t even cover the minimum needed to pay off a loan in 30 years, Prince added.
“Especially now, with the market, you can have a bachelor’s degree and still not get into a high-enough paying job that it’s going to cover the expense of debt,” she said. Even getting a second job might not help, since the added income could enable a higher payment that still doesn’t cover interest expense.
“It’s almost like a hamster wheel,” Prince said.
Minimizing student debt on the front end is much easier than trimming it afterward, agreed Betsy Mayotte, founder of the Institute of Student Loan Advisors, which offers free advice to borrowers.
Starting at a lower-priced school and transferring to a more expensive “dream” school later, when career goals are clearer, is one strategy she recommends.
“Parents need to realize that 70% of students change majors,” Mayotte told the Washington Examiner. “Maybe they wholeheartedly want to study X, but the odds are absolutely in favor of them changing their minds.”
Changing majors and earning degrees in fields not lucrative enough to cover the costs of obtaining them aren’t the only challenges. Some former students have found themselves with thousands of dollars in debt at for-profit schools that shut down, such as the Illinois Institute of Art, which closed at the end of last year.
R.J. Infusino, a student who was recruited by the institute while still in high school and wanted to develop sound effects for video games, was already somewhat disillusioned by that time. The internship program that he had been told would place him “in the heart of the media industry” had instead put him in an insurance sales position.
Then, in 2018, he was told that the school had lost its accreditation and would be closing, he told the House Oversight Committee’s consumer policy panel in late May. That could make his credits difficult or impossible to transfer.
“This was one of the worst days of my life,” he said. “I felt like the world was crashing down around me and everything that I had done at the school was just going away.”
His options, he found, were either seeking to have his loans discharged because the school had closed — an option under federal law — or completing his original program through a different school that would accept institute students.
While a discharge would have eliminated Infusino’s debt, “the tens of thousands of dollars my family had already paid out of pocket would be lost forever, on top of the credits I worked so hard to earn,” he said. “And even though I did not feel any closer to a job in the audio industry, I still did not want to give up or start over on my dream of becoming an audio engineer.”
Ultimately, Infusino decided a transfer was the least painful choice, although he was largely limited to for-profit schools, since they were the ones willing to accept the most credits from the Illinois Institute.
“If none of this had happened, I would be graduating next month,” he said. “Instead, I’m spending an extra year in school, a year where I should be making money and advancing in my career. On top of all this, I have had to take on much more student loan debt than I originally intended.”
Carrying a standard repayment period of 10 years that may be extended for as many as 30, student loans can easily inhibit borrowing for high-ticket purchases like homes, according to a report by Amy Sze, an analyst for JPMorgan Chase, which doesn’t make student loans itself.
About 2 million borrowers from 25 to 34 years old are locked out of the housing market due to high student loan debt, with balances of $20,000 or more accounting for the majority, Sze wrote. Student loans accounted for the largest share of debt held by young adults, about 39%, an amount that outpaces mortgages, auto loans, and even credit cards, Sze wrote.
“Irrational student lending, soaring college costs and the burden of student loans have become a significant issue,” JPMorgan CEO Jamie Dimon warned in his annual letter to shareholders. “The impact of student debt is now affecting mortgage credit and household formation — a $1,000 increase in student debt reduces subsequent home ownership rates by 1.8%.”
While alleviating student debt would give more young graduates access to the housing market, government action such as allowing the loans to be discharged in bankruptcy or forgiving some or all of their balances is unlikely in today’s polarized government, according to Sze, the analyst.
“One party would need to take control or the two need to compromise — the former probably more likely — to see notable reform,” she wrote.
For lenders, consumer loan applications from graduates whose student loan balances are increasing as interest charges outstrip monthly payments — which can occur when loans are in forbearance, for example — is a worrisome indicator, said Mark Brucker, the chief risk officer for consumer and community banking at JPMorgan Chase.
“If you can’t make a minimum amortizing payment, is that really a loan in good standing?” Brucker asked. “From a lending perspective, we learned through the mortgage crisis that negative amortization loans are generally not good for lenders or borrowers.”
While Chase is no longer in the student loan business, Brucker noted that the business is inherently challenging since the job status and income of student applications are unknowns and may not become clearer for several years.
But student debt, according to some conservatives, is only one facet of a larger problem: college costs that have far outpaced income growth. It’s a position that Bill Bennett, the education secretary under President Reagan, articulated in a New York Times column as long ago as 1987.
“Increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that federal loan subsidies would help cushion the increase,” he wrote.
“It is by no means clear that the performance of many of our colleges and universities justified this level of expenditure,” Bennett continued, and they “should be more willing to shoulder their responsibilities to students, their families and taxpayers. Too often, these responsibilities have been evaded. This we can no longer afford.”
It’s a perspective much of the American public has come to share: Some 75% of respondents in a Pew Research Center survey in 2011 said college was too pricey. Conversely, the percentage who believe most people can afford to pay tuition bills has dropped from 39 in 1985 to 22 in 2011.
Congress could eliminate some of the affordability issue by phasing out student loans altogether, Lindsey Burke, director of education policy for the Heritage Foundation, told the consumer policy committee.
“Private lending can better serve the needs of students by setting interest rates that reflect the choices students make with regard to course of study, enabling students to make a more informed risk assessment when it comes to academic major,” she said. “Many of the issues facing higher education today would be better addressed not through regulations but by letting the market determine program pricing and student borrowing.”
