A college education is more important today than ever. Those who graduate with a four year degree earn 50 percent more than those with only a high school diploma. But higher education is expensive. As a result, most families rely on student loans to help defray this cost. Over the past decade, as more students pursued higher education, loan debt soared. In 2001, only one in eight households had an educational installment loan. By 2010, one in five had such a loan. Today, outstanding student debt exceeds one trillion dollars.
Loan defaults have also increased. Of the 20 million borrowers who have begun repayment, nearly one in three is past due. These increased debt and default rates are exacerbated by the confusion student borrowers and their families face as they attempt to navigate their financial aid options.
One area of confusion is the difference between governmental loans and private loans. Many private, non-governmental loans do not offer the same consumer protections and repayment options of federal loans. Private loans often come with uncapped, adjustable interest rates that are more expensive in the long-term, and carry more payment shock for students. These terms make it difficult for borrowers to budget for repayment.
This chart shows an example of what a borrower in a lower credit tier might pay on a private loan compared to what they would pay on Stafford loan. Additionally, most private loans do not offer the flexible repayment options that are available on federal loans. It becomes harder for borrowers facing financial difficulties to work out a payment solution and prevent default. Moreover, unlike all other unsecured non-governmental loans, private student loans are not dischargeable in a bankruptcy. This lack of repayment options for private loan borrowers make it very difficult for student borrowers to recover from economic hardship such as unemployment or underemployment.
Another factor contributing to the increase in student loan defaults is the increase in for-profit educational institutions. Representing only nine percent of overall student population the for–profit segment takes a disproportionate share of federal student aid and contributes to student debt burden levels and default rates. This chart shows three-year default rates for private colleges, public colleges and for-profit colleges. Even though for-profit schools represented less than 10 percent of total college enrollment, these students comprised 47 percent of federal loan defaults. While the for-profit industry attributes their lower graduation rates to vulnerable students, many policymakers and education advocates challenge both the financial burden these students bear and the institutional commitment to education.
In order to address the wide range of challenges that face student borrowers today, lawmakers and regulators will need to use a multi-faceted approach that addresses the cost of the financing and repayment options. CRL recommends three specific policy reforms: A simplified financial aid process, enhanced borrower awareness, and more accountability from educational institutions. With so many challenges facing student borrowers today, lawmakers and regulators will need a variety of remedies to address the cost associated with financing a college degree.
The high cost of higher education• More than $1 trillion in student debt• 37 million borrowers
20 million borrowers repaying Delinquent Student Loan Borrowers in the Repayment CycleAlmost 1 in 3 (2011Q3)borrowers isbehind on Past due balancetheir student 27% Currentloan 73%
Important differences between Federal and Private Loans Federal Loans: Private Loans: • Directly from federal • From banks, other financial government institutions, and schools • Fixed interest rates – directly subsidized (current rate • Variable interest rates, and 3.4%) and unsubsidized other loan terms vary by lender • Grace period and other • Often lack protections repayment protections available with federal loans65% of students surveyed say they misunderstood or weresurprised by aspects of their student loans or the loan process
Private Loans are More Expensive Monthly Payment Comparison for Student Loan Borrowers With Lower Credit Scores: Federal Stafford vs. Private loans $450 $450 $400 $348 $350 $300 $268 $250 $229 $200 $150 $100 $50 $0 3.4% Subsidized fixed rate 6.8% Unsubsidized fixed 13% Private loan adjustable 20% Private loan adjustable Stafford rate Stafford rate rate40% of students taking out private loans did not take outall the lower-cost federal loans they were eligible for first
For-Profit college loans are driving the jump in defaults25.0% 22.3%20.0% 17.2%15.0% 9.7%10.0% 7.1% 6.8% 5.0% 4.2% 0.0% FY2005 Private colleges Public Colleges FY2008 For-Profit Colleges Source: The Senate Committee on Health, Education, Labor and Pensions
Student Loan Reforms • Require school certification of private loans. • Allow private student loan debt to be discharged in bankruptcy. • Increase oversight of for-profit educational institutions.
For More InformationContact us: Kathleen Day (DC): 202-349-1871 Graciela Aponte (CA): 510-379-5518 Ginna Green (SC): 510-866-5989