Student Loans for Higher Education

Background

In 2018, 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.

Nearly nineteen percent of this debt, or $263 billion, is held by people age 50 and older, according to data compiled by the Federal Reserve Bank of New York. The number of people age 50 and older with student loan debt more than tripled between 2004 and 2017, with a total of $263 billion in student debt.

Impact on retirement savings—carrying student debt later in life makes it harder for people to save for retirement. The Consumer Financial Protection Bureau An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. ( CFPB An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. ) 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 “offset” (or garnishment). The number of people whose Social Security was offset to pay off a defaulted federal student loan more than quadrupled between 2005 and 2015, from 8,700 to 40,000.

Older Americans primarily help others pay for college through two types of loans: taking out a Parent PLUS federal loan directly from the federal government and cosigning a private student loan.

Parent PLUS loans can be taken out for up to the full cost of attendance. They 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. A 2017 AARP survey 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).

Parents, grandparents, and others who cosign a private student loan do not always understand that they 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 the 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. Today, the amount of federal student loans and grants available to students covers a much lower proportion of the overall cost of college attendance. For example, the maximum federal Pell Grant award—offered to students from families with low incomes—covered 79 percent of the cost of attendance of four-year public colleges in 1975, compared with 29 percent in 2017. In 2016-2017, the average cost of attendance for four-year degrees at public universities was more than $20,000 for in-state students and more than $35,000 for out-of-state students. For private nonprofit schools, it was more than $45,000. Yet the maximum federal Pell grant—which, unlike loans, does not have to be repaid—was just $5,815 that academic year. 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. At least ten states offer free tuition for community colleges after taking into account Pell and other grants. 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 less than $125,000 per year. Although these students still must pay fees and other expenses, 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 in New York for the length of time they are in the program. Other states’ programs have similar work, service, or residency requirements.

Impact on race and ethnicity—student loans pose disproportionate burdens on people from non-white racial and ethnic groups. 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 were carrying 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, who are more likely to attend them. This includes historically disadvantaged racial and ethnic groups, people with low incomes, single parents, and older students seeking new skills. But for-profit colleges are expensive and often do not offer valuable educational opportunities for students. This makes them especially risky for the vulnerable students who typically enroll, more than half of whom ultimately drop out. One study of data obtained through a Freedom of Information Act request with the Department of Education found that for-profit colleges accounted for 99 percent of fraud claims filed by students. At the same time, for-profit colleges only enrolled ten percent of students and accounted for 18 percent of outstanding federal loan dollars.

One study found that the vast majority of for-profit college students experience higher debt and lower pay than they did before. In addition, 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, these 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 are companies that collect debt payments on behalf of lenders. Servicers have often been accused of engaging in deceptive practices. According to the CFPB An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. , 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 that 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 complain 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. Older federal student loan borrowers have complained to the Consumer Financial Protection Bureau An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. that debt collection account errors have led to improper Social Security garnishment.

Unlike other consumer debts, both federal and private student loans are largely ineligible to be discharged in bankruptcy under current law (see also Banking, Credit, and Debt—Bankruptcy section of this chapter). Bankruptcy discharges for student loans are only available in very limited circumstances, often requiring the borrower to prove a higher standard of financial distress than what is necessary to discharge other types of debt. However, federal loans can be discharged administratively outside of bankruptcy in cases of death, permanent disability, or a small number of other scenarios.

Federal repayment plans—The Department of Education offers income-driven repayment plans for students who take out loans but cannot afford the standard payment amount. Payments can be as low as 10 percent of discretionary income. But federal Parent PLUS borrowers cannot directly enroll in income-driven repayment plans. Those who wish to do so must first consolidate their federal loans and then apply for the least generous income-driven repayment plan. This could still leave them in debt for 25 years. In addition, federal student loan borrowers who are in default cannot enter receive an income-driven repayment plan 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.

Right to redressstudents at some institutions—including 98 percent of students at federally funded for-profit colleges—are prohibited from going to court to settle disputes. Instead, they are required to go to arbitration and may not pursue class claims even in arbitration (see also Chapter 12, Personal and Legal Rights - Post-dispute Mandatory Binding Arbitration). Yet some of these for-profit institutions have engaged in fraud or have not provided a 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.

STUDENT LOANS FOR HIGHER EDUCATION: Policy

Transparency

In this policy: FederalStateLocal

Higher education institutions should set tuition and fees in a manner that ensures affordability and increases educational opportunities for all, including by establishing innovative programs to lower the cost of attendance. Tuition and fees should be transparent.

Investment and oversight

In this policy: FederalState

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, loan originators, student loan servicers, and student loan debt collectors from engaging in unfair, deceptive, or abusive practices.

Increased public investment

State policymakers should increase investment in state university systems, including increasing per-student tuition subsidies and providing free or reduced-cost tuition for students with low and middle incomes.

Federal policymakers should increase the number of students who receive federal need-based grant aid (such as Pell grants) and the amount each student is eligible to receive.

Federal policymakers should expand federal student loan availability, including subsidized loans, for students themselves to take out to decrease reliance on private student loans and Parent PLUS loans.

Policymakers should put 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.

Robust oversight

Federal and state policymakers should provide oversight to determine whether higher education institutions are making investments that increase the educational opportunities for students, rather than simply increasing amenities.

Higher education institutions should provide information on how revenues are spent as well as key outcomes for students and graduates. This includes the percentage of students who graduate as well as employment rates and salary data for program graduates.

Protection against unfair, deceptive, or abusive practices

For-profit schools and programs that do not provide a return on investment should not enroll students. 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, low salaries relative to debt incurred, or a combination of these 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 out to attend a program.

Federal and state policymakers should prohibit misleading marketing practices. This includes 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, including considering whether schools and programs are providing 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 discharging these loans should be borne by the fraudulent school, not taxpayers.

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 streamline the process to efficiently enroll eligible borrowers in public service loan forgiveness and income-driven repayment plans.

States should also establish an office of the student loan ombudsman Derived from the Swedish word for an intermediary, “ombudsman” as used in health care and long-term care settings is a person who investigates and resolves complaints on behalf of older people who are residents of nursing homes and supportive housing. The complaints generally focus on a… to provide timely assistance to student loan borrowers.

Federal policymakers should expand the circumstances in which student debt is dischargeable in bankruptcy (see also Banking, Credit, and Debt—Bankruptcy policy in this chapter). This may include:

  • loans that do not provide access to income-based repayment options,
  • private loans that lack death or disability discharges, and
  • loans taken out for programs with documented histories of engaging in unfair, deceptive, or abusive acts and practices.

Communication of repayment options

In this policy: FederalStatePrivate Sector

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 with consumer protections, including seamless access to income-driven repayment plans for federal loans. This includes refinancing options with consumer protections and the ability of federal borrowers in default to enroll in income-driven repayment plans and public service loan forgiveness if qualified.

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 and loan aid.

Federal Parent PLUS borrowers should be able to enroll easily in income-driven repayment plans.

All federal borrowers should be able to receive income-driven repayment plans (and if qualified, public service loan forgiveness) while in default.

Student loan refinances should incorporate consumer protections. These include:

  • 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; and
  • Federal borrowers who seek to refinance should be first informed whether they qualify for income-driven repayment plans, public service loan forgiveness, or both. These may provide more relief than a private loan refinance and incorporate other consumer protections.

Social Security beneficiaries and student debt

In this policy: Federal

Social Security benefits should not be garnished, levied, or offset to collect federal student loan debt (see also Chapter 4, Savings and Retirement—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, as well as income tax refunds.

Arbitration in education contracts

In this policy: Federal

Mandatory binding arbitration and restrictions on participating in class action A class action combines the claims of all the people injured by a particular policy or practice into one lawsuit.  lawsuits should ideally be prohibited in higher education contracts (see also Chapter 12, Personal and Legal Rights - Pre-Dispute Mandatory Binding Arbitration and Chapter 12, Personal and Legal Rights - Private Enforcement of Legal Rights).

In general, our cross-referenced arbitration policy calls for an end to mandatory binding arbitration (MBA) and class action A class action combines the claims of all the people injured by a particular policy or practice into one lawsuit.  waivers. In addition, when MBA is imposed, it calls for improving consumer protections within arbitration. This policy supports action from government and the private sector to ensure meaningful access to redress for these students.