Colleges and states are expecting students to take on an insane amount of debt.
Editor’s note: One of the nation’s leading public high school principals, a 2014 winner of the prestigious Harold W. McGraw Jr. Prize in Education, wrote this after viewing the financial aid awards sent by colleges to the seniors at his Philadelphia magnet high school. Two-thirds of his students at the Science Leadership Academy are minorities, and one-third are considered economically disadvantaged.
This year has been a fantastic year for Science Leadership Academy college acceptances. We’ve seen our kids get into some of the most well-respected schools in record numbers—and many of our kids are the first SLA-ers to ever get accepted into these schools.
Whether or not they are able to go to is another question.
Today, I was sitting with one of our SLA seniors. She’s gotten into a wonderful college—her top choice. The school costs $54,000 a year. Her mother makes less than the federal deep poverty level. She only received the federal financial aid package with no aid from the school, which means that, should she go to this school, she would graduate with approximately $200,000 of debt.
She would graduate with approximately $200,000 of debt—for a bachelor’s degree.
Now, how in good conscience could a college do that? I’ve sat with kids as they’ve opened the emails from their top choice schools. Watching the excitement of getting into a dream school is one of the real joys of being a principal. It’s just the best feeling to see a student have that moment where a goal is reached.
And as amazing as that moment is … that’s how horrible it is to sit with a student when they get the financial aid package and counsel them that the school just isn’t worth that much debt.
I sat with my student today and pulled up a student loan calculator. I showed her that $200,000 of debt would mean payments of $1,500 a month until she was 52 years old—and then we pulled up a budgeting tool so she saw how much she would have to make just to be able to barely get by.
(Are you in the same situation? Here’s how to negotiate for more aid.)
Then we looked at the state schools she’s gotten into, and we talked about what it would mean to be $60,000 in debt after four years, because Pennsylvania has had so much cut from higher education that Penn State is now $27,000 / year—in state, and we’ve noticed that their financial aid packages have dropped by quite a bit.
So we have to tell the kids to apply to the private schools because the aid packages the kids get from private colleges are sometimes significantly better than what the public schools are offering. Kids have to apply to a wide range of schools and hope. And then we sit down with kids and help them make sane choices, as the $60K a year schools send amazing brochures and promises of semesters abroad and pictures of brand new multi-million dollar campuses, all while promising that there are plenty of ways to finance their tuition.
(Check out Money’s lists of the 100 Best Private Colleges For Students Who Don’t Want To Borrow, 25 Most Affordable Colleges and the 10 Colleges With The Most Generous Financial Aid.)
Dear colleges—you are doing this wrong.
It doesn’t have to be this way. When I was a teacher in New York City even as recently as ten years ago, I felt that kids could go to amazing and affordable CUNY and SUNY schools if the private schools didn’t give the aid the kids needed. But Pennsylvania ranks 47th out of 50 in higher ed spending by state, and as a result, seven of the top 14 state colleges are in Pennsylvania.
And as private colleges hit times of financial crisis and public colleges become more tuition dependent, students are being asked to take out more and more loans, which is putting a generation of working class and middle class students tens—if not hundreds—of thousands of dollars in debt to start their adult lives.
The thing is—I still powerfully agree with those who say that a college education is a worthwhile investment. And on the aggregate, it is true – especially because the union manufacturing jobs of the last century have been lost. But when we look at the individual child, and the choices that kids and families are being asked to make, we have to ask how we can ask kids to take that kind of risk and take on that kind of debt.
Of course, all of this is exacerbated for kids from economically challenged families and for kids who are the first in their families to go to college. And if you are thinking about leaving a comment about kids getting jobs in college to help make it affordable, you show me the job market for college kids to make $30,000 a year while in school full-time. I must have missed those listings in the morning paper.
A college education can—and should—be a pathway to the middle class.
Colleges should have a moral responsibility to offer sane packages that don’t saddle students with unimaginable debt to start their adult lives.
Work hard, go to college, live a meaningful life. That is what we hear promised to children all the time from President Obama to parents across America.
Colleges and universities have to be honest and fair agents in that dream. Asking students to take out $30,000 and $40,000 of debt a year for access to that dream is a betrayal of the educational values so many of us hold dear.
You have a lot to lose if you default on your student loans, and in some states, that includes state-issued licenses.
Failing to repay student loans has all sorts of terrible consequences, but in some states, more than just your financial well-being is at risk — student loan default could cost you your professional certification or even your driver’s license.
Two state legislatures (Iowa and Montana) are considering bills that would repeal laws that allow states to suspend the driver’s licenses of student loan defaulters, Bloomberg reported in a March 25 piece on the topic. Even if those repeals succeed, several other states have such laws in place. Some states suspend licenses needed to practice in certain fields, from health care to cosmetology, though license suspension can extend to driving, too.
Repeal advocates argue that license suspension is a counterintuitive punishment for student loan defaulters, because it may keep them from working, which theoretically enables them to repay their debts. That’s the case Montana state Rep. Moffie Funk is making for the bill she introduced to repeal the state’s law that allows driver’s license suspension, Bloomberg reports.
According to a list from the National Consumer Law Center, 22 states have laws that enable suspension of state licenses issued to student loan defaulters. The professions and licenses affected by suspensions vary by state and cover a wide range of earning potential, but some of them include doctors, social workers, barbers, transportation professionals and lawyers — the lists can be quite extensive. If your state is on the list and you’re at risk of defaulting, you might want to research the details:
Student loan default trashes your credit, and the loans continue to incur interest and fees as long as they remain unpaid, so getting out of default can be very challenging. If you have federal student loans, as most people who borrow do, there are many options available to you before you’re 270 days past due on your student loan payments (that’s the definition of default): You can apply for income-based repayment or pay-as-you-earn programs, in addition to applying for an extended repayment period, which will raise the cost of your loans in the long run but make them more affordable now.
If you want to see how your student loans are affecting your credit, you can get your free credit scores, updated monthly, on Credit.com. You can check your credit reports for free once a year from each of the three major credit reporting agencies at AnnualCreditReport.com. Because student loans are generally not dischargeable in bankruptcy and default can be catastrophic for your credit, it’s crucial to prioritize making your loan payments on time.
More from Credit.com
- How Student Loans Can Impact Your Credit
- Can You Get Your Student Loans Forgiven?
- Strategies for Paying Off Student Loan Debt
This article originally appeared on Credit.com.
The financial aid letters that colleges send accepted students are often confusing. Here's how to figure out how much a school will really cost.
When colleges start releasing their admissions decisions toward the end of March, it’s easy for applicants and their parents to figure out the end result: You’re in, you’re out, or you’re on the waiting list.
Unfortunately, when those same schools release their financial aid decisions for accepted students, the results aren’t quite so clear.
Over the years that I’ve worked with families as an independent college admissions counselor, I’ve learned that the financial aid letters that arrive in the mail can be terribly confusing. Parents’ sweat turns icy cold as they try to figure out which college offers the best deal. It takes some work to decipher exactly how much help a family is being offered.
The first step for families trying to assess financial aid packages from different schools is to separate “family money” from “other people’s money.” This process helps focus the mind — and the budget — on forms of financial aid that truly reduce the overall cost of a college education.
Each college provides a total Cost of Attendance — the educational equivalent of the manufacturer’s suggested retail price. The COA includes tuition, fees, room, board, a travel allowance, and a bit of spending money that is somewhat randomly determined by the director of financial aid.
Generally, I find these estimates a bit low, so I encourage families to think about these variable expenditures — things like travel, pizza, cell phones, and dorm furnishings — and come up with a more realistic figure. Then I put these figures into a spreadsheet so that we can see how the starting price tags of similar colleges can vary widely.
Then we tally up the “other people’s money” in the financial aid letter — grants and scholarships with no strings attached. OPM reduces the bottom-line cost of a college education.
Throughout the college selection and application process, I like to help my families zero in on those schools that will be most generous. Assuming all has gone well, a good student may receive 50% or more off the price of tuition. That can be a good chunk of change.
Once we’ve subtracted the OPM from the COA, then we look at the part of the financial aid award that’s dressed up as “aid” …but is really just the family’s money in disguise.
This gussied-up aid comes in two forms. First is work-study aid, which is merely an expectation of a kid’s sweat equity in the coming years. Work-study aid is family money that doesn’t yet exist.
Then there are the loans. Generally, I won’t let my clients borrow more than the maximum that the government will lend to the student directly. These are the federal loans that max out at $27,000 for a 4-year undergraduate education.
Armed with all this information, we then create a spreadsheet to line up the different COA prices and subtract the OPM. That helps us arrive at a total cost of the education to the family — including both the immediate costs and the subsequent costs in the form of either future employment or loans that will have to be repaid.
And if we really want to get down and dirty, we can add the cost of interest over the life of those loans to illustrate exactly how much that college education will cost.
Unless the family has front-loaded the process by picking schools that are likely to maximize the grants and scholarships, I’ve found that most families are taken aback by the cost of college.
But with strong planning and a realistic look at the numbers, families can make wiser long-term financial decisions.
For example, a family I worked with a few years back made the painful but smart decision not to send their daughter to Notre Dame, which offered her nothing in scholarship aid, but to choose Loyola University of Maryland, which with a lower COA and hefty scholarship saved the family over $100,000 for her bachelor’s degree.
The family had money left over to buy their daughter a nice used car, cover expenses for a great summer internship in New York, and subsidize a spring-break service trip to New Orleans. And the young woman graduated from college debt-free.
As parents of college-bound seniors suddenly realize this time of year, a college education is not priceless. A cold, hard look at the numbers makes the price very clear, and enables a family to make the most reasonable financial decision possible.
Mark A. Montgomery, Ph.D., is an independent college admissions consultant. He advises families around the country on setting winning strategies for both admissions and financial aid. He also speaks to schools and civic groups nationwide about how to choose, and get into, the right college. His firm, Montgomery Educational Consulting, has offices in Colorado and New Jersey.
Nearly 2 million Americans pay too much in taxes because of confusion over education benefits. Here's how to avoid that mistake.
Back in January President Obama proposed consolidating many overlapping education tax benefits, a plan that appears long dead. Too bad, since millions of taxpayers make mistakes writing off education expenses on their 1040s and pay hundreds in unnecessary taxes as a result.
A 2012 Government Accountability Office report found that education tax breaks were so complicated and poorly understood that 1.5 million families who were eligible for one failed to claim it and overpaid their taxes by more than $450 a year. Another 275,000 families were so confused that they opted for the wrong benefit and overpaid by an average of $284.
Here’s how to get college tax breaks right on this year’s return and beyond.
Stick With The Winner
In any given year, you’re allowed to claim only one of these three tuition tax benefits: The tuition and fees deduction, the lifetime learning credit or the American Opportunity Tax Credit (AOTC).
Don’t be distracted by all the options. The AOTC is the most lucrative and broadest education tax benefit available, and it should be your first choice, says Gary Carpenter, a CPA who is executive director of the National College Advocacy Group.
The AOTC, available to a student for up to four years, cuts your federal taxes dollar-for-dollar. You can take the credit for up to $2,000 in tuition or fees, and 25% of another $2,000 of qualified expenses, for a total max of $2,500. Married couples with adjusted gross incomes of up to $180,000, or $90,000 for single filers, are eligible to claim the AOTC.
Even if you owe no federal income taxes, you can get a refund check for up to $1,000 by claiming the AOTC.
Maximize Your Benefit
Now that you know that the AOTC is tops, you need to know how to get the full benefit on the maximum $4,000 in eligible expenses, which can be complicated in these four situations.
1. You have a super generous financial aid package: Did your little genius get such a big scholarship that you’ll pay less than $4,000 for tuition, fees, and books? Once you’re done celebrating, call the scholarship provider and ask if you can use some of that money to pay for room and board instead, advises Alison Flores, principal tax research analyst with The Tax Institute at H&R Block.
This may seem odd, since scholarships are tax-free only if you use the money for tuition and fees. But by shifting some of the aid so that you pay $4,000 worth of tuition, fees, or book costs out of your own pocket, you can get the maximum benefit from the AOTC. That $2,500 credit typically outweighs whatever additional taxes you’d have to pay on a re-allocated scholarship, says Flores.
2. Your tuition payments are low: One way students attending low-tuition colleges can make sure they get the full advantage of the AOTC is by paying a full academic year’s tuition by Dec. 31, instead of waiting until the start of the second semester in January to pay that semester’s bills.
3. You’ve saved in a 529 plan: You can claim the AOTC only for tuition that you paid for with taxable savings, notes the NCAG’s Carpenter. When you take money from a 529 college savings plan to pay your tuition, that withdrawal is tax-free. So there’s no double dipping. You can’t also claim the AOTC for those funds.
Assuming you don’t have enough in the 529 plan to pay the entire annual tuition, room and board bill (and who does?), earmark the 529 withdrawal for room and board, and pay at least $4,000 in tuition with taxable savings.
4. You’re taking out large loans. If you’re using loans to cover tuition, you can use the money you borrowed to claim the AOTC. If you and your spouse report a joint income of less than $160,000, you can also deduct the interest on your payments.
Parents can deduct the interest on loans they take out for their children’s education, but not on payments they voluntarily make on the student’s loans, Flores notes.
Take Care With the Paperwork
Once you’ve done everything else right, don’t lose a tax break at filing time. For that, you need to keep good records.
Colleges typically don’t report all the information you need to claim all of your education tax breaks on the 1098-T forms they send out each year. They usually provide only the amount they’ve billed you, explains Anne Gross, vice president of regulatory affairs for the National Association of College and University Business Officers (NACUBO).
To get all of the tax goodies, you’ll have to show the IRS how much you paid, and where the money came from. Some colleges will allow you to gather that information from their online accounts portal, Gross says. But as a backup, it’s smart to keep your own records.
Shift Gears as a Super Senior or Grad Student
Once you’ve used up a student’s four years of eligibility for the AOTC, try for some of the smaller, more limited education tax breaks. If you earn less than $128,000 as a married couple, switch to claiming the lifetime learning credit starting in year five of your dependent student’s higher education. There is no limit to the number of years you can receive this credit of up to $2,000.
If you make between $128,000 and $160,000, you can write off up to $4,000 from your income using the tuition and fees deduction.
Keep Cutting Your Taxes Post-Graduation
When school is finally over, the tax breaks don’t end. Singles earning less than $80,000 and couples earning less than $160,000 can deduct up to $2,500 a year in student loan interest. Parents with federal PLUS loans can claim their interest payments on this deduction. But parents who are voluntarily making payments on their children’s student loans cannot claim that interest.
Catch a Break When You Save Too
Finally, President Obama’s plan to eliminate tax-free withdrawals from 529 college savings plan has been squashed as well, preserving the tax benefits on the money you’ve set aside for your, your children’s, or your grandchildren’s college costs. Although contributions to a 529 are not deductible on your federal income tax return, the earnings grow tax-free. And as long as you spend the money on qualified college expenses, withdrawals are tax-free as well.
What’s more, 32 states give you a break on your state taxes for your 529 contributions (or, in New Jersey’s case, a scholarship). These benefits are worth exploiting: A Morningstar report found that, on average, they equate to a first-year boost on your investment returns of 6%. Check this map to see if you live in a state that rewards college savers.
Pending legislation in Colorado could secure student loan relief for workers with certain degrees.
A Colorado state representative proposed legislation that would give some employers tax credits for making student loan payments on behalf of some of their employees. The bill introduced by Rep. KC Becker (D-Boulder) could give qualified workers each up to $10,000 a year in student loan payments from their employers. The employer gets a tax credit equal to 50% of the loan payments (so $5,000 on a $10,000 payment), up to $200,000 total per tax year.
Those qualified workers come from a limited pool of graduates. If you want your employer to make some of your loan payments under this proposed bill, you’d need to have an associate’s or bachelor’s degree in a science, technology, engineering or mathematics field (STEM) from a Colorado college or university, graduated no earlier than Dec. 31, 2010, make less than $60,000 a year and have a STEM-related job. Of course, you’d need to work for an employer in Colorado, as well. The credit applies only to new hires who are retained for at least 12 months.
The bill is one of several workforce-development bills progressing through the state’s legislature, focusing on attracting and retaining educated, talented Colorado workers. One way to look at the employer tax credit is as a good deal for everyone involved.
“It’s good for employers because it gives them a competitive advantage for attracting new workers,” said Patrick Pratt, program manager of the Colorado Manufacturing Initiative at the Colorado Association of Commerce & Industry (CACI). “It’s good for employees because it helps alleviate their student loan burden, as well.”
And then there’s the state of Colorado, which gets to hold on to graduates whose skills are in high demand. One of CACI’s missions is to increase the number of skilled, educated workers in the state, and this proposal aligns with some of those goals.
The average monthly student loan payment in this program is estimated to be $224, totaling $2,688 a year, according to Pratt, which is well under the $10,000-per-employee limit. That means workers who qualify for this program may not have to make student loan payments out of their own pockets for as long as the program continues, if the bill becomes law. It still has a long way to go in the legislative process, but if it is approved as is, the program would run from Jan. 1, 2016 through Dec. 31, 2019.
In a small survey sent from CACI to its manufacturing members, most respondents said they had a favorable opinion of the legislation. (Pratt sent the survey to 400 members, and about 30 responded.)
Only one person who had a negative opinion of the bill explained why: “This is a solution that exacerbates the problem,” Pratt quoted from the survey response. He said the comment went on to say that the problem was the high cost of education.
The average student loan debt of a 2013 graduate from a Colorado college is $24,520, the 16th lowest of the 50 states and the District of Columbia, according to the Project on Student Debt. That’s below the national average ($28,400), but the Colorado default rate is 15.3%, higher than the 13.7% national average. Default can seriously damage borrowers’ credit for years, not to mention the hardship that comes with wage garnishment and debt collection, as a result of default. If you want to get an overview of how your student loans are affecting your credit, you can see your free credit report summary on Credit.com.
More from Credit.com
- Can You Get Your Student Loans Forgiven?
- How to Consolidate Your Student Loans
- How Long Will I Be Paying My Student Loans?
This article originally appeared on Credit.com.
Here are some student loans forgiveness programs that you might not have even known about. Do you qualify?
If you’re like most people, your student loans probably feel a bit like a ball and chain that you’ve been dragging through your life for years. Every month, you dutifully make a payment knowing that you’ll be making that same payment next month, the month after that, and so on. But what if you didn’t have to? What if there was a way to get your student loans forgiven?
It turns out that there are many ways to get federal student loans forgiven. In fact, the Consumer Financial Protection Bureau released a report in 2013 estimating that more than one-quarter of working Americans are eligible for the Public Service Loan Forgiveness Program, but only a small percentage are actually using it.
Programs like the Public Service Loan Forgiveness Program are relatively well known. However, there are some lesser-known programs that may also help you pay down your loans.
Here are five ways to say goodbye to your student loans that you might not have even known about. If you’re not eligible for any of them, there are still other ways to lessen your student loan burden – such as through student loan consolidation, refinancing your loans, or by picking the right federal or private student loan repayment plans.
1. Loan Forgiveness Programs for Health Care Professionals
If you’re a doctor or a nurse, there is probably somewhere in the country where you could get a significant amount of your student loans forgiven in exchange for your service. From federal programs like the Health Professionals Loan Repayment Program that helps health care professionals serving in the military repay up to $50,000 in loans per year of service, to the Maine Dental Loan Repayment Program which pays up to $20,000 a year for serving an underserved area, there are many ways to get your loans repaid.
2. Perkins Loan Cancellation & Discharge
Did you get Perkins loans to pay for college? Well, then that’s good news for you. Borrowers of Perkins loans can have their entire debt forgiven after five years if they fit certain criteria. The professions that qualify for forgiveness are fairly broad and include anything from an attorney to a librarian, to even a speech pathologist. Check it out to see if your job fits the bill.
3. Teacher Loan Forgiveness Programs
Great news if you’re a teacher who is willing to work in underserved areas – there are several student loan forgiveness programs tailored to you. Many states offer awards specifically to draw teachers to underserved areas. Not only can you make a difference, but you can pay off your student loans while doing it.
SponsorChange.org is a nonprofit organization that helps graduates pay off student loans in return for volunteer work. Donors give money to projects or nonprofits to help them recruit volunteers and those volunteers get great work experience while also lessening their student loan burden.
5. Total and Permanent Disability Discharge
While no one plans to be disabled, it’s good to know that if you have a terrible accident that your student loans could be forgiven. If you have a condition that prevents you from working that has lasted for more than 60 months or can be expected to last for more than 60 months, then you may be able to get your student loans discharged.
The Bottom Line
If you’re having trouble paying your student loans, it’s important to find a workable solution so you don’t default on them. For the most part, student loans aren’t dischargeable in bankruptcy, and falling behind on your payments can hurt your credit and may even lead to wage garnishment. (If you want to see how your student loans are affecting your credit, you can get a free credit report summary on Credit.com.)
There are many more people eligible for student loan forgiveness programs who don’t take advantage of them. One important thing to remember — if you do get your student loans forgiven, you will then owe taxes on the amount forgiven. The IRS counts forgiven student loans as income; so while you might be able to escape your student loans, you definitely can’t escape taxes.
More from Credit.com
- How to Consolidate Your Student Loans
- How Long Will I Be Paying My Student Loans?
- Repayment Options for Student Loans
This article originally appeared on Credit.com.
"By using our debt as leverage, we’re making our voices heard"
A recent graduate of a for-profit college’s nursing program is refusing to pay back her federal student loans, saying the school defrauded her.
Mallory Heiney says her 12-month nursing program at Everest Institute, a Grand Rapids, Mich. school owned by Corinthian Colleges, failed to adequately prepare her for the state nursing licensing exam and put her $24,000 in debt. In a column in the Washington Post, Heiney writes that thousands of students were caught in Everest’s “debt trap.” She and several other students who have dubbed themselves the Corinthian 15 are demanding that the Department of Education discharge their federal loans.
“By using our debt as leverage, we’re making our voices heard,” Heiney wrote. “We are not asking for a handout. We are demanding justice for students ensnared in a debt trap.”
Heiney said she was inspired by Susan B. Anthony’s advocacy for women’s suffrage and by Rosa Parks’ efforts to end racial discrimination.
Corinthian Colleges, which once operated more than 100 campuses across the country, began shutting down much of its operations and selling off its assets last summer following a Department of Education investigation into its educational and financial practices.
Joe Hixson, a spokesman for Corinthian, noted that the vast majority of the students from Heiney’s nursing program successfully graduated, including Heiney herself, and that most of these students successfully passed the nursing licensing exam. “Recent criticism of Corinthian Colleges wrongly disparage the career services assistance that we offer our graduates and mischaracterize both the purpose and practices of the ‘Genesis’ lending program,” he wrote in an email, referring to Corinthian’s private student loan program.
A Department of Education spokeswoman said the agency worked with the Consumer Financial Protection Bureau to provide $480 million in loan forgiveness for borrowers who took out loans through Corinthian. However, she also encouraged students to continue paying back their outstanding loans to avoid default.
These top schools offer enough money to cover students' financial needs—and hand out award ample merit grants to high achievers too.
If you need a lot of financial help to pay for college, you’ll have much better odds at a schools that has a generous aid budget.
Unfortunately, these days that’s a small group. The average college provides only enough scholarships or grants to meet 70% of what low- and moderate-income students need to pay the bills, according to data provided by the colleges to Peterson’s.
In all, only 64 colleges in the country say they hand out enough aid to meet the full demonstrated financial need of every regularly admitted undergraduate, according to Peterson’s data. And many members of that elite group, including schools in the Ivy League, don’t provide a penny in merit scholarships. That means no scholarships to students who don’t qualify for need-based aid, no matter their academic achievements.
So Money crunched financial-aid data to find the 10 schools on our Best College Values list that not only provide 100% of the scholarship money they think you need, but also have large merit-aid budgets to help high-achieving, wealthier students.
It’s important, however, to be realistic about what’s “generous.” When colleges say they “meet full demonstrated need,” that doesn’t mean they give everybody full-tuition scholarships. Colleges first calculate how much they think your family can afford to pay (also known as the “expected family contribution”), using the financial information you provide on the FAFSA or the College Board’s CSS/Financial Aid Profile.
On top of that number, many colleges add an expectation that students will take out loans and earn a few thousand dollars a year. The difference between the total expected student and parent contribution and the cost of the college is your “need.” That’s the amount that the most generous colleges will provide in need-based scholarships. Merit scholarships are awarded without regard to your family’s financial situation. (For tips on how to appeal for additional aid, click here.)
|School||Money rank||Avg. est. total family education-related debt||Est. average net price of a degree||% of students who get merit awards||Average merit grant|
|University of Chicago||106||$12,986||$188,813||17%||$10,205|
|University of Richmond||120||$14,317||$157,221||16%||$23,300|
|Washington and Lee University||39||$15,270||$149,377||8%||$35,060|
|Harvey Mudd College||7||$17,736||$187,694||20%||$9,743|
Notes: Average total estimated debt is federal student debt and parent Plus loan borrowing per graduating senior; net price for freshman starting in the fall of 2014.
Sources: Peterson’s, U.S. Department of Education, Money calculations.
On Tuesday President Obama proposed some relief, but experts say more is needed.
President Barack Obama on Tuesday proposed a “student aid bill of rights” that offers about a half-dozen small but important improvements for the 40 million Americans who are dealing with student loans.
While congressional action would be needed to make significant changes in the student loan program, President Obama has ordered the Department of Education to take steps by 2016 to make things simpler and easier for student borrowers.
In a speech at Georgia Tech, the president said the federal government will now “require that the businesses that service your loans provide clear information about how much you owe, what your options are for repaying it, and if you’re falling behind, help you get back in good standing with reasonable fees on a reasonable timeline.” The reforms announced today will:
1. Create a centralized website that makes it easy to file complaints and to see all your student loans in one place. Jesse O’Connell, assistant director of federal relations for the National Association of Student Financial Aid Administrators, said many students are confused by the government’s use of contractors to collect their loans. Some borrowers who receive letters from these anonymous-sounding private companies, such as Navient (a spinoff of Sallie Mae), throw the letters away, thinking they are identity theft scams. A simple centralized website where borrowers could see all their student debt information, payment amounts, and due dates is a “basic consumer-friendly protection,” O’Connell said.
2. Try having federal employees collecting debts instead of private contractors. The Department of Education is already working with the Department of the Treasury to test out having federal employees collect defaulted student loans. Deanne Loonin, of the National Consumer Law Center, called this a good first step, though only a first step. In a blog post about the proposals, she called the use of private debt collection agencies “a disaster” for financially distressed borrowers, and called for the Department of Education to stop using private debt collectors all together: “Debt collectors are not adequately trained to understand and administer the complex borrower rights available under the Higher Education Act, and the government does not provide sufficient oversight of their activities.”
3. Make it easier for borrowers who become disabled to get their student loans discharged. Currently, some borrowers who qualify as disabled through the Social Security system don’t know that they are eligible for a disability discharge, Loonin says. Making the disability discharge rules clear and consistent “is a critical change for some of the most vulnerable borrowers and should be implemented immediately,” she wrote.
4. Ensure that the private debt collectors hired by the Department of Education apply prepayments first to loans with the highest interest rates, unless the borrower requests a different allocation.
5. Make it easier for students to get IRS information to qualify for income-based student loan repayment.
6. Clarify the rules under which students who declare bankruptcy can get their student loans reduced or eliminated. Congress and the federal bankruptcy courts have imposed tough rules that make it far more difficult for student loan borrowers to get out from under their obligations than almost any other kind of debt. But the president asked the Department of Education to at least clarify the rules to collectors so they can be applied consistently.
What Government Can Do Next
While these steps would improve the lives of many people struggling with student debt, experts pointed to three bigger, but politically unlikely, changes that could make student loans far more affordable and fairer. First, simplify the government’s complicated, income-based repayment system into one option, and automatically sign all borrowers up for the program. University of Michigan economist Susan Dynarski, one of the nation’s leading researchers on financial aid, calls the current menu of “income-driven,” “income-contingent” and “income-based” options a “bewildering array” that requires students to jump through many bureaucratic hoops to qualify for the payment plans that will benefit them the most.
Second, stop charging fees on federal student and parent loans. O’Connell, of the association of financial aid administrators, says that the 4.292% fees on federal parent PLUS loans, for example, are not well explained to borrowers and add an unnecessary expense to families. Eliminating them, which would take congressional action, would save families more than $1 billion a year, he says.
And finally, make it easier for borrowers in dire financial straits to reduce or eliminate their loans in bankruptcy. Loonin, at the NCLC, notes that bankruptcy judges across the country apply varying levels of strictness to the rules, which say loans can only be discharged if repaying would cause an “undue hardship.” These variations make it unfair for borrowers seeking relief and force many to spend what little money they do have on lawyers. Since the strict bankruptcy rules were created by Congress, however, it’s up to Congress to change them.