Everyone’s Talking About Student Loan Debt — Here’s What You Need to Know

Loans, Student Loans
Everyone’s Talking About Student Loan Debt — Here’s What You Need to Know

This article is the first in an ongoing NerdWallet series on student loan policy issues.

The amount of student loan debt carried by U.S. graduates is big. And the buzz around it is even bigger.

Total outstanding student loan debt was $1.2 trillion as of December 2014, according to the Federal Reserve Bank of New York — $77 billion more than the year before. And the National Center for Education Statistics reports that between 1995 and 2012, average tuition and fees at public four-year colleges increased more than 45%, from $15,900 a year to $23,200 a year.

Policymakers and think tanks across the political spectrum have suggested ways to minimize college costs and make student loans more manageable. Here’s a look at the proposals out there, what they are aiming to do and how they could affect you.

What Congress and Obama are saying

Policymakers have offered up a wide range of proposals in Congress the past few years to streamline student loan repayment. Last summer, Sen. Marco Rubio (R-Fla.) and Sen. Mark Warner (D-Va.) co-sponsored the Dynamic Student Loan Repayment Act, creating a program that automatically ties all federal student loan borrowers’ monthly payments to their incomes.

In January, Sen. Lamar Alexander (R-Tenn.) — chairman of the Senate’s Health, Education, Labor and Pensions committee — and Sen. Michael Bennet (D-Colo.) introduced the Financial Aid Simplification and Transparency Act, simplifying the Free Application for Federal Student Aid (FAFSA) form and limiting federal student loan repayment options to either 10-year standard repayment or income-based repayment.

There’s been a simultaneous push to minimize the amount of debt students take on or are required to pay back. Sen. Elizabeth Warren (D-Mass.) introduced an amendment to the federal budget in March that would have let graduates refinance their federal student loans at 2013-14 interest rates of 3.9% — a substantially lower rate for some borrowers. But it wasn’t included in the final budget.

And in April a group of Democrats introduced twin House and Senate resolutions supporting increased funding to public universities that would offer in-state students the option to attend public colleges debt-free.

While none of these efforts have translated into laws so far, higher education policy discussions will most likely escalate as Congress looks to reauthorize the Higher Education Act, first passed by President Lyndon Johnson in 1965. It’s a major piece of legislation, the most recent version of which expired at the end of 2013, that includes provisions governing federal student loan and financial aid programs.

Sen. Alexander has said he plans to bring an updated version of the bill to a vote by the end of this year.

Sen. Elizabeth Warren (D-Mass.) introduced an amendment to the federal budget in March that would have let federal student loan borrowers lower their interest rates.

Meanwhile, the Obama administration has centered its student debt strategy primarily on loan repayment. The White House expanded income-based repayment for eligible federal student loan borrowers, which caps monthly payments at 10% of discretionary income and forgives the remaining loan balance after 20 years (or 10 years for those who work in public service).

In March, President Barack Obama also signed a presidential memorandum, the Student Aid Bill of Rights, which aims to simplify borrowers’ relationships with student loan servicers, companies that manage loans on behalf of the federal government.

How serious is the student debt problem?

The Consumer Financial Protection Bureau says there’s evidence student loan debt keeps graduates from buying homes, starting businesses and saving for retirement. Almost 14% of students defaulted on their federal loans as of 2011, according to the most recent data available from the U.S. Department of Education.

At the same time, the cost of college has risen steadily for decades. A 2014 report by the State Higher Education Executive Officers Association found the amount of state money appropriated per student fell 24% nationwide in the past 25 years.

Conservative think tank the American Enterprise Institute has endorsed enhancing a college education’s value by shutting institutions out of federal aid programs if they show a history of low graduation rates and high instances of student loan default. Rising college costs has also shifted much of the conversation to giving students a “debt-free” option at their public universities.

“The decline in state funding for state colleges and universities is the main driver of what’s increasing costs,” says Mark Huelsman, senior policy analyst at Demos, a liberal think tank. He’s the author of a 2014 proposal for increasing public higher education funding that he says has drawn interest from several presidential primary candidates.

“States used to be very generous with their state funding of their higher education systems,” he says. “It wouldn’t be such a radical idea to return us to a system of primarily debt-free public higher education.”

But there’s a lack of consensus that eliminating student debt altogether is the best approach to college affordability. Beth Akers, a fellow at the Brookings Institution’s Brown Center on Education Policy, says research shows that the conversation has mischaracterized the reality of student debt.

In January, Sen. Lamar Alexander (R-Tenn.) — chairman of the Senate’s Health, Education, Labor and Pensions committee — introduced the Financial Aid Simplification and Transparency Act.

“The policy solutions that are on the table are kind of solving a problem that I don’t think exists,” she says.

Just 7% of graduates between 20 and 40 years old carried $50,000 or more in debt in 2010, according to a 2014 report co-authored by Akers. The largest share of households, 58%, had between $1,000 and $10,000 in student loans.

“This debt reflects an increase in investment in education, which is a good thing,” she says. “The cases of individuals who have very large debt balances are really pretty rare.”

The candidates weigh in

As the 2016 presidential primaries inch closer, candidates from both parties have signaled they may make the case for wholesale student debt reform. Hillary Clinton has made early mentions of a student debt crisis on the campaign trail, and she is expected to release details of a reform proposal in mid-July, according to Politico.

Hillary Clinton has made early mentions of a student debt crisis on the campaign trail.

Clinton’s challenger for the Democratic nomination, Sen. Bernie Sanders (D-Vt.), introduced the College for All Act in May, which would eliminate tuition and fees at all public colleges and universities.

In an April op-ed in the Washington Post, fellow Democratic contender and former governor of Maryland Martin O’Malley said he supported automatic income-based repayment for all borrowers and the option for college graduates to refinance their federal loans.

Republican candidates Sen. Marco Rubio (Florida) and New Jersey Gov. Chris Christie have recently backed a plan to minimize student debt through income sharing, which allows investors to pay part of students’ college costs in exchange for a percentage of their incomes after graduation.

And Sen. Rand Paul (R-Ky.), who has said he believes a “student loan bubble is looming,” has supported the idea that tuition is a business expense and should be tax deductible, including loan principal and interest.

Republican candidate Sen. Marco Rubio (Florida) has recently backed a plan to minimize student debt through income sharing.

No matter which candidate wins and what shape reform takes, the consequences of growing student debt have the potential to make it a top issue in the coming months, says Huelsman of Demos.

“It’s not good for morale,” he says. “It’s not good for economic growth, it’s not good for achieving what we want to achieve.”

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Brianna McGurran is a staff writer at NerdWallet, a personal finance website. Email: bmcgurran@nerdwallet.com. Twitter: @briannamcscribe.

 

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