In 2017, Americans owed $1.4 trillion in outstanding student loan debt, second only to mortgage debt. Although younger people hold most of this debt, older Americans increasingly find themselves saddled with student loan debt as well. The number of people age 60 and older with student loan debt quadrupled between 2005 and 2015. About three-quarters of them borrowed to help pay for their children’s and grandchildren’s college education. People age 60 and older owed $66.7 billion in student loans in 2015.
Impact on retirement savings—carrying student debt later in life makes it harder for people to save for retirement. Indeed, those nearing retirement age with student debt have less saved for retirement than those without student debt. Specifically, the CFPB found that heads of household age 50-59 with outstanding student loan debt had a median of $55,000 in an employer-based retirement account such as a 401(k),compared with $65,000 for those with no outstanding student debt. Similarly, those with outstanding student debt had a median of $31,000 in an individual retirement account, compared with $56,000 for those without outstanding student debt. And student debt can directly affect retirement income, as those who default on federal student loans are subject to Social Security garnishment. The number of people whose Social Security was garnished to pay off a defaulted federal student loan more than quadrupled from 8,700 to 40,000 between 2005 and 2015.
Older Americans primarily help others pay for college through two types of loans:
Taking out a Parent PLUS federal student loan for up to the full cost of attendance. Parent PLUS loans require a credit check, but they are not underwritten for affordability. As a result, some parents find that they are unable to afford payments and face potential default. An AARP survey from 2017 of people age 40 and older who had taken out loans to help others go to school (or had repaid such a loan in the prior five years) found that 40 percent of Parent PLUS borrowers who have reached the repayment stage have shown signs of distress. These include making at least one late payment (20 percent), making at least one partial payment (20 percent), contacting the loan servicer about lowering the monthly payment (15 percent), and missing at least one payment (15 percent).
Cosigning a private student loan, in which parents, grandparents, and others who cosign are legally responsible for repaying a loan if the primary borrower fails to do so. The 2017 AARP survey found that 14 percent of cosigners whose loans have reached the repayment stage have had to make payments on the loans because the primary borrower did not pay.
Role of high cost of college—older people are taking on this high level of debt at least in part because the cost of attendance at schools has risen much faster than inflation and wage growth; as a result, the amount of federal student loans and grants available to students today covers a much lower proportion of the current overall cost of college attendance. For example, the maximum federal Pell Grant award—offered to students from families with low incomes—covered on average about half of the cost of attendance of four-year public colleges in the 1980s, compared with less than 30 percent in 2017. In 2016-2017, the average cost of attendance for four-year degrees at public universities was over $20,000 for in-state students and over $35,000 for out-of-state students. For private nonprofit schools, it was over $45,000. Yet the maximum federal Pell grant—which, unlike loans, do not have to be repaid—was just $5,815 that academic year. And students themselves have difficulty getting loans without help from others; juniors and seniors could generally get no more than $7,500 themselves in loans directly from the federal government. As a result, students increasingly must rely on parents, grandparents, and others to help fund their education.
In order to expand the opportunity to attend college to people with low and moderate incomes, some states are offering new tuition-assistance programs that lower the cost of attendance. For example, New York offers a program that will pay the cost of in-state tuition for students from families with low and moderate incomes. The Excelsior Scholarship Program offers free undergraduate tuition (after Pell and other grants are applied) to students whose families make under $125,000 per year. Although these students still must pay fees, which can be substantial, this is a positive step toward reducing the debt burden on students of low and moderate incomes. In exchange for free tuition, these students must take at least 30 credit hours per year and agree to live New York for the length of time they are in the program.
Impact on race and ethnicity—student loans pose disproportionate burdens on people from racial and ethnic groups that have experienced discrimination. For example, 90 percent of African American and 72 percent of Latino undergraduates take out student loans, compared with 66 percent of white undergraduates. African Americans and Latinos are also more likely to default on their student loans. One analysis of federal student loans found that African Americans typically owe more than they borrowed 12 years after taking on that debt, with nearly half of African American borrowers defaulting. A 2017 AARP survey found that among people age 40 and older who took on debt to help others go to college or had repaid such debt within the past five years, African Americans and Latinos were more likely to still have outstanding student debt of their own. The widening wealth gap between whites and non-whites can help explain both this higher propensity to take out loans and the higher rates of loan default.
Problems with for-profit colleges—for-profit colleges claim to expand educational opportunities for underserved populations. Indeed, people from racial and ethnic groups that have experienced discrimination, people with low incomes, single parents, and older students seeking new skills are more likely to attend for-profit colleges than are other types of students. But for-profit colleges are expensive and often do not offer valuable educational opportunities for students, making them especially risky for the vulnerable students who typically enroll, more than half of whom ultimately drop out. One study found that the vast majority of for-profit college students experience higher debt and lower pay than they did before, largely because so many for-profit college students ultimately drop out and the cost of attendance is about four times higher than at community colleges. A Senate investigation found that more than half the students enrolled in for-profit colleges end up dropping out, and that for-profit colleges had more than 2.5 times the number of recruiters for each employee providing support services. In 2010, for-profit colleges employed more than 3,500 recruiters but just over 3,500 career services staff and just under 12,500 support services staff, according to the Senate Health, Education, Labor, and Pensions Committee.
Given the high cost and negative outcomes of for-profit college students, such institutions sometimes use aggressive sales tactics, such as highlighting false program graduation and employment rates, to attract students. According to a Senate investigation, recruiting at these schools is “essentially a sales process,” focused on enrolling vulnerable students without regard to whether the school will provide educational opportunities for them. Some have been shut down for fraud. For example, several large chains of for-profit colleges have shuttered after the schools lost their accreditation and the federal government announced that new students would not qualify for financial aid. Because for-profit colleges receive the vast majority of their funding from students who receive federal student aid (including federal loans, Pell grants, and GI bill benefits), when their students can no longer receive that aid, they typically shut down. The federal government plays a large role in the proliferation of for-profit colleges. For example, the Senate Health, Education, Labor, and Pensions Committee found that federal taxpayers invested $32 billion in for-profit colleges over one year, and that for-profit colleges receive 86 percent of their revenues from taxpayers.
Abuses in servicing and debt collection—regardless of the quality of a program, once a borrower is required to repay a student loan, other potential problems can arise. Student loan servicers—companies that collect debt payments on behalf of lenders—have often been accused of engaging in deceptive practices. According to the federal Consumer Financial Protection Bureau (CFPB), nearly two-thirds of complaints they receive about student loans relate to servicing problems. For example, borrowers complain that servicers are not putting them into income-driven repayment plans, which would substantially lower their monthly payments, even though they meet eligibility requirements; instead, servicers simply suspend payments for struggling borrowers, which increases the interest owed over the life of the loan. Other borrowers complained about improperly applied payments.
Student loan borrowers who default on their debt face additional problems because of the abusive practices of some debt collection agencies. The Federal Trade Commission has taken enforcement action against debt collectors for illegally harassing student loan borrowers, and older federal student loan borrowers have complained to the CFPB that debt collection account errors have led to improper Social Security garnishment.
Student Loans for Higher Education: Policy
Higher education institutions should provide transparency regarding tuition and fees and establish them in a manner that ensures affordability and increases educational opportunities for all, including by establishing innovative programs.
“Higher education institutions” refers to all post-secondary education programs, including vocational programs and for-profit colleges.
Investment and oversight
Federal and state policymakers should both increase public investment and provide robust oversight and regulation in higher education to:
- facilitate cost containment,
- ensure transparency, and
- prohibit higher education institutions, student loan servicers, and student loan debt collectors from engaging in unfair, deceptive, or abusive practices.
“Higher education institutions” refers to all post-secondary education programs, including vocational programs and for-profit colleges. Increasing public investment in higher education includes:
- increasing state government investment in state university systems, including by increasing per-student tuition subsidies and providing free or reduced-cost tuition for low- and middle-income students;
- increasing the number of students who receive federal need-based grant aid (such as Pell grants) and the amount the each student is eligible to receive;
- expanding federal student loan availability, including subsidized loans, for students themselves to take out so they do not need to rely on private student loans and Parent PLUS loans to the extent that they do now; and
- putting in place other mechanisms to lower the overall cost of attendance and thereby decrease the need to take out increasing amounts of student loan debt. Facilitating higher education cost containment includes providing state and federal oversight to establish whether higher education institutions are making investments that increase the educational opportunities for students, rather than simply increasing amenities.
Ensuring transparency includes ensuring that higher education institutions provide information on how revenues are spent, as well as key outcomes for students and graduates, such as the percentage of students who graduate and employment rates and salary data for program graduates.
Prohibiting higher education institutions from engaging in unfair, deceptive, and abusive practices includes the following:
- For-profit schools and programs should not enroll students when they do not provide a return on investment. In making such a determination, federal and state policymakers should consider factors such as the percentage of students who graduate, level of student loan debt coming out of the program, percentage of attendees who default on their student loan debt, percentage of attendees or graduates who are employed, and average earnings for attendees or graduates.
- Federal and state policymakers should put in place policies to align the financial outcomes of for-profit colleges and programs with student success. For example, programs with low graduation rates, low employment rates, and/or low salaries relative to debt incurred should not be able to receive federal student aid. Students should typically be able to earn enough money after leaving a program to be able to pay back the student debt they took on to attend a program.
- Federal and state policymakers should prohibit misleading marketing practices, including misrepresenting data related to program outcomes, such as graduation rates or the employment rates and salaries of graduates.
- Federal policymakers should continue to require schools to be accredited in order for their students to receive federal financial aid, including federal student loans. Federal and state policymakers should strengthen accreditation standards to better focus on program quality, with an evaluation of whether schools and programs are providing marketable skills that will lead to gainful employment.
- Students who took out federal student loans for an educational institution that has been shown to have defrauded students should be eligible for loan forgiveness. To the extent possible, the cost of the forgiveness borne by the fraudulent school, not taxpayers.
Prohibiting student loan servicers and student loan debt collectors from engaging in unfair, deceptive, or abusive practices includes the following:
- Student loan servicers and student loan debt collectors should be required to be licensed in each state and properly apply payments.
- Student loan servicers should be required to provide cosigners with statements and other loan information as a matter of course. They should also seamlessly enroll eligible borrowers in public service loan forgiveness and income-driven repayment plans.
States should also establish an office of the student loan ombudsman to provide timely assistance to student loan borrowers.
Communication of repayment options
People who seek to take out or cosign student loans should receive clear information on their responsibility for repaying the loan. Once they are required to repay a loan, they should be able to choose among affordable repayment options, including:
- seamless access to income-driven repayment plans,
- refinance options with consumer protections, and
- for those in default, the ability to enroll in income-driven repayment plans and public service loan forgiveness.
Access to clear information on responsibility for paying back a loan includes the following:
- In particular, those who seek to cosign private student loans should receive clear and accurate information so they understand they are legally responsible for repaying the loan if the primary borrower fails to do so.
- Financial aid award letters should be uniform (comparable among schools). They should include, in a simple and understandable format, a breakdown of grant aid (that decreases the total amount owed) and loan aid (that will ultimately need to be paid back).
Seamless access to income-driven repayment plans includes the following:
- Federal Parent PLUS borrowers should be able to enroll easily in income-driven repayment plans. (Currently, Parent PLUS borrowers cannot directly do so; they must first consolidate their federal loans and then apply for the least generous income-driven repayment plan.
The ability to enroll in income-driven repayment plans and public service loan forgiveness when in default includes the following:
- All federal borrowers should be able to receive income-driven repayment plans and public service loan forgiveness while in default. Currently, they cannot do so until they “cure” the default. Yet they may be in default because their required payments were never affordable and they did not know that they could enroll in income-driven repayment plans prior to defaulting.
Refinance options with consumer protections includes the following:
- For example, the interest rate and annual percentage rate (which incorporates both the annual interest rate and up-front fees paid) of the new loan should be lower than that of the existing loan, even if the overall loan term is longer.
- In addition, federal borrowers who seek to refinance should be advised to check first whether they qualify for income-driven repayment plans and/or public service loan forgiveness, which may provide more relief than a private loan refinance.
Social Security beneficiaries and student loan debt
Social Security benefits should not be garnished, levied, or offset to collect federal student loan debt (see also, Garnishment of Social Security Benefits)
Although this policy specifically refers to Social Security benefits, it also is intended to apply to other federal benefits intended for subsistence, such as those provided by the Department of Veterans Affairs.
Arbitration in education contracts
Mandatory binding arbitration and restrictions on participating in class action lawsuits should ideally be prohibited in higher education contracts (see also Pre-Dispute Mandatory Binding Arbitration and Private Enforcement of Legal Rights).
“Higher education contracts” refers to contracts for all post-secondary education programs, including vocational programs and for-profit colleges.In general, our cross-referenced arbitration policy calls for an end to mandatory binding arbitration (MBA) and class action waivers. In addition, when MBA is imposed, it calls for improving consumer protections within arbitration.
In the context of higher education, some institutions—including many for-profit colleges—require consumers to go through MBA and prohibit class actions as a condition of entering a program. Yet some of these for-profit institutions engage in outright fraud and provide no return on the substantial investment a student may have paid. Students can suffer high financial damages in these situations and end up without a degree and with credits that cannot be transferred to other institutions.
This policy therefore supports action from government and the private sector to ensure meaningful access to redress for these students.