If the federal government were a private lender, it would be one of the world’s three most profitable companies, next to Exxon Mobile and Apple. Student loans, however, are crippling a generation that can’t afford to skip college but also can’t afford to pay for it.
WASHINGTON — Roshan Bliss owes nearly $80,000 for a degree he never received. A Master’s degree candidate at the University of Denver, he dropped out two-thirds of the way through.
“I already owed more than $70,000 in student loans,” he told MintPress News. “I did the math and figured out I would still have to take out another $30,000 for tuition and more for living expenses. It just wasn’t worth it.”
The interest rate for his loans is set at 6.8 percent and that goes directly to the federal government, which has administered student loans since 2010. Some — including Bliss — accuse the government of taking in billions of dollars in “profit” from students who much go into debt to finance their education.
In fiscal year 2013, the federal government cleared $41.3 billion in profit from its student loans. If the government were a private lender, it would be the third most profitable company in the world behind Exxon Mobil and Apple.
The student and the Great Recession
Bliss had managed to keep his loans in check during his undergraduate experience at Purdue University. He had received a full-tuition scholarship and worked part-time for the full four years to pay most of his other expenses. Yet he still graduated with $13,000 in debt.
That was in 2009, just a year into the Great Recession. Recent graduates like Bliss were entering a workforce without jobs for them.
“Everyone always told me study what you love and you’ll never work another day in your life,” Bliss said. However, “Starting my career at the height of job loss in the economy, no one was saying, ‘Wow, we really need someone with a philosophy degree.’”
Without work, he heeded advice to go to graduate school and wait out the recession. By the time he finished, the logic went, there would be more jobs. Getting a partial scholarship to University of Denver, he “saw all these zeroes” and came to the conclusion “I can’t afford not to go.”
So Bliss decided that he would get actual job skills and started a program in conflict negotiation. “I’m a trained mediator now,” he said with a mix of pride and pessimism.
It soon became clear he probably wouldn’t find a job, even with the new degree, so he dropped out to cut his losses and now blogs part-time and works as an organizer who advocates for eliminating college debt. His income is so low that he isn’t required to pay any of his loans back yet. In the meantime, however, the interest on his loans will continue to accrue — that’s already added several thousand dollars to what owes to the U.S. federal government since quitting the program.
Bliss is far from alone. He’s among around 40 million other Americans who have $1 trillion in unpaid aggregate student debt. The average student debt holder owes about $30,000.
“That’s up a lot in the last 15 years or so,” Jennifer Wang, policy director for The Young Invincibles, a Washington-based policy group, told MintPress. “Many people are struggling to do basic things like buy a home or buy a car. Some are impacted even greater in terms of credit, and some put off getting married and starting families.”
Wang noted that people like Bliss, in particular, are victims of misleading information.
“People who don’t complete their degrees but take on student debt have the hardest time paying down their debt,” she said. “This is really a problem and it stems from a lack of tools out there to make wise decisions.”
How the government profits from student loan debt
Several bills have been proposed to fix the student loan problem. Just last week, Massachusetts Sen. Elizabeth Warren filed a bill that would have allowed 25 million debtors to refinance their loans at lower interest rates. The bill didn’t even make it to the floor, marking the second time it failed in Congress.
Calling it a political move, Republicans opposed the bill because it included the so-called “Buffett Rule” which would pay for the loss of revenue from the interest the federal government earns by increasing taxes on the wealthy.
Democrats, meanwhile, “want an issue to campaign on to save their own hides this November,” argued Senate Minority Leader Mitch McConnell.
Regardless of moral imperatives, it will be difficult for the federal government to give up the income provided by student loan interest. Further, the Congressional Budget Office expects the profit to increase, with the government raking in as much as $127 billion over the next 10 years.
“The Department of Education has become dependent on student loan interest,” a Senate staffer who works on education issues told MintPress.
In a press conference last year, Secretary of Education Arne Duncan argued that categorizing student loan interest as a “profit” is a mischaracterization, noting that the funds go toward subsidizing other education programs. Yet little of that revenue benefits the people who spend decades paying off their college tuition.
Students are charged 6.8 percent interest for unsubsidized loans, which constitute most loans. Parents who take out loans to pay for some of their childrens’ education pay 7.2 percent. Last year, the interest rate cap on federally-subsidized student loans was set to expire. Long set at 3.4 percent, the expiration of the law that set the cap meant the interest rate would jump to 6.8 percent — the same as the rate on unsubsidized loans.
However, outcry resulted in Congress settling on a market-based interest rate, which varies year to year with the market but is fixed for the life of the loan. A student matriculating this fall would be taking subsidized loans with interest rates of 4.66 percent and that rate will remain in place through 2015.
“After that, we expect the interest rates to continue to rise,” Wang warned.
Strike the Debt
There was a time when a student could afford to go to college simply by working while taking classes. This is what Peter Holguin did in 1956, while he was a student at University of Texas.
“You could pay $50 and you got to take as many courses as you wanted,” Holguin told MintPress. “I got a part-time job and just paid as I went.”
Holguin says his three brothers — one of whom eventually went on to work as a space engineer for NASA — also “paid as they went” and graduated without any debt. Holguin says he feels for the later generations who haven’t been faring as well.
“That’s hard,” he says of the $30,000 average student debt. “It really ties you down.”
The Vietnam War veteran would like to see a return to the “good old days.” As would Rolling Jubilee, an offshoot group of Occupy Wall Street, which started the Strike the Debt movement. Just last week — around the same time that Sen. Warren’s bill failed — Rolling Jubilee announced that the group had paid $4 million in defaulted student debt for 2,761 people.
Rolling Jubilee — which garnered widespread attention for paying $15 million in unpaid medical bills since November 2012– is focusing on debt incurred by students of for-profit colleges like Everest College. Although they enroll only about 13 percent of the total student population in the country, students of for-profit colleges constitute nearly half of all loan defaults. Everest College is currently inundated with lawsuits regarding their predatory practices, such as one filed last week by the Consumer Financial Protection Bureau against Corinthian Colleges Inc., which operates Everest.
Bliss, the philosophy major and organizer, hopes the opening salvo by Strike the Debt is just the beginning. He believes that millennials, in particular, are rising up against student debt — and maybe even debt altogether.
“A lot of students are in denial and completely ignore it because they don’t want to think about it because it’s terrifying,” he said. “That is, until they’re out of college and have to face reality, and then they get pissed and then they look for things to do to change the situation.”
The costs aren’t just in the tuition bills, Bliss noted.
“Eliminating the debt restraints,” he concluded, “is really about making our country better as well as the economy.”
Private loans, state disinvestment and exploding tuition
One saving grace for borrowers is the income-based repayment program. In 2010, Congress passed a law implementing an option for borrowers to enroll in an income-based repayment program and put 10 or 15 percent of their income toward paying down their loans, depending on when they took out their loans. However, such options extend the life of the loan, making interest rates an even greater factor in the total cost of one’s education.
Still, Wang, the policy director, notes that the interest rate issue is only one part of an overarching problem: private student loans come with their own challenges, the lack of investment by the states and the federal government in higher education and the exploding cost of higher education over recent decades.
Private loans are made to students without any government regulation beyond standard credit laws. Private lenders take on the risk but they can also charge higher interest rates and, in fact, are more expensive than public loans on average. They also are not eligible for the income-based repayment program and can’t be consolidated as public loans can be. One advantage they have over public loans is that they can typically be refinanced when interest rates are lower. However, the new interest rate is not likely to be lower than the rate for public loans unless the student already has an excellent credit history or a cosigner who does.
Ryan, who preferred not to give his last name, was lucky enough to have such a cosigner and is paying less in interest than he would be if his loans were public. He would like the opportunity to lower his payments this early in his career, though.
“The biggest challenge of having private loans is not having the option of income based repayment,” Ryan told MintPress news. “I’m paying about 1/3 of my monthly salary into my loans and that kind of burden is crippling.” Ryan owes more than $70,000 in private loans as well as a smaller amount in public student loans.
With the recession — and, in many cases, even before — there has been a gradual disinvestment in public colleges. For example, Massachusetts, long considered a leader in public higher education, has cut funding of its state schools — including the University of Massachusetts and its community college system — by more than 30 percent over the last 14 years. A majority of other states have similarly scaled back such funding during the same period. As a result, the public schools in those states have raised tuition and fees to cover the loss of income.
“Four-year public universities have always been a more affordable option but what we’re seeing is that tuition at those schools is increasing and families are making up the difference and going further into debt,” Wang said.
Since 1985, both private and public schools have seen tuition skyrocket by more than 500 percent. That’s five times higher than the rise in the consumer price index and well over the rise in health care costs, real estate prices and the price of gas. Some have speculated that the “easy money” provided by the student loan system is to blame for rising tuition costs. As students have access to more student loan funding, that money supply is leading colleges to increase costs, especially by investing in new campus amenities designed to attract more, higher-paying freshmen.
“College has become much more expensive than in the 80s and the 90s and the rate of return has been changing as well,” says Alexander Monge-Naranjo, an economist at the Federal Reserve Bank, St. Louis district.
Monge-Naranjo has been studying the issue for years, releasing a recent white paper on the impact that student loan debt is having on graduates as members of the economy.
He says that students are in a no-win situation, as not obtaining a college degree is simply not an option.
“The differences between college graduates and non-graduates have increased,” he told MintPress, noting that the income gap has only widened in recent times for those with and without college degrees.
While the cost of college has dramatically increased, the non-loan opportunities for lower-income students to pay for college have remained stagnant. The maximum federally-funded Pell Grant offered for the 2012-2013 academic year was about the same as the one offered in its inaugural year 1976, adjusted for inflation.
Wang wonders why more of the projected $127 billion in “profit” isn’t poised to benefit those who are paying it more.
“The profit we’re seeing is one reason we should be seeing more investment in higher education,” she said. “There are resources that we need to devote to ensure access to quality education.”
Monge-Naranjo adds that college debt isn’t as big of a problem in better economic times.
“If I have to pay a lot of money to go to college, I still might earn more,” he said. “But if I cannot find a job, the compensation is more than the return on investment. I have this debt that is not adjusting to labor market incomes.”
One proposed way of fixing that problem: automatic income-based repayment. Rather than have students apply for an income-based repayment program, everyone would be enrolled and pay a percentage of their income. However, as some have pointed out, that would expand the life of the loan, forcing graduates to pay more interest in many cases. It could also impact graduates’ credit.
Regardless, Bliss regards these as Band-Aid approaches. Nothing short of eliminating debt, he says, will let his generation have the same shot at the American dream his parents and grandparents did.
“If you want to ruin a society, cripple all of the young people, the entire millennial generation, saddling them with debt is one way to do it,” he said. “How are we supposed to start families and buy homes? People deserve to start their lives debt-free.”