Debts Out of School (Summer 2007 Trust Magazine article)

Leslie Durham's American dream has curdled into something like a nightmare.

Maybe it began to sour when a lawyer told her that her only realistic option for managing the payments on her $85,500 of student debt was to default and hope that the lenders could not find her.

Or maybe it was this past May, when she broke off her engagement because her fiancé insisted that, if they were to marry, she would have to quit her job counseling battered women and find a better-paying position in pharmaceutical sales.

Or maybe it was when she was diagnosed with anxiety disorder. Durham, who is 34 and lives in Austin, Texas, is not sure.

She just knows that her plight has left her feeling defeated and insecure. “I have no money in retirement,” she says. “I have very little in savings. I can hardly
afford to pay all of the interest on my loans each month, so the debt keeps growing. It's all very overwhelming.”

A graduate of Northern Kentucky University, Durham did exactly what our society has urged generations of high-school kids to do: She got a college degree, even if it meant borrowing scads of money. Her parents, a mechanic and an insurance-company clerk, could contribute little to her education.

“I knew I was taking on a lot of debt,” she says. “But I had this idea that as long as I got a degree, everything would be fine.”

The Project on Student Debt, which was initiated by The Pew Charitable Trusts, aims to help people like Durham as well as future generations of students who may otherwise face the choice between piling up debilitating debts and skipping college. It is part of Pew's growing portfolio of projects aimed at increasing family financial security by advancing practical policies to help Americans save and borrow wisely in the face of rising college, housing and health-care costs.

“Given the increasing importance of a college degree and its rising cost, we set out to identify meaningful reforms that people from across the ideological spectrum could agree on,” says Pauline Abernathy, Pew's deputy director of Health and Human Services Policy.

Abernathy contacted Robert Shireman, one of the nation's leading experts on student financial aid, who had recently founded the nonprofit Institute for College Access & Success with the mission of making college affordable for all.

The institute's first report had spotlighted a costly loophole in the studentloan system. Back in 1980, when the economy was sluggish and private lenders might have begun offering fewer loans, Congress guaranteed them a 9.5 percent return. They could charge students the relatively low market-interest rate and bill the federal government for the difference.

When the need for the subsidy passed, Congress eliminated it but grandfathered the older loans. A few lenders re-processed those loans to continue claiming the 9.5 rate on an increasing, rather than decreasing, number of loans.

“These grandfathers have turned out to have long lives, and a lot of children,” Shireman told The Des Moines Register recently, “and have cost a lot of tax dollars”—more than $1 billion. The outcry over the report, Money for Nothing, ultimately prompted Congress to close the loophole and direct the savings to student-loan forgiveness for teachers.

Based at the institute, the Project on Student Debt was launched in 2005 to advance practical policies to reduce the growing burden of such debt. The need for reform is only increasing. In 1993, fewer than half of college graduates finished school with debt. Today, about two-thirds do, and their average debt has increased by more than 50 percent over the past decade after accounting for inflation.

This gush of debt affects students' lives and career choices after college. Some young people, unwilling to endure the sorts of stresses that Leslie Durham faces, shy away from lowerpaying but socially useful fields like social work, teaching, journalism and the clergy. Others say they are postponing buying cars and homes and saving for retirement. College may have given them a ticket to the middle class, but their debt is preventing them from punching it.

Allan Carlson, president of the Howard Center for Family, Religion and Society, and a participant in a 2005 student-debt symposium cosponsored by the project and the American Enterprise Institute, has called growing student debt “an anti-dowry” because it discourages graduates even from marrying and having children.

Studies have shown that hundreds of thousands of college-qualified but low income students skip college altogether, often for financial reasons, including fear of student debt. Studies have shown that Latino families especially tend to avoid debt, contributing to a growing education gap along socio-economic and ethnic lines, Shireman says.

“We're not anti-student loan,” he points out. “Loans have been an important element in providing access to higher education. We're about reducing the negative aspects of student debt. A large part of what we've focused on is how student-loan repayment works.”

Adds Lauren Asher, associate director of the project and of the institute: “We want to make sure that repaying debt doesn't reverse all the individual and societal benefits of higher education.”

To this end, the project has developed an agenda for reform that includes:

+Making income-based repayment more widely available.

+Reforming economic hardship protections for borrowers, including incorporating family size into the formula for determining who qualifies, and eliminating some of the perversities in the current hardship rules. For example, a borrower currently does not receive hardship protection if she earns $12,000 working full-time but does if she makes the same amount working part-time.

+Simplifying the federal financial-aid application process.

+Expanding need-based grant aid by eliminating excessive lender subsidies.

+Converting the federal tax deduction for student-loan interest into a refundable tax credit, thus allowing lower-income borrowers to benefit.

Taken together, the project's proposals aim to ensure that responsible borrowers with modest post-college earnings do not face an Everest of debt, and that the prospect of indebtedness does not deter students from attending college or entering low-paying but necessary fields.

“It is not difficult to imagine a better, more rational system of student-loan repayment in the United States,” a project white paper says. “The building blocks are there but need to be assembled in a way that makes sense to borrowers.”

Federal policy makers and presidential candidates have been quick to embrace the project's proposed reforms. In July, the House and Senate passed student loan reform legislation by wide margins, incorporating several of the project's recommendations. Both bills would cap monthly loan payments at 15 percent of disposable income and use the savings from reducing excess lender subsidies to increase Pell grants, which do not need to be repaid. The Senate also passed legislation incorporating a pilot of the project's proposal to dramatically simplify the complex federal student-aid application form.

Student debt is a topic that is easy to ignore unless you are facing it or have a spouse or child who is. And it can be tough to gin up sympathy for students who take on big loans—after all, they stand to benefit financially from their education. The evidence is plain. If debt is daunting, life without a college degree is worse: Over the course of a career, someone with a bachelor's degree earns $1 million more, on average, than someone with a high-school diploma.

But when it comes to student debt, straightforward facts like this can get tangled up with misconceptions. “I've been surprised at how much people assume that borrowing is just for high income folks and expensive private schools,” Asher says.

In fact, she points out, low-income students typically borrow the most because funding for need-based grants has not kept pace with the cost of college. And Ivy League universities and their peers often have hefty endowments from which they can provide aid, while state schools lack those resources. According to the project's research, the average debt for a graduate of a public university more than doubled, to $17,250, over the last decade. In seven states, the average loan debt for students graduating from public universities is even higher than for graduates of private, nonprofit colleges.

Furthermore, student debt levels also show unexpected regional differences. Mississippi and Louisiana are America's poorest states, but New Hampshire and Iowa had the most indebted graduating seniors in 2005, both with averages topping $22,000.

Misconceptions about student debt stem partly from the complexity of the current higher-education financing system. On some issues, the public understands the outlines of the debate and stakes involved. But higher-education finance is far from simple: There is a complex blend of federal, state and institutional dollars at work, each with different strings and restrictions attached. Federal policy grew by patchwork, over decades, with blue-ribbon commissions and presidents setting forth principles and ideas to make Americans better educated, and lawmakers creating new aid programs and amending older ones.

The results often lack clarity, yet the bills have risen inexorably. “College prices have increased faster than the rate of inflation for more than two decades,” says Jamie Merisotis, president of the Pew-supported Institute for Higher Education Policy in Washington, D.C.

At the same time, state and federal money for financial aid, measured on a per-student basis, has declined, and many schools have shifted their grants from need- to merit-based awards. (In the United States, affluence and educational achievement are strongly correlated, so the criterion of merit tends to benefit the wealthier.) “Debt has been the only reasonable alternative for a lot of students and their families,” Merisotis says.

“The problem with the current system is that it isn't driven by the interests of students,” he adds. “It's driven by players who've benefited from the student-loan system like lenders, loan-guarantee organizations and colleges and universities.”

The Project on Student Debt was created to change that by involving students in the debate. With support from Pew and the Surdna Foundation for the student activities, the project joined forces with the Student Public Interest Research Groups—better known as the Student PIRGs—to encourage students to testify at public hearings, write to policy makers and speak with reporters about their indebtedness.

To raise awareness of the growth in student debt and the need for reforms, the PIRGs launched Student Debt Alert (www.studentdebtalert.org), complete with a national student-loan debt clock, a student-debt yearbook, and campus rallies and other events where students are photographed next to a giant inflatable ball and chain representing their ballooning debts. Little balls and chains also appeared on students' mortarboards at graduation.

The campaign recruited students to testify at the hearings of the Commission on the Future of Higher Education, a panel created by U.S. Secretary of Education Margaret Spellings.

“The students were at every meeting of the Spellings Commission,” says Tobi Walker, the senior officer at Pew who has overseen the institution's work to engage young people in civic life. “Student debt wasn't on the agenda when the commission began, but the commissioners really shifted to addressing it, and they all said it was the students who made it a priority for them.”

Efforts to bring attention to the issue received a boost this year from New York Attorney General Andrew Cuomo. His office has been investigating the conduct of players in the student-loan industry—including financial-aid directors—and has uncovered misdeeds and conflicts of interest. A former director at Columbia University, for example, owned stock in a private lender that he was recommending to students. And a director at Johns Hopkins University received consulting fees from lenders the school was recommending.

As a result of Cuomo's investigation, several schools made payments as part of settlements—Columbia paid $1.1 million—and several financial-aid directors, including those at Columbia and Johns Hopkins, were dismissed or resigned. It has also given the $85- billion student-loan industry a run on the front pages of the nation's newspapers.

Merisotis, of the Institute for Higher Education Policy, called the financial aid directors implicated in Cuomo's investigation “exceptions, not the rule.” He worries that, if students lose trust in their schools' financial-aid offices, they will be more susceptible to the blandishments of companies offering private loans, which typically carry higher interest rates and fewer protections than those backed by the government.

Debt, like coffee, beer and television, is bad only if you have too much. And most college graduates have debts within reason of repayment, says Sandy Baum, an economist with the College Board, the New York nonprofit that administers the SAT. The amount of debt accumulated by the average college graduate—about $20,000—is manageable for someone making $50,000 a year, which is roughly what the typical college graduate stands to earn in current dollars.

“In the public discussion of student loans, what grabs headlines is panic: ‘Students drowning in debt,'” she says. “But that's just not true.” For most students, Baum views loans as analogous to, say, a businessperson borrowing money—that is, an investment in the hope of creating long-term opportunity. “Everyone thinks it's okay to borrow money to start a business,” she points out.

A few students, though, do stumble into a financial tar pit; about 15 percent borrow $30,000 or more while pursuing their bachelor's degrees, she says. As she told a congressional subcommittee, “Focusing on the plight of these heavily indebted students is more constructive than searching for blanket solutions.”

With funding from the project, Baum and Saul Schwartz, a professor of public policy and administration at Carleton University in Canada, recommended keying students' loan payments to their post-college incomes. This would eliminate repayment for people with the lowest incomes and limit most folks' payments to no more than 10 to 16 percent of income. Only borrowers who ended up with the highest incomes—more than $100,000 for a single person in 2006—would pay a higher percentage than that.

Baum and Schwartz also called for loan-forgiveness programs for people who become, say, teachers, and they recommended a relaxation of the restrictions on discharging studentloan debt in bankruptcy. Under current law, student loans, like unpaid taxes and child-support payments, cannot be dismissed.

Building on Baum and Schwartz's work, the Project on Student Debt developed a Plan for Fair Loan Payments to improve borrower protections and help graduates repay. It petitioned the Department of Education to implement the plan and recruited more than 50 leading student, lender, higher education and civic groups to call for action on it (the plan is reflected in the House and Senate bills).

The project also advanced loan forgiveness and bankruptcy proposals similar to those that Baum and Schwartz recommended.

In Austin, Texas, Leslie Durham awaits some debt relief. She earns only $33,000 a year, so she qualified for repayment relief, but it's of marginal help. Instead of paying $653 a month for 20 years, she pays $605—and $515 of that merely covers interest.

In the meantime, she is trying to buy a one-bedroom condo, which would lower her monthly housing payment—rents are high in a college town like Austin—and enable her to devote more money to repaying her loans. “I know it's questionable whether I'll be approved,” she says.

Durham understands that, in social work, she picked a notoriously lowpaying profession. “I tried working as a financial advisor for Fidelity, but I lasted two weeks,” she says. “I was no good at it.”

But the income-based payment plan passed by the House and Senate gives her reason to cheer up a bit. As the bills currently stand, the team at the Project on Student Debt estimates that she would pay $221 a month for 20 years, contingent on her income and loan amount.

That should enable her to stay in her chosen field. “I really believe that we need social workers,” she says. “There's so much poverty and domestic violence and pain in the world. It's what I'm good at, and I feel like it's wrong for me not to do it.”

Philadelphia-based freelancer Tim Gray previously wrote on the Retirement Security Project for Trust.

Pew is no longer active in this line of work, but for more information, visit the Project on Student Debt Web site or visit the The Project on Student Debt on PewHealth.org.