Tackling Student Loan Debt
By Dustin Weeden | Vol . 23, No. 21 | June 2015
Did you know?
- Two-thirds of student loan borrowers owe less than $25,000.
- People with loan balances of less than $10,000 who did not complete their degree are most likely to default.
- Those over age 50 owe 17 percent of the outstanding student loan balance.
By every measure, student loan debt has increased rapidly in the last 10 years. Since 2004, the number of postsecondary students incurring debt increased by 89 percent, and the average amount owed increased by 77 percent. At the end of 2014, 43.3 million borrowers collectively owed $1.2 trillion in student loan debt. As the modern economy’s reliance on a highly educated workforce continues to grow, more Americans are pursuing postsecondary credentials. Although some of the increase in the number of student borrowers can be attributed to increased enrollment at higher education institutions, more students from all income levels now are borrowing to complete their degrees.
This rapid rise in student loan debt has coincided with an increase in delinquency and default rates. According to the Federal Reserve Bank of New York, more than 1 million borrowers are defaulting—not making a payment for 270 consecutive days—on their student loans each year. Some evidence also suggests that student loan debt is negatively affecting state economies. Student loan borrowers are less likely to own homes, build household wealth, marry, start retirement accounts and purchase cars.
These trends—more students borrowing, larger average loan balances, higher default rates and potential negative economic effects—have propelled what has traditionally been a federal issue into state-level policy discussions. While most states focus on reducing the cost of college, a growing number of legislatures are exploring and enacting policies that address student debt.
Forgiveness/Repayment Programs. At least 35 states offer a loan forgiveness or repayment program. Under repayment programs, states provide financial support to borrowers. Under forgiveness programs, a portion—or occasionally the full amount—of a loan is forgiven if the borrower meets certain requirements. States traditionally have offered these programs to graduates in targeted professions such as primary care physicians who work in rural areas. In recent years, however, several states expanded repayment and forgiveness programs to include additional professions and specifically targeted graduates in critical but moderate-wage fields such as teaching and social work.
Providing Students More Information. Recent research indicates that many students are not fully aware of how much they are borrowing to pay for college. Several states are taking steps to provide students with more and better information about borrowing. For example, Indiana HB 1042 requires higher education institutions to provide students with information estimating the total amount of loans taken out, the total payoff amount, the monthly repayment amount, and how close the student is to reaching the maximum borrowing limit.
Refinancing Existing Loans. While federal loan interest rates are the same for all borrowers in each of its four student loan programs, the interest rates on private loans vary with the borrower’s credit risk. Consequently, private loan interest rates tend to be higher than federal rates for many borrowers—in some instances, much higher. Iowa, North Dakota and Rhode Island have started programs or pilot programs to refinance existing loans at lower interest rates. California and Minnesota enacted legislation in 2014 giving state loan entities the authority to start refinancing programs. Although these programs are in the early stages of implementation, they are designed to offer lower interest rates, allowing borrowers to more quickly repay loans at lower total costs.
Tax Deduction and Credits. At least 36 states indirectly allow residents to claim an income tax deduction for interest paid on student loans. Because these states use a taxpayer’s federal adjusted gross income or calculation for taxable income, the maximum deduction is equal to the federal limit of $2,500. Massachusetts allows borrowers to deduct the full amount of interest paid on loans used to earn an undergraduate degree. Maine offers a tax credit to individuals and businesses for student loan payments. The amount of the credit is tied to the price of tuition at Maine community colleges and universities.
The federal government enacted the first public student loan program in 1958, and the U.S. Department of Education currently is the largest direct lender of student loans. Federal loans accounted for more than 90 percent of the $106 billion of student debt issued in the 2013-14 academic year. The federal government currently offers four loan programs, which are outlined in the table. The direct subsidized and unsubsidized programs account for 81 percent of federal loans. Dependent undergraduate students may borrow a maximum of $31,000 in direct loans, only $23,000 of which can be subsidized.
Currently, seven federal student loan repayment options are available for which borrowers may be eligible. Under traditional repayment programs, borrowers make fixed or graduated payments for 10 to 25 years, depending on the option selected. Newer repayment options are linked to a borrower’s income. Under these income-driven repayment options, borrowers pay 10 percent to 20 percent of discretionary income, depending on the program and when the loan originated. Under certain income-driven repayment options, any loan balance remaining after 20 or 25 years is forgiven.