Students across the country are borrowing money at record levels in order to finance the ever increasing cost of a college education. Student-loan debt is the only type of household debt that has grown since the recession and is now the largest type of debt owed by Americans after mortgages. The situation calls for reflection on the sustainability of the federal student-loan program and its lasting impact on participants that continue to struggle in a weak economy.
A college education is still the best bet on landing a good paying job, but how much student-loan debt is too much? According to a recent analysis highlighted in the Wall Street Journal, the Class of 2014 is the most indebted ever, with the average student-loan debt holding 2014 graduate owing $33,000. This amount is almost double the amount that borrowers had to pay back just 20 years ago. The issue is particularly important to Hispanic students as 67% of them borrow to attend college making them the second most indebted minority, with 81% of African American students relying on student loans to attend college.
Unfortunately, few people are seriously confronting the problem of excessive student loan debt. In early May, a bill was introduced in the Senate that would allow for the refinancing of federal student loans at the current 3.86 percent interest rate for undergraduate loans. While this may reduce the interest rates for borrowers, the measure would do nothing to tackle the real problem, which is the excessive level of student-loan debt caused by the rising price tag of a college education. Making it easier for students to borrow more money in an economy that doesn’t offer many jobs to pay them back is not a fiscally responsible policy. Many Hispanic college graduates are struggling to pay back their loans not because the interest rate is too high but because colleges have very few incentives to slow down the rise of tuition. With an endless stream of revenue going into colleges around the country in the form of federal student loans and any increase in tuition covered by more borrowing, why lower tuition?
Some schools seem to be very aware of this predicament and have begun to bank on this secure source of funding. For example, Georgetown University, is currently taking advantage of the availability of unlimited student loans in tandem with two other federal programs: the “Pay As You Earn Repayment Plan” program, which under certain circumstances caps monthly loan payments to 10% of an individual’s discretionary income; and the Public Service Loan forgiveness program (PSLF), which forgives student debt after 10 years for U.S. government agencies or non-profit organizations employees. As reported by the Wall Street Journal, for those students who work for 10 years in a U.S.-based government agency or 501(c)(3) organization, the University offers to pay their monthly payments under the Pay As You Earn Program. However, nothing stops the university from raising tuition at the same time. This situation make it so that taxpayers may end up covering the entire cost of a college loan since the remainder of the debt for those student who work in the government or the non-profit sector will be forgiven under the PSLF program. With these kind of incentives, the level of indebtedness will only go up with potentially tragic consequences for the borrowers.
As more Hispanic enroll in our nation’s colleges but unemployment remains high it is time to acknowledge that encouraging students to borrow more money to attend college is not the right path. Also, a recent study by FinAid had highlighted how the average loan repayment rate is lower at colleges with large minority enrollment. Washington needs to revisit the whole system of incentives and recognize that the current government policies only drive up the cost of college education and burden our student with a level of debt that is simply unsustainable.