Solving The Costs of a Career: Self Wagers & Soaring College Debt
At one point Chris Rong was an ambitious high school student, preparing to move to college and pursue his dreams. Back then he didn’t know he would become a victim of student debt. He didn’t know that, by the time he finished graduate school, he would have incurred 400,000 dollars in student loans. In a sense college has become almost like a bet. Student’s have to take out thousands of dollars in loans just to get a chance to go to college, and there’s always a chance they could fail or not land a lucrative job after graduation. This is a huge responsibility for teens that are merely turning 18. By putting their signatures on loan applications, students are signing away and jeopardizing their financial stability for the next 20 years. There isn’t a practical solution to this problem other than better informing students to increase their awareness of the consequences of student loans.
A Complex Background
Not all students qualify for the same loans. They can be split into federal and private loans, and federally there are four different types. Direct Subsidized Loans are for undergraduate scholars who are eligible and show a financial need for their college costs, while Direct Unsubsidized Loans are for undergraduate and graduate students without financial need. The difference between the two are that subsidized loans require the government pays the accrued interest while students remain school, while with unsubsidized loans scholars have to pay the interest. Another option is a Direct PLUS Loan for graduate scholars, who are still dependent on their parents, and typically it comes with an interest rate of 7.9 percent. The final option is a Direct Consolidation Loan which simply brings all of the scholar’s federal loans into one payment for convenience. However, private sector loans are usually offered through separate institutions like banks, and have their own individually set interest rates. Typically scholars use federal loans because a third party signer isn’t needed, there are flexible repayment options, and interest is usually fixed at the current rate. Still private loans are always a possible option to replace them. These forms of loans make up the figure for average student loan debt, and these different ways that students can get tangled up in debt warrants the complexity and dire need to find a resolve.
Every year the average for student debt and tuition increases immensely. According to the BloomBerg article “Interest Rates on Student Loans Are Expected to Drop Soon”, the average student’s loan debt was sighted at nearly 28,400 dollars in 2014. The article states, “From 2005 to 2012, average student loan debt has jumped 35%.” That correlates to the increase in tuition that grows about 2.2% annually. As the job market becomes more competitive, the amount of students going to college grows higher. Over the last few years the push for our youth to go college has gotten stronger. With this swelling push paired with a continuing rise of tuition, the debt that our young scholars will have to carry on their backs will grow immensely.
The Broken Spiral
Excessive debt has shown a correlation to scholars’ choice of college major. In “Choosing a College Major: For Love or for the Money?”, David Koeppel’s tells the story of how Jieun Chai, a Stanford Graduate, deeply regrets her choice in major. She explains that she argues with herself all the time for not continuing her major in Asian languages. That’s her true passion. “I’m so angry at myself for giving in to peer pressure, parental pressure and societal pressure,” says Ms. Chai. And this links to a huge epiphany; are we really are only given two choices, being happy or financially stable? Isn’t the whole point of college to major in something you love and perfect something you could be happy doing for the rest of your life. What’s the true point of taking this huge financial bet if you’re not truly happy at the end of your collegiate career.
This huge amount of stress caused by that financial burden then translates to scholars’ later lives. It is causing students to reevaluate their life decisions, and more importantly it’s affecting their happiness. In many cases it’s almost like a relapse, as if students didn’t fully understand the situation they’re currently stuck in. In “Students Borrow More Than Ever for College” Anne Marie Chaker explains that there are rippling effects of debt that then affects many ex-students’, which includes putting off traditional milestones like buying a house or having kids. When students get in debt and then become parents in debt, the spiral just continues onward and families fail to grow, putting many young adult’s lives on hold. This spiral stops college graduates from contributing to markets and from paying for goods and services that helps our economy grow. Sam Frizell touches on this in his article “Student Loans Are Ruining Your Life. Now They’re Ruining the Economy, Too”. “Think about it this way: if students have significant debts, it means they’re less likely to spend money on other goods and services, and it also means they’re less likely to take out a mortgage on a house. Consumer purchasing is the primary driver of the U.S. economy, and mortgages and auto loans play a huge role as well.” Without the contribution of those generation of students our economy as a whole will always be stifled. Consequently the federal government gets impacted, so do federal student loans. Obviously the system is broken and future reforms should halt these problems from flowing into one another.
“800 dollars compared to nearly 30,000 isn’t even a drop in the bucket”
Their New Hope
On July 1st of 2014 a temporary 0.8 percent interest rate bump for federal loans was mandated, so current students are fixed at a rate of about 4.66 percent. This increased rate is supposed to expire on June 30th of 2015 and with that waves of antcipation have recently surged forward. According to “Interest Rates on Student Loans Are Expected to Drop Soon” this wouldsave students about 800 dollars over the span of a ten year loan. It’s something, but 800 dollars compared to nearly 30,000 isn’t even a drop in the bucket. It’s not even a semester’s worth of books.
Suprisingly ex-students that have taken loans out in the past wont be affected by this decreased interest. This shift wont effect these old scholars who are trapped in debt and some have fixed interest rates that are hovering around 8.5 percent. Moreover the only way these federal loans are ever forgiven is if a person makes payments for up to 20 years. These monthly payments end up costing them 10 percent of their discretionary, yearly income. In comparison, you’re taxed 15 percent of your yearly income if you’re married and making between 18,451 and 74,900 dollars. Considering that private loans are almost never forgivable, students that go to college could face a 20 year long consequence. These changes in interest rate are not impacting the amount of debt that our young students have. 800 dollars is simply not going to help students with their 360 monthly payments.
President Obama’s new initiative called “The Student Aid Bill of Rights” is supposed to mitigate some of the problems that students have been facing through out their loan lives. This bill includes creating a centralized complaint system, establishing better communication between loan holders and loan distributers, and possibly reforming debt forgiveness in bankruptcy. This definitely would help out students in certain situations and make it easier when trying to find help for current problems. It is definitely a step in the right direction, but it seems to only really benefit certain scenarios like if a student needs information about their loans, or perhaps if a student had become completely trapped in debt with their only option being bankruptcy. It doesn’t address the full scope of the problem. That students have no clue what they’re signing up for until long after the pen’s left the paper. It only trims the edges.
A New Solution
Through out high school students take many classes ranging from psychology to drivers education, and being a college student many of peers have no idea how student loans work. To them loans are more or less a momentary evil, and they’ll worry and learn about later down the road. According to a study by NERA, “About 65 percent misunderstood or were surprised by aspects of their student loans or the student loan process. About two-thirds of private loan borrowers, including those who took out both private and federal loans, said that they did not understand the major differences between their private and federal options.” Perhaps in all of those high school classes we take, there could be a class sponsored by the school or the government that informs these young scholars about how these loans actually work. Then they would be able to aptly understand the financial consequences of going to college and could create a better way of paying for it. Furthermore with extra time to evaluate their options, scholars would be able to choose majors they love without as much financial fear. Years of debt and stress could easily be shaved off of the situation.
Even though it’s very convenient to have everything kept online, student loans shouldn’t be completed on there. Now all it takes is a simple electronic signature. You don’t even have to be in the room to sign up for up 20 years worth of loans. If a student is taking out 30,000 dollars in loans, the same price as a brand new car, perhaps they should get the opportunity to meet with a federal advisor to talk over their payment plan and how long it will take for them to be debt free. Even high school advisors could give these students guidelines about debt. A few meetings through out a high school student’s senior year could save them from so many possible mistakes.
Similar my proposal, schools in Oklahoma have recently required that students be taught how to manage their finances. Starting at 7th grade students begin learning topics that include understanding loans, borrowing money, and understanding interest. In order to graduate they need to demonstrate an understanding in loans, taxes, investing, and many other financially related areas. With these freshly learned topics students now have the ability to make wiser economic decisions. As of now only 5 states mandate such a requirement for graduation, but in Oklahoma the program is growing in acclaim and gaining local support. “To help, local banks such as Bank of Oklahoma are sponsoring these programs, providing needed funds and software to teach personal finance literacy.” says Elyssa Kirkham in “Oklahoma Adopts the Toughest Personal Finance Educational Requirements in the U.S.” In the coming months many graduating students from this new program should be carving out their financially careers. Those choices will have a huge impact on their lives. This could spread awareness and also bring similar financial course requirements to other high schools.
It’s understandable that this problem is extremely complex and not easily solvable. Specifically, this solution isn’t meant to instantly solve the problem of student debt, but what it does is give students the ability to aptly make their financial decisions and educatedly choose their futures. Unlike the “The Student Aid Bill Of Rights” and decreased interest rates, it does affect the problem at it’s root, our youth. Hopefully school programs like Oklahoma’s will catch on. Then the paths and gambles our young scholars have to take wont be as long or as treacherous, and their futures wont be as rife with debt.
