Tag Archive | "financial responsibility"

The College Conundrum: How US student loan repayment policy created $1 trillion in outstanding debt

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On average, a US student will spend approximately $21,000 per year pursuing a college degree, approximately 22% of which will be paid through borrowed funds. Considering the increasing costs of college tuition coupled with the need for students to borrow almost ¼ of their tuition, it no surprise that the outstanding federal student loan debt has crossed the $1 trillion mark. With continuously increasing tuition threatening to put higher education just out of reach for many Americans, it’s intriguing to consider that many countries around the world take a surprisingly different approach to higher education tuition and funding.

Recently, Germany reverted back to a free tuition model for public universities, after an eight year period in which the universities were allowed to charge up to €1,000 per year (approx. equivalent to $1,300). Denmark takes a similar approach but goes a step further by providing higher education completely free, not only to its own citizens but also to those of any country in the European Union, while also providing monthly stipends for cost-of-living expenses. While not tuition free, Australia nonetheless has a similar student-centric policy that bases tuition on major, with higher rates for those areas in which the student can expect a higher future income. As an incentive to lessen the amount of debt taken on by students in financing their education, students who pay as much of their tuition upfront as possible receive a 10% discount on their tuition rate.

When compared with countries like Australia and New Zealand, the United States’ debt forgiveness and repayment policy seems rather harsh. As previously mentioned, Australian students who are able to pay some of their tuition upfront receive a discounted rate. Anything that is not paid up front is paid back based on income but only once the student has graduated, become employed, and their income has reached a certain minimum level. In the event that their income drops below the minimum level, they are not required to make further payments until their income again meets the minimum standard.

While the US does offer a somewhat comparable systems in theory, in practice the differences are significant. For example, American students do have the option of applying for an income-based repayment plan, but rather than automatically being enrolled in the plan or allowing anyone to opt-in, only students demonstrating partial financial hardship can take advantage of this option. Similarly, American students have the option to apply for deferment or forbearance if they are unable to continue making payments on their loans, however, these options are limited in time, up to three years for deferment and twelve months for forbearance. Most significantly, interest continues to accumulate during the deferment/forbearance period whereas no interest accumulates during the Australian no-payment period.

So is a US college degree worth the increasing price tag? The answer depends on your perspective.

In the US, college graduates in general have a much lower unemployment rate than those without a college degree. As you might expect, when comparing unemployment rates of all college graduates with recent college graduates, the unemployment rate for recent college graduates is higher but maintains fairly steady (peaking at 5% for all graduates in 2010 compared with 7% for recent college graduates in the same year). Somewhat troubling however, is the fact approximately 44% of graduates are underemployed, meaning those graduates who report having a job are employed in a job that does not require their degree. Thus the question of whether or not to pursue a college education depends on balancing the likelihood of landing a “dream job” (or even finding a job after graduation), with the encumbrance of a large amount of unforgivable debt. Given the staggering and still increasing amount of federal student loan debt, this, apparently, is a gamble that many hopeful young Americans, myself included, are willing to take.

 

Demi Arenas is a 2L and Staff Editor on the Denver Journal of International Law and Policy.

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