Student loan debt has reached record highs of over $1 trillion, and it continues to grow. Each year, according to the National Center for Education Statistics (NCES), about 19.7 million high school students graduate and move on to a college education. Over two million of these students will graduate and move on into the world, finding careers. However, the average cost of the college education they have acquired is piling up. The cost of tuition for a four-year public school is around $12,000, while at a private school, the average cost is around $32,000. In 2010, the average student loan debt for a person pursuing higher education was $25,250, which is 5 percent higher than in 2009, according to a study by the Project for Student Debt.
Recently, debt in the U.S. has come to the forefront as a major
economic problem — it was exacerbated by the recession in 2008. At
RIT alone, over 75 percent of the students have accepted federal aid.
For anyone who can’t pay for college out of pocket, this college path,
and the debt that accompanies it, is unavoidable. However, in the face
of potential increases in interest rates and proposed legislation, the
student loan market may soon be undergoing a sea change.
A SECOND CHANCE
The government currently has no policies controlling student
loan debt, unlike many other kinds of debt. Right now, the current
bankruptcy laws do not forgive student loan debts; if a person files for
bankruptcy, they are still required to pay off all of their student loans.
However, this may be changing soon: U.S. Representative Hansen
Clarke (D-Mich.) proposed a bill that will cut student loan debt after
10 years. This Student Loan Forgiveness Act will forgive student debt
of those who have paid 10 percent of their income towards their loans
over a period of 10 years. It also caps the interest rate on federal student
loans at 3.4 percent. In the interest of professions which are statistically
lower paid — but are deemed to provide a public good — those who are
pursuing careers in teaching, public service or practicing medicine in
under-served areas may have their loans forgiven after only five years.
If this act is passed, students all across the country, including those
from RIT, may be saved thousands of dollars of debt. According to the
Huffington Post, the bill will forgive students for up to $45,520, equal
to the cost of a four-year degree at an average public university. In an
attempt to help this act pass, an online petition has been established; at
the moment, the petition has over 870,000 signatures. Clarke has been
encouraging students and all those affected by this bill to get involved.
Adding onto the current financial burden is the continuous inflation
of tuition rates add to this financial burden. College tuition increases
between six and nine percent annually, far greater than the dollar’s
average inflation rate of three percent. Pairing this with a proposed
increase in student loan interest rates, the price of education is rising
faster than the value of the dollar would dictate. Current student loan
interest rates are capped at 3.4 percent, but starting on July 1 this
year, the interest rates on federally subsidized Stafford Loans are set
to double from 3.4 to 6.8 percent. This will affect all college students
nationwide who have these loans.
Senator Chuck Schumer (D-N.Y.) visited RIT recently to talk about
a bill he proposed, which would lock the interest rate at 3.4 percent,
preventing the increase. He was introduced by President Bill Destler,
who spoke of how he too believes that college costs are getting too high.
At the presentation, Schumer explained how the bill will work and
his reasons for backing the change. “When a student cannot afford a
college they deserve to go to because the cost is too high, and they
don’t have the back-up to go, they lose,” said Schumer. He promised to
continue to press this matter forward until some change is made.
The current cap of 3.4 percent on interest rates was set up by Congress
in 2007. Senator Jack Reed recently introduced a bill that would extend
the cap for another year. If the interest rate is increased, it is expected that
the average student who receives four years of subsidized Stafford Loans
will have to pay an extra $3,798 more over a 10 year repayment term.
According to Schumer’s web site, this would directly affect over 8,000
RIT students, who may have to resort to acquiring private loans instead.
A CHANGING MARKET
The private loan market has also been shifting recently, as JPMorgan
Chase & Co. recently announced that it is pulling out of the student
loan market. Representatives from the company stated that they
will start to only extend student loans to customers with an existing
financial relationship with Chase. The date for this change, according
to a Tuesday, April 10 Huffington Post article, is July 1 — the same date
that the federal loans would increase their rates. The article also states
Chase is following the actions of the U.S. Bancorp, a Minneapolis-based
bank which stopped accepting student loan applications from nonmembers
in late March.
This change comes as the Consumer Financial Protection Bureau
increases its scrutiny of private student loan lenders. According to
a Department of Education study, the percentage of student loan
borrowers who have defaulted on their loans by the second year of
repayment them has doubled since the reported 8.8 percent in 2007.
This increase in defaults means the student loan industry is more risky,
but also more profitable.
With the new legislation and policies that are currently in the works,
the student loan industry is clearly a field of the finance world that may
soon look very different from how it does now. As certain acts pass in
the government, the industry will shift in profitability, which will cause
the companies offering private loans to shift their policy. There is no
way to predict the ultimate result of this industry activity, but it will
affect each and every one of the millions of people who have borrowed
money to pay for education. Where this will lead, only time will tell.