Maryland Senator Ben Cardin joins us to talk about the youth movement against gun violence, Russian sanctions, and more. D.C. Councilmember Mary Cheh shares her thoughts on relief for high water bills and news that D.C. Public Schools is taking over an all girls charter school.
The statistics on student loans are scary: Student debt skyrocketed to more than $867 billion last year, and nearly 15 percent of borrowers defaulted. Tuition is rising steadily amid a weakened economy and an 8.3% unemployment rate. The rising debt load has led to warnings of a student debt “bubble” akin to the housing mortgage loan crisis. But many experts say the real picture isn’t as grim as the headlines. Kojo explores what’s behind the numbers, plans to combat student debt, and how we’re rethinking paying for college.
- Sandy Baum Senior Fellow for the Graduate School of Education and Human Development at George Washington University; she's also an independent higher education policy analyst and consultant
- Mark Kantrowitz Publisher of FinAid and Fastweb; Author of "Secrets to Winning a Scholarship"
MR. KOJO NNAMDIFrom WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. Next month, thousands of fresh faced graduates will be leaving the halls of academia with sparkling new degrees and about six to nine months before they have to start making loan payments for them. It's a scary statistic, the average student loan debt for graduates runs close to $25,000. Last year, graduates faced a 9.4 percent unemployment rate, the highest ever recorded. The rising debt load has led to warnings of a student loan debt bubble, a kin to the housing mortgage loan crisis that brought the economy to its knees in 2008.
MR. KOJO NNAMDIBut is the real picture as grim as the statistics and the headlines make it sound? Is relief in sight for student loan debt and what should borrowers know before they take out federal and private loans? Joining us in studio to have this conversation is Sandy Baum, senior fellow at the Graduate School of Education and Human Development at George Washington University. She's also an independent higher education policy analyst and consultant. Sandy Baum, good to see you again.
MS. SANDY BAUMNice to be here, thank you.
NNAMDIAnd joining us by phone from Cranberry Township in Pennsylvania is Mark Kantrowitz, publisher of FinAid.org which is a financial aid information site and FastWeb.com which matches students to scholarships. He's also the author of "Secrets to Winning a Scholarship." Mark Kantrowitz, thank you for joining us.
MR. MARK KANTROWITZThank you for having me.
NNAMDIIf you'd like to join the conversation, feel free to call us at 800-433-8850. Are you still paying back student loans years after you left college? How has it impacted the quality of your life, 800-433-8850? You can send email to firstname.lastname@example.org, send us a tweet @kojoshow or simply go to our website kojoshow.org and join the conversation there. Sandy Baum, lets break down the numbers for a second, starting with this figure. Student loan debt last year totaled $867 billion. What kind of personal tab does that mean for students who attend public and private schools?
BAUMWell, it's really important to ask the question about what it means for people. Because the aggregate amount of student debt is much less meaningful then what it means for individuals. The reason that, for example, the widely sided statement that student loan debt now exceeds credit card debt has happened is because credit card debt has plummeted. More and more people are going to college so there's more and more student debt out there.
BAUMWhat matters is individual students and for individual students, for most of them, their lives are really better because of the educational opportunity provided by going to college. There are some students, however, for whom student loans are a serious problem and we really have to tackle those problems for that group of students.
NNAMDIAs I mentioned, most federal loans offer a six to nine month window before students have to start repaying. What are the default rates looking like for students who have these debt loads?
BAUMWell, default rates on all loans are up because of the condition of the economy. They are also up on student loans. Actually, however, that shouldn't be the case for federal student loans because students have the option of an income-based repayment plan and you don't have to pay if you don’t have a job and you don't have to pay if you don't have enough money. So we have a real problem with getting students to take advantage of those protections.
NNAMDIWe'll talk more about that later. But what's generally the source of these loans? How many are federally backs and how much is from private sources?
BAUMWell, for a while, a few years ago, about a quarter of the loans that students were taking came from private sources. That was a serious problem because those loans don't come with much protection for students. Now, about 10 percent of the loans come from private sources. And students should be very, very careful. Federal loans are much better than private loans. You have very little recourse if you have trouble with a private student loan.
NNAMDIMark Kantrowitz, there's been a lot of ominous warning from legislators, bankruptcy lawyers and others that student loans, paired with our weakened economy and high unemployment, could be the next economic bubble to burst. What say you?
KANTROWITZI don't think it's realistic to call it a bubble at this point. Maybe, two decades from now we might have a bubble. But right now, the vast majority of students graduate college with a reasonable amount of debt and are able to repay their student loans. Perhaps about 10, 12 percent will struggle to repay their loans, either because they majored in a field of study that doesn't pay very well or they graduated with too much debt for that particular income level. A good rule of thumb is to not graduate -- that your total debt at graduation should be less then you're expected annual starting salary. If your debt is less than your income, you'll be able to pay off that debt in 10 years.
NNAMDIWell, I'm see a lot of quotes here that make me a little scared. This from Standard and Poor's in February, "Student loan debt has ballooned and may turn into a bubble." This from the head of the National Association of Consumer Bankruptcy Attorney's "This could very well be the next dead bomb for the U.S. economy." And this by Bill Frezza, fellow at the Competitive Enterprise Institute, that's a free market think tank based in D.C., "And just as the federal government was forced a national Fanny Mae, when the bubble busts, Uncle Sam has now nationalized the college loan business with an eye on disguising the coming tsunami of student loan defaults." What do you say to that, first you, Mark Kantrowitz?
KANTROWITZWell, it's hard to nationalize a loan program that is already a federal loan program. All the government did in the Health Care and Education Reconciliation Act is shift the role of the private lenders in making new loans to having the direct loan program make all new loans, saving the government money. The government was still on the hook either way. A bubble requires a disconnect between the value of an asset and the price of an asset that is fed by an oversupply of liquidity. Now, the federal government is a source of 90 percent of all new education loans. If the federal government runs out of the money to make new loans, we have much more serious problems than any putative student loan bubble.
NNAMDISo you're saying that this is not like the mortgage crisis we experienced starting in 2008?
KANTROWITZNo, first of all, student loans are a 10th the size of the mortgage market place. And what we are seeing is severe declines in college affordability. Both the federal and state governments have been disinvesting in post-secondary education. Congress cut $8 billion a year out of the Pell Grant program last year and cut an additional $1 to $2 billion out of it this year. The state government, according to the Illinois Grapevine report, cut their support of post-secondary education by 7.6 percent last year.
KANTROWITZWhen you cut -- when grants fail to keep pace with increases in college costs, there are three main outcomes. Either students graduate with thousands of dollars of additional debt or they shift their enrollment from higher cost colleges to lower cost colleges such as from four year colleges to two year colleges or they just don't go to college at all.
NNAMDISo I'd like to ask you, Sandy Baum, are you seeing any warning signs that point to a bubble like scenario at all?
BAUMNo, I agree with Mark about the bubble analogy. We have some very exaggerated headlines. I mean, the fact is that mortgage debt is about 3/4's of the consumer debt in the economy. Student loans are small relative to that. And the payoff to a college education is as high as it's ever been. And so it's not that people are -- people bought houses thinking the price would go up and instead the price went down. And the fact is that people's education still gives most people very high return. So for some people, it doesn't work out, for most people, it does.
BAUMAnd the problem is, I think, for people to think of the appropriate counterfactual. The question is, what if you didn't go to college? And people's earnings are higher if they go to college. If they have the money out of those earnings premiums to pay back loans, the unemployment rate is much lower. You sited a high unemployment rate for college graduates, try the unemployment rate for high school graduates of the same age.
BAUMSo we should be concerned about the students who are having trouble and there are some institutions to which students are turning that really are not doing them a service and they are borrowing a lot of money and graduating without a good education. But that's not true for most students. We need to protect students in those areas.
NNAMDI800-433-8850 is the number to call if you have something you'd like to add or a question to ask about this conversation about college student debt. Have you chosen not to pursue a college major or a particular career path because you don't think the degree will pay off in the long run, 800-433-8850? Can you discharge your student loans if you file for bankruptcy, Mark Kantrowitz?
KANTROWITZNo, you cannot. The only way to discharge a student loan, whether it's federal or private in bankruptcy, is an undue hardship petition in an adversarial proceeding. That's an incredibly harsh standard. In 2008, the most recent year for which we have data, a total of 29 students exceeding getting a full partial discharge of their federal student loans out of 72,000. That's less than 0.04 percent. You're more likely to die of cancer or in a car accident then to get your student loans discharged in bankruptcy.
NNAMDISandy, what kind of repayment plans are most kids choosing when they leave school?
BAUMThe repayment plans are important. Let me just say one thing about something that Mark said, which has to do with the federal government's role. It's true that the sticker price of college is going up very rapidly, partially because states are decreasing their per-student funding for institutions. But the reality is that the federal government has rapidly increased subsidies to students in the past few years. Pell Grant spending, grants for low income students, doubled in just two years.
BAUMAnd tax credits have become much more generous. So even though the price is up, the federal government is picking up a much bigger part of that price and students should know that. And then when it gets to repayment, most students just do a standard repayment plan and they pay back equal amounts for 10 years. And they are unaware of or have difficulty accessing the repayment plans for federal loans that would diminish their obligations when their incomes are lower. Everyone who is having trouble at all should look into income based repayment.
NNAMDIWell, since we don’t seem to be talking about a major bubble at this point, maybe we're potentially talking about a bunch of mini bubbles, depending on what your major you choose and what employment is like for you in your chosen career path. Sandy, are statistics bearing that out? Are we seeing default levels rise in some majors over others?
BAUMWell, it's difficult to talk about majors because, of course, liberal art students can major in -- you might major in philosophy and get a great job. So people really need communication skills, critical thinking skills to go into the labor force. However, what it is, I mean, if you're going to major in early childhood education and be a nursery school teacher, you should not borrow a lot of money. Also you should be very careful that if you're going to a vocational program, you find out whether that program is appropriately certified, whether it appropriately prepares people for job opportunities because the people with the biggest problems are people who get a narrow skill and then find out that they got the wrong training to use that skill.
NNAMDIWell, here's this tweet we got from Abduania (sp?), "I graduated with a degree in social work, couldn't afford to pay loans on salary, changed careers. So I'm paying for a degree I am not using." Mark Kantrowitz, care to comment on how frequent that might occur? Frequently.
KANTROWITZWell, if she borrowed only federal loans, she should look into public service home forgiveness. It works in conjunction with income-based repayment. Income base repayment basis your monthly loan payments on a percentage of your discretionary income as opposed to the amount you owe. And public service loan forgiveness, if you work full time in a public service field such as social work or the example Sandy gave of elementary school teacher, after 10 years, the remaining debt is forgiven.
KANTROWITZSo that makes majoring in social work or teaching a viable career path for someone who wants to give back and through public service. On the other hand, if you're getting a degree in history or sociology or ethnomusicology, those don’t pay as well and you need to focus on borrowing less. The other key thing is to borrow federal first. Federal loans offer income-based repayment in public service home forgiveness. Private student loans do not.
NNAMDISandy, how do we figure out if our college degree has lost or is losing its value?
BAUMThere is a disturbing amount of discussion these days about whether it's worth going to college or not. And it's understandable because in this tough economy there are many college graduates who are really struggling. But if you look historically, this is always true during recessions. And we know that employment for college graduates is increasing before employment for others increases.
BAUMSo, college degrees are worth it for people who have enough information to make wise choices who are motivated and do well in college. People can't just hand you a degree, you have to actually work for it in order to make it pay off. But people do have to think about where they're headed afterwards. You can't just go to school thinking, oh, I'll spend this money now and worry about it later.
BAUMYou need to think about where this degree is likely to get you. And you need to dig for really good information.
NNAMDIHere is Katherine in Reston, VA. Katherine, you're on the air, go ahead please.
KATHERINEHi. Thank you for taking my call, Kojo. I just have a quick question and I'll take my answer off the air. How has the revenue been going for universities across the country? Are revenues on the rise? And how does this impact people's ability to get an education? Thank you.
NNAMDIFirst you, Mark Kantrowitz.
KANTROWITZWell, college revenues have increased at a gross level. On a net level, they have actually been relatively flat because increasingly more and more of the tuition dollars is going back to the students in the form of grants. According to the NACUBO, the National Association of College and University Business Officers, 37 cents of every dollar of tuition is going back in the form of grants. And that's up about 5 percent from about six, seven years ago. So, more and more of the tuition revenue is going back in the form of financial aid.
NNAMDIAnd I guess, Sandy Baum, the question that Katherine is raising implies that are colleges somehow doing much better even though they are charging increased tuitions?
BAUMNo, they're not doing better. And you have to look separately at public and private institutions, those discount rates that Mark is sighting for private colleges. Public colleges face real problems. And in fact, the revenue that they are getting from the state government has gone way down per student turns. It's lower than it was 25 years ago.
BAUMSo they are using tuition revenues to try to compensate for some of what they've lost in state revenues. But actually, revenues at public four-year institutions are really not even coming up with inflation.
NNAMDISandy, you're particularly concern about students at for-profit institutions in this burgeoning student debt trend. Why is that?
BAUMI'm concerned about for-profit institutions. There are some great for-profit institutions and there are some irresponsible nonprofit institutions. So it's not totally consistent across sectors. But students at for-profit institutions, one, all of them tend to borrow and they graduate with much higher debt than others. For-profit institutions do a pretty good job of getting people short-term certificates.
BAUMBut if you want a four-year degree, your chances of getting one at a for-profit are very low. And we know that half of the student defaults come from the for-profit sector.
NNAMDIWell, you testified in Congress last year that students at for-profit schools are really suffering from a lack of good information about the loans they're taking out. How so?
BAUMWell, it's interesting to note that in the for-profit sector, many of the students are older. But among those who are traditional college age, almost none of them come from middle and upper income families. In other words, no one with parents to guide them is making this choice. So there's a lot of advertising in the for-profit sector and a lot of information that comes online. And it may not be accurate information.
BAUMStudents really don't understand what they're getting into when they pay these high prices when they could pay a much lower price and go to a public institution.
NNAMDIMark, is the same lack of information a problem for students at public institutions who are waiting into repayment?
KANTROWITZI think the financial aid award letters, as a form of college cost and financial aid disclosure need improvement in every type of college, whether they're for-profit, nonprofit or public. And many of these award letters characterize loans as though they reduce the cost of attending a college when in fact usually they charge interest, which increases the cost.
KANTROWITZI'm a very strong proponent of presenting the net price of a college as a difference between the cost of attendance and just the grant, because that's an amount of money the student and their family will need to pay from savings, earnings and loans. It's a much better basis for comparing college cost among different colleges.
NNAMDIOn to the telephones again. Here is David in Hagerstown, MD. David, your turn.
DAVIDHi, thanks for having me on. I just have a comment. I went to a two-year technical institute and I found that -- oh, and I just paid my loan off yesterday or the day before. So…
NNAMDIHow long ago did you go to the two-year...
NNAMDIHow long ago was your...
DAVIDI graduated in 2003.
NNAMDIAnd how much did you have to pay off?
DAVIDIt was in the neighborhood -- I had two loans and it was in the neighborhood of $26,000.
NNAMDIAnd you did that in a matter of nine years or so?
NNAMDITo what do you attribute the choice of technical institute that gave you the kind of income that you could afford to pay that off in that period of time?
DAVIDWell, they actually sent out a recruiter to the high school where I went. And that's what got my interest. But I think while having the degree got me the interviews, it didn't teach me the skills I needed to do my job. I've had two full-time jobs since then and really the skills I'm using are things I taught myself.
NNAMDISo you're saying that the money you're making is unrelated to the education that you got?
DAVIDNot totally unrelated, but the education I received did not prepare me for the jobs I'm doing.
NNAMDIWhat do you say to that, Sandy Baum?
BAUMThat's very difficult to know without the specifics.
BAUMBut the caller said that he thinks he got the interviews because of the degree. One of the functions of degrees is a credential. And it's a flag for employers and they don't know how to look personally at every individual to start with. And another purpose is what you learn. And it's obviously a terrible system if you're not learning things while you're in college. We think most people do, but probably not as much as we would like.
BAUMBut for an individual, whether it's because it's a credential or because you've learned, you still need that degree to get a lot of good jobs.
NNAMDIHere's Matt in Gettysburg, PA. Matt, your turn.
MATTYeah. Hey, Kojo. Thanks for having me on. Great show, great topic. Last year I graduated with my master's degree in public administration. I'm working in a related field and I've got $75,000 in student debt. It is keeping me from getting a home loan. And when you get a call and talk to a bank, they're looking at your debt to income ratio. Sometimes they will count your student debt as debt, other times they won't. But in those cases, it's keeping me from getting a home loan. So...
NNAMDIMark Kantrowitz, any...
MATTThat's my problem.
NNAMDIMark Kantrowitz, any advice for Matt?
KANTROWITZWell, it's not uncommon for student loan debt to force a delay in life cycle events such as buying a car, buying a home, getting married, having children, saving for your children's college education, saving for retirement. The only key advice is to try to pay down the debt as quickly as possible, to devote more than the minimum payment to paying down the debt to eventually pay off that loan and improve your credit score and improve your debt utilization so that you don't have a high debt to income ratio.
NNAMDIThank you very much for your call, Matt. Sandy, the Obama administration's income-based repayment plan is not very well known, but it's got some distinct advantages apparently for people who may not have sufficient income to repay their federal loans. Can you give us some of the basics on this plan?
BAUMThe income-based repayment plan, which applies only to federal loans says that if your income is below 150 percent of the poverty line, you don't have to make payments until your income rises. Then after your income exceeds that level, you only have to pay not 15, it will be 10 percent of the excess income above the poverty line. So that makes the student loan payments very affordable.
BAUMThere are some problems. You have to be careful about whether interest will be accruing while you're not making this payments, for some students it will and for some it won't. But finding out how you can manage your loans so that when you can't afford to pay, you won't be delinquent is terrifically important for people.
NNAMDIAnd I think you pointed this out earlier but it bears repeating, excuse me, if one is unemployed, does one have to pay back your federal loans under this plan?
BAUMNo, you don't have to pay when you're unemployed. You can also have deference and forbearance in other federal student loan programs. So, for federal loans, you shouldn't have to pay when you're unemployed. If you have private student loans, and again the caller was $75,000 of debt, may well have private student loans, I don't know. But those you might have to pay anyway.
BAUMAnd I would urge in the case of -- the question of buying a home, one way to think about it is to ask yourself suppose you didn't have the job you have, supposed you hadn't got that education, how much would you be earning? And would you be able to buy that house under those circumstances? And try to figure out about your standard of living and adjusting your standard of living to make it possible to pay those loans of as quickly as possible.
NNAMDIYou'll find a link to the income-based repayment plan on our website, kojoshow.org. Sandy Baum is a senior fellow at the Graduate School of Education and Human Development at George Washington University. She's also an independent higher education policy analyst and consultant. Sandy Baum, thank you for joining us.
BAUMThank you very much.
NNAMDIWe're going to take a short break. When we come back, we'll continue this conversation on student debt, on whether or not there's a bubble. You call us at 800-433-8850. Have you defaulted on your loans or come close to default? What did you learn from the experience? 800-433-8850 or send email to email@example.com. I'm Kojo Nnamdi.
NNAMDIWe're talking about student loan debt and inviting your calls at 800-433-8850. Has student loan debt forced you to make tough choices about your lifestyle? Give us a call, 800-433-8850 or send us a tweet @kojoshow. Joining us by phone from Cranberry Township, PA is Mark Kantrowitz. He is publisher of FinAid.org, which is a financial aid information site and Fastweb.com, which matches students to scholarships.
NNAMDIHe's also the author of "Secrets to Winning a Scholarship." Mark, an article in Smart Money magazine last week pointed out that a growing number of parents are seeking tuition assistance as soon as kindergarten. How popular are loans for elementary education becoming amidst this growing student debt?
KANTROWITZWell, people who send their kids to private K to 12 are affected by the economy the same as people who send their kids to public institutions. But they don't have necessarily the same financial resources to replace a loss of income. So when they are laid off, they don't want to disrupt their child's college education or increasingly borrowing to help pay for that. We're also seeing a decline in the number of parents who are sending their children for the entire kindergarten through twelfth grade.
KANTROWITZIt's much more likely these days to see them sending them only for the high school education. It's very hard to quantify the decline. And there are a couple of the lenders that have said there has been increased and a couple of the schools have said that there is a decrease in enrollment. But there is no national database showing overall statistics for the industry.
NNAMDIIs the demand mainly from higher income families, since we're essentially talking about private schools for young kids? And exactly how much debt are they taking on?
KANTROWITZWell, in some cases, a private K to 12 education can cost as much as a college education for each year in school. Now the idea that some parents say, well, they'll send a child to private school for, let's say, high school and then the child will win more scholarships to help pay for college. While they do win more scholarships, about $1,000 additional scholarships for students who graduate from a private high school, that doesn't pay for the cost of the college education and it doesn't compensate for the cost of the private school.
KANTROWITZSo if the goal is something other than financial, a private school can be a great education for their child. But if their goal is solely to try to improve the odds of winning scholarships, generally speaking, it doesn't pan out.
NNAMDIHere's Katie in Frederick, MD. Katie, you're on the air. Go ahead, please.
KATIEHi, Kojo. Thanks for taking my call. I had a question. I have accrued a large amount of debt, myself being -- going to get my four-year degree. And, sadly, 90 percent of it is in private loans. I didn't realize, obviously, when I took these out that there was just a difference. I just don't think I had the information or didn't look hard enough for it. But is there any options for me now?
KANTROWITZOkay. So, there have been proposals in the past to allow refinancing of private loans into federal. They haven't passed the most recent effort by Representative Hansen Clarke. It hasn't yet been reported out of committee, so I wouldn't pin ones hopes all on that. There really isn't any way to convert a private loan into a federal loan.
KANTROWITZSo the main option is to try to figure out ways to either reduce the cost of the private loans or to accelerate repayment of them. So, for example, if you're paying a very high interest rate on that private loan or if you're concerned about the interest rates rising over the next few years, you may want to look into fixed rate products such as a home equity fixed rate loan if you have access to that, maybe through a relative.
KANTROWITZThere are risks, however, if you default on a home equity loan, they can foreclose on your home and you can lose the house. If you default on a private student loan, they can't repossess your education. The strategy I often advocate is to line up all your loans according to the interest rate and to pay accelerate repayment of the highest interest rate loans first.
KANTROWITZSo if you have a 6.8 percent Stafford Loan, a federal loan and a 10 percent private student loan and a 12 percent credit card debt, you would want to try to pay off your credit card debt first, then the private loan, the federal. Of course, you'd be making the required minimum payments on all these loans so that you don't go into default.
NNAMDIWell, since Katie is on the line right now, Mark, can you remind us, since tax season is upon us, about some of the credits that are offered to students and their families?
KANTROWITZOkay. Well, one that will be of interest to Katie is the student loan interest deduction. This allows you to deduct as an above-the-line exclusion from income so you can take it even if you don't itemize up to $2,500 in student loan interest, both federal and private loans per year. It'll save you a few hundred dollars off of your taxes. There are also several education tax benefits for students who are still in school.
KANTROWITZThe most popular of which is the HOPE Scholarship tax credit, also known as the American Opportunity tax credit. This gives a tax credit of up to $2,500 based on amounts that you pay for your college education. It's limited to the first four years of post-secondary education. It provides 100 percent of the first $2,000 and 25 percent of the second $2,000 in college tuition fees and textbook expenses.
NNAMDIKatie, thank you very much for your call and good luck to you.
KATIEThank you, Kojo.
NNAMDIMark Kantrowitz, I'd like to read two emails we got, one from Mike in the D.C. suburbs. "I'm an older student. I paid off my college loans many years ago. I was accepted into a local private university MBA program. But after researching how to pay for it, I realized that I should not get a loan for $100,000 in tuition estimated $180,000 total cost including rent, et cetera, for this degree."
NNAMDI"I would be too old with student loans if I did that. It's money that should instead go to my retirement. Younger students can pay it off over a career lasting 30 or 40 years, keeping in mind that graduate students tend to be older, it seems graduate student tuition and the loans to pay for it are becoming an impediment now when it the past these costs, while painful, were acceptable."
NNAMDIThen we got this email from another Mike at the William and Mary School of Law, class of 2011. "The amounts being thrown around in your discussion sound incredibly low to those who have had grad student debt such as I do, or those who have grad student such I do that approaches six figures. While we were promised higher earning potential in exchange for going into debt, for many of us, that is not the case." What do you say, Mark Kantrowitz?
KANTROWITZOkay. Well, first of all, the older student has a very good point, which is, if you are going -- and there's a presumption that if you're borrowing to pay for your education, that you're going to be able to pay back that debt, and if you're close to retirement, you shouldn't be borrowing as much. The ideal is to borrow no more than you can afford to repay in ten years. If you're going to be still repaying your debt when you're in retirement, you're going to have a problem because you don't have new income in retirement.
KANTROWITZAll your debts, whether they are student loans, credit cards, auto loans, mortgages, should be paid off in full by the time you retire, otherwise it just doesn't make financial sense. But there are loans available for graduate school. The Federal Stafford and Federal Grad Plus loans are available and can cover up to the full cost of education which includes not just tuition and fees, but also room and board and other living expenses. Whether that's advisable for someone who is an older student is a bit questionable.
KANTROWITZNow, with regard to a graduate student taking on six-figure debt, a lot depends on the degree. The same rule of thumb that I advocate for undergraduate students, that your total education debt should be less than your expected starting salary applies to graduate students as well. Education debt may be good debt, but too much of a good thing can hurt you. So if you take on six-figure debt for a master's degree that doesn't pay very well, that may not be a very good bargain because you may be following your dreams, but the debt may force you to abandon those dreams by the need to repay the loans.
KANTROWITZSo before you take on six-figure debt to pay for a graduate degree, ask yourself whether there are jobs there, whether the jobs will pay well enough so that you'll be able to repay the debt, and if it isn't the case, then you need to think very carefully about the trade-off between pursuing your dreams and getting into too much debt in order to do so.
NNAMDIKatie, thank you very much for your call. We're going to take another short break. When we come back, if you have called stay on the line. We'll get to your call on the issue of student loan debt or if you still have a question or comment, call us at 800-433-8850. Have you taken out loans to fund your child's private elementary education? 800-433-8850. Send us a tweet @kojoshow. I'm Kojo Nnamdi.
NNAMDIWe're talking student debt and whether or not there is a bubble that can affect the economy. We're talking with Mark Kantrowitz. He is publisher of FinAid.org. That's a financial aid information site and Fastweb.com, which matches students to scholarships. Mark Kantrowitz is also author of "Secrets to Winning a Scholarship." Mark, I wanted to talk a little bit more about private loans in terms of the kind of repayment assistance that holders of private loans have, but I'd like to do that by way of an email and a question.
NNAMDIThe email we got from Beth in D.C. It says, "In the Bush years, conservatives privatized the federal student loan program by running my tax dollars through private banks on the theory that they would run the program more efficiently. Of course these banks had to charge a higher interest rate for all that efficiency, so now big surprise, students are burdened with crushing student loan debt. Obama restored a lot of the program to a government-run footing and conservatives accused him of nationalizing our student loan program.
NNAMDINone of this is surprising to me given this history." Bloomberg and ProPublica have released articles recently pointing out that loan holders who don't know their options under some of these plans are allegedly be taken advantage of by aggressive debt collectors contracted by the federal government. Mark, what kind of basic rights should people default keep in mind if debt collectors come calling?
KANTROWITZWell, the debt collectors are paid on commission, and it's to their financial benefit to get the borrower to pay as much as possible. There are options for borrowers who are in default such as income-based repayment that will yield a lower monthly payment. The debt collectors will not necessarily tell the borrower about those options, so when you get called by a debt collector, the first thing you should do is to look to see what your options are.
KANTROWITZYou might be able to get income-based repayment to rehabilitate the loan. The debt collector may not be as willing if that yields a much lower monthly payment. They have to get you to pay at least three-quarters of a percent of the outstanding principal balance per month in order for them to get a higher commission. Income-based repayment may yield a lower monthly payment. But before you default on a loan, the first thing you should do is call the lender and ask about the options, because you lose options if you default first.
KANTROWITZYou can't get a deferment or a forbearance if you are in default on your loans, and it's more difficult for you to get into the income-based repayment plan. So explore your options. It costs less in a monthly payment under income-based repayment than the 15 percent wage garnishment that goes into effect if you default on your federal education loans.
NNAMDIOn to the telephones. Here is David in Bethesda, Md. David, you are on the air. Go ahead, please.
DAVIDThanks for taking the call, Kojo. I have a question about the cost of education, the rising cost of education for your guest. I started college in 1972 at a four-year private university. Tuition was $2,000. My car cost $3,000. You know, 40 years later, tuition is 15 to 20 times that amount. The same kind of car is probably five to six times that amount. It's been a period of low inflation other than the late '70s and the early '80s, and other than health care, nothing has gone up year after year after year at six, seven, eight percent, as has college tuition.
DAVIDI understand -- I heard the comments earlier about in recent years that federal support for public universities is -- has been diminished and that's, you know, caused a problem, but it seems to me there has been a -- just this steady rise over the last few decades, and I've never heard a very good explanation as to why.
NNAMDICare to offer one, Mark Kantrowitz?
KANTROWITZOkay. So first of all, automobile manufacturing has the potential for economies of scale where they have machines, robots creating the cars, so there are productivity gains. You can have one person controlling many more factory cycles that yield improvements whereas the student faculty ratio today is about the same as it was 40 years ago. So there -- the opportunities for economy to scale and higher education are not as great, and because it is an inherently labor intensive practice.
KANTROWITZIf you were to double the class size, you would be affecting the quality of education because education is interactive. There are also other factors that cause tuition inflation. As Sandy Baum earlier mentioned, when the state governments cut their support of post secondary education, it forces the colleges to increase their tuition revenue, the only discretionary source of revenue, in order to compensate. And if you graph the cuts in state support against tuition inflation, you see mirror images. The primary driver of tuition inflation at public colleges is cuts and state support of post-secondary education.
KANTROWITZAt the private colleges, it's much more dominant, dependent on factors such as faculty and staff salaries, the number of faculty and staff, facility, energy, equipment costs, healthcare costs. I mean, those are key drivers. In addition, at both types of colleges there's a multiplier effect that comes into play because of the awarding of financial aid. As I said earlier, the discount rate is 37 percent, meaning that for every dollar increase in tuition, the college nets only .63 cents on the dollar.
KANTROWITZSo if their costs have gone up say slightly higher than the inflation rate, for every dollar of net tuition revenue they actually have to increase gross tuition rates by $1.58, $1.59. So the cost structure is higher at the private colleges, but it's also a multiplier effect from the awarding of financial aid to enable students to attend the school.
NNAMDIThank you very much for your call, David, and thank you for the explanation, Mark. Here is Ari in -- oh, I'm sorry. Here is LaShawn in Upper Marlboro, Md. LaShawn, you're on the air. Go ahead, please.
LASHAWNHi, Kojo. Thanks for taking my call. I graduated from college six years ago, and I was under the impression that I had federal student loans. Now, I've been paying no problem for the past six years, but it seems that my balance is virtually unmoved. So I called, I found out that I have private loans. I don't remember going from federal to private loans, so I'm wondering -- I would like some -- like a third party to look at my situation just to tell me, you know, just explain to me how this happened.
LASHAWNI also called the company who I'm paying back just to explain to me, you know, about my balance virtually unmoving, but it's like you almost have to be an economist to understand, you know, this was applied here, amortization and all these terms that I don't understand. So I'm just wondering is there a third party….
LASHAWN...that could look into that?
NNAMDIMark Kantrowitz's website, FinAid.org is a very popular resource for information on loans and financial aid. Mark, what other tools do you recommend for someone like LaShawn, people who are either entering or, as in LaShawn's case, already knee-deep in student loans?
KANTROWITZWell, the first thing is that, uh, the student loans could be still federal loans.. Federal loans until July of 2010 were made both directly by the federal government and by private lenders. So it could be that she has federal loans that were made by a private lender, or it could be that they were purely private alternative loans, and there were some lenders that were offering both federal and private loans and it was not uncommon for students to get confused about the difference between the two, especially with some of the entities making the loans seeming to be somehow affiliated with the federal government.
KANTROWITZOften when students say that they've been paying on their loans for many years and they haven't seen much change in the loan balance, there may be other factors. For example, the student may have deferred repaying the loans while they were in school, so it's not just the original amount borrowed, but all that interest that was capitalized while they were in school. That can raise the total loan balance, and in the monthly statement may see the accrued but unpaid interest going down, but not the principal balance, or the student could have chosen a very long repayment term such as a 30-year term so that just like on a mortgage, in the first few years of a mortgage, you don't see very much progress in paying down the principal balance.
KANTROWITZMost of the monthly payments are going to interest, and it's only when you reach the halfway point through the loan term that you start seeing significant progress in paying down the principle balance. But FinAid has a lot of calculators that can show you where you should be given the loan balance, the term of the loans, and you can print a repayment schedule so you can see exactly where you should be at that point in time.
NNAMDIThank you very much for your call, LaShawn, and good luck to you.
NNAMDIMark, this year President Obama proposed a financial aid overhaul that would tie colleges eligibility for campus-based aid programs like the Perkins Loans, work-study jobs, grants for low-income students, to the institution's success in improving affordability. I'd like to hear your reactions to this plan. Is it a step in the right direction in your view?
KANTROWITZWell, it's a step in the right direction because the campus-based aid has been to date based on historical allocations that depend to a large extend on how much money the college got in the previous year, and has not been used to achieve any particular public policy purpose. President Obama's proposal is an updated version of a proposal that he introduced in 2009 that actually passed the House of Representatives in September 2009, but was ultimately dropped in the Senate in the legislation that became the Healthcare and Education Reconciliation Act of 2010.
KANTROWITZNo, keep in mind, campus-based aid represents only about six percent of federal student aid funding, so it's not likely to have a dramatic impact. It is the main form of federal aid that's under the college's discretionary control, so college financial aid administrators really like this money because it helps them fill in the gaps of other aid sources to help students. So they will argue strenuously for colleges to comply with President Obama's proposals, but to some extent, for example, some public colleges don't really have control over their tuition, so their ability to be below average in terms of the net tuition increases that may be more difficult for them to do, and ultimately those colleges may have to increase tuition more in order to compensate for the lost funds. But I believe it's a step in the right direction.
NNAMDIWe got an email from Matthew, who says, "I wish I could go back in time. I have two children, one with $70,000 and one with $45,000 in student debt. Both have only low-paying jobs currently, and of course, I am the co-signer for these. I've saddled them with debt and they or my wife and I will take a lifetime to pay off." I'm afraid that's just about all the time we have. Any quick comments on that one, Mark Kantrowitz?
KANTROWITZWell, and with private student loans, the key risk is that as a co-signer -- a co-signer is a co-borrower so you're equally obligated to repay the debt. If the child isn't able to repay the debt, then the parent's going to be stuck with that loan. They should think very seriously before co-signing any student loan.
NNAMDIMark Kantrowitz is publisher of FinAid.org, which is a financial aid information site, and FastWeb.com, which matches students to scholarships. Thank you for joining us.
KANTROWITZThank for having me.
NNAMDI"The Kojo Nnamdi Show" is produced by Brendan Sweeney, Michael Martinez, Ingalisa Schrobsdorff and Tayla Burney, with help from Kathy Goldgeier and Elizabeth Weinstein. The managing producer is Diane Vogel. The engineer is Jonathan Charry. Natalie (word?) is on the phones. Podcasts of all shows, audio archives, CDs and free transcripts are available at our website, kojoshow.org. To share questions or comments with us, email firstname.lastname@example.org, join us on Facebook, or send a tweet to @kojoshow. Thank you all for listening. I'm Kojo Nnamdi.
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