As the count of students pursuing higher education increases due to expectations and requirements by employers, tuition prices and the inevitable student debt associated are a growing concern. As industries transform and require more-skilled workers, greater numbers of employers are requiring new hires to possess college degrees to some extent, thus demanding that young people invest in years of education regardless of steep borrowing costs and long term financial concerns. Despite more than $1.3 trillion in student debt—a number that will continue to rise—and countless numbers of proposals made in order to mitigate the student debt problem, no major solutions have been adopted. Exploration finds many different solutions to reduce payments on an individual basis, but no long-term cost has been designated as the primary reducer of student debt.
One of the most available solutions is the income-based repayment plan, which depends largely upon income and family sizes. Borrowers pay up to the fixed 10-year payment amount in increments of 10% of discretionary income. The plan is discharged after 20 years for any undergraduate debt. Payments are kept affordable with reasonable caps, and any remaining debt that exists after the discharge date is forgiven. Those whose incomes are lower than 150% of the poverty level will not have a minimum loan repayment amount, while those who earn above will be charged at a maximum of 15% of their income. Somewhat similarly, graduated payment plans depend on income, but are adjusted if future income changes, as well as the level of indebtedness of the borrower. While this plan is good for some, for others the plan might not be appropriate for certain individuals, who might be able to secure a lower payment under a different plan depending on their circumstances [IBRInfo (2017)].
Not so unlike a standard payment plan, the extended repayment plan allows a repayment period of up to 25 years. Eligibility is not dependent on indebtedness or income, although a minimum monthly payment is required. Because the plan is flexible regarding eligibility, it remains friendly towards low debt, high-income students who otherwise might not qualify. The plan covers both subsidized and unsubsidized Stafford loans, federal consolidation loans, as well as PLUS loans [McGurran (2017)]. However, because of the inclusiveness of this plan, users would not be able to seek debt forgiveness.
In order to qualify for certain repayment plans, including the income-based plan as described, consolidation might be required. Consolidation, which allows borrowers to consolidate multiple loans into a single loan, can help them obtain lower interest rates, achieve a lower monthly payment, and can be valuable to those who want to withdraw a co-signer, or are close to paying off their loans [StudentAid (2017)]. Consolidation can help those individuals bearing multiple loans that are in good standing, since borrowers are able to make just one payment instead of several on different loans. A downside to consolidation is the potential extension of the loan term and potentially paying thousands more over the life of the loan, however there are some forgiveness programs available due to an increase in loan balances for those who qualify. Given that forgiveness programs vary by state, change of residency might be an option for those borrowers who are looking for ways to save on loans. In contrast, refinancing lets borrowers find a lower interest rates and better repayment terms, but because it is based on a borrower’s credit score, income, and financial status, it might not be suitable for some.
Some employers today are helping students to pay back their debts by offering repayment assistance. These programs are gaining traction over time, but are still relatively new and only offered by a mere 3% of employers. As more big name companies begin to offer these benefits, more will likely follow. At a company’s discretion, they offer a monetary amount to workers for a certain period of time, unless the loan is paid off sooner. Current federal law allows this benefit to be taxable to the employees, although this might change in the future under the Student Loan Repayment Assistance Act (which is under review by Congress). This change would make the benefit tax deductible, incentivizing more employers to offer the benefit [College Ave Corner (2016)].
Several other solutions for college borrowers include automatic billing, and Upromise. Most companies reward automatic billing with small (0.25%) decreases in interest rate, which can make a substantial impact on the total amount paid at maturity. Upromise is a loan-linking program that helps students pay back existing loans by giving them up to 10% cash back earnings on their shopping expenses. Despite the perk of getting cash back, there exists many hidden expenses such as transaction costs, steep late and return payments, high purchase APR’s and a complicated reward scheme. Regarding high APR’s, the card charges a 26.24% interest rate even for someone with an 850 FICO. Other, similar credit reward systems like the Amazon rewards Visa card can be deceptive in the fine print. For example, the card offers 5% cash back on all Amazon prime purchases, but that requires the user has an Amazon prime membership, which costs $99 [Magnify Money (2016)]. Borrowers should take care to ensure that the benefit of these credit rewards systems outweigh the hidden cons associated with them.
In exceptional cases, some borrowers may be able to wipe out their student loans in the case of bankruptcy. The law requires that in order for borrowers to qualify for early discharge of loans, they need to prove that paying back the loans would cause an undue hardship. Courts are hesitant to allow loans to be discharged through bankruptcy, calling to use the Brunner Test, requiring that borrowers meet three factors that help define “undue burden” (The College Investor 2017). These criteria include the presence of poverty where the individual cannot maintain a minimal standard of living, a persistent financial situation that is likely to remain or decline in the foreseeable future, and lastly “good faith” where the borrower has made every reasonable effort to repay the loan. Failure to meet any one of these criteria will result in a decision by the courts not to discharge the borrower’s loan. These criteria exclude the vast majority of borrowers, preventing them from filing for bankruptcy to get out of the loan (Michon 2016).
Something to consider with the implementation long-term solutions is whether or not such solutions will cause a change in demand for both high education and financing for education. Ideally, a solution like decreasing interest rates on student loans should cause demand for education to increase, but economic theory argues that many decisions are made based on incentives that effect the “moment of decision-making”, rather than long-term ramifications. Therefore, students given the same funds are not basing their decision to enroll in school on whether their interest rates are two-percent, four-percent, or ten-percent [McGrath (2016)]. If a student is in jeopardy of default, the interest rate charged shouldn’t necessarily make a substantial difference. Yet, decreases in interest rates could make loans more manageable, and therefore could help to decrease overall defaults. Additionally, lowering interest rates across the board is costly and poorly targeted, as it benefits all borrowers, including those who have no trouble paying off their loans. In an income-based payment system, decreasing interest rates only effects the length of the loan, not the monthly payment. This, again, would not effectively target those borrowers who need it. This system would provide easy help for those with high incomes, and lackluster aid for those who are struggling to pay off their loans.
If the ultimate goal is to increase enrollment numbers, grants and decreasing tuition prices are likely much more effective, because the immediate benefits are what attract students to enroll. Decreasing tuition costs will cause a greater number of students to pursue college, thereby increasing the number of educated professionals. Education accessibility will help to increase innovative thinking and human capital availability. Although human capital realizes that the skill sets of individuals can greatly vary, the United States might see a surge of demand for jobs in STEM fields, as there is a large pull for more students to pursue technology related fields [Oxford University Press (2013)]. Some fear that innovative technology such as robots, computers, and automation will disrupt the workforce and replace the vast majority of blue collar workers. However, this concern is not a novel one; as early as the 1800’s many argued that automation would detrimentally increase unemployment rates, however historical technological advancements have increased jobs, productivity, and demand for skilled labor [Nath (2015)]. On the other hand, unskilled workers tending blue collar jobs will likely see a displacement by technological advancements, yet the benefit of increased safety levels for jobs where manual labor is required will increase significantly.
Effect on salaries:
Historically, high wage states possess more highly educated workers, who return the states’ educational investments by participating more in taxes over their lifetimes [EPI (2017)]. Those positions requiring educated workers will experience salary increases to attract the best talent. With a potentially vast expansion of technical jobs, skilled workers would not struggle as much as unskilled laborers, whose jobs could be severally disrupted by innovative advancements in automation. Individuals who do not have access to education will continue to chase a decreasing number of available blue collar jobs, and salaries would likely remain at minimum wage levels.
Initiating a reduction in interest rates would likely fail to deliver any sizable impacts on the debt outstanding. Because borrowers tend to make decisions based on how they benefit “now”, people are not notably more likely to borrow money at a lower interest rate compared to a higher interest rate; perhaps there would be a slight decrease in debt outstanding in the long term if borrowers find it marginally easier to make payments and wish to pay more than the minimum payment each month. However, people who are at risk of not being able to make a payment on their student loans would not suddenly find themselves able to pay off their debt even if interest rates drop significantly. Overall, changes would be small enough that there would not be substantial enough justification for a steep decrease in interest rates. Based on earlier discussion, decreasing tuition costs would be the best way to decrease debt outstanding. This solution would increase enrollment numbers for those who were previously too-burdened by the ever-increasing education costs. Even if the college and workforce demographic remained as it is now, the average person would be able to pay off their loans more quickly because of decreased costs. Yet, because of increased enrollment numbers, more educated working professionals will achieve higher salaries, further contributing to a decrease in the total student debt outstanding.
Ultimately, there exist countless solutions that can potentially help decrease the debt that borrowers face on an individual basis, but perhaps the only reasonable long term solution lies in addressing the daunting tuition prices—which could be the root cause of the issue. Decreasing the overall costs of higher education would ultimately increase enrollment numbers and thus churn out college graduates in higher numbers who are qualified and able to enter the workforce without facing crippling amounts of debt. An offset benefit of this decision would result in a faster rate of technological advancement, lowering the number of manual labor contractors and assembly line workers demanded by consumers today.