Beginning with the 2016 U.S. presidential election and Democratic candidate Bernie Sanders, the liberal U.S. Senator from Vermont, tuition-free higher education has become a political hot topic. That, of course, has merged with dramatic news about the ongoing student loan debt crisis, which totals some $1.7 trillion in outstanding debt. In the 2020 presidential election, several Democrats proposed forgiving some or all federal student loan debt (debt from federal student loans, but not necessarily private loans).
President Joe Biden has indicated some support for forgiving some student loan debt, but action on forgiveness has been delayed. Currently, payments on federal student loans are paused until August 31, but no further information has been given. The pause on loan repayments began during the 2020 Covid shutdown as a way to protect struggling college graduates, but these debtors are still on the hook to repay their balances eventually. Although some narrow groups of student loan debtors have received some loan forgiveness, an announcement on all student loan debt has not been forthcoming, frustrating many. It’s not looking promising for the once-anticipated announcement on broad student debt forgiveness, but a recent poll indicates that college students may be taking on more student loan debt in anticipation of a forgiveness announcement.
A Brief Explanation of the Student Debt Crisis
In 1992, the U.S. federal government began its Direct Lending program for student loans, allowing college students (and their parents) to borrow directly from the federal government. While this greatly improved access to student loans and allowed more people to benefit from the lower interest rates charged on federal student loans versus private student loans, it led to a steady increase in college tuition costs. Since 1980, college tuition has almost tripled in cost, far surpassing the rate of inflation (rising prices).
The rising tuition rates force more college students to borrow money to attend college. And as the ratio of borrowing has risen, so have both the total number of students attending college and the average amount they are borrowing. In terms of supply and demand, the ease of getting federal student loans (and student loans in general) has massively increased the demand for college since 1980, resulting in a huge increase in tuition costs.
Unfortunately, the student loan crisis is difficult to fix: As more and more students graduate from college, more career fields require college degrees. This keeps college attendance high even as tuition costs rise. Fortunately, some key pieces of knowledge can help aspiring college students avoid costly mistakes when it comes to student loans!
Key Things to Know About Student Loans
During your senior year of high school, fill out the FAFSA (Free Application for Federal Student Aid). This application gives you access to federal student loans – the ones with a lower interest rate – and, more importantly, access to grants that do not need to be repaid. Through federal and state grant programs, “free money” is available to students who qualify! Unfortunately, many aspiring college students do not apply in time to receive them.
You’re paying interest on everything you borrow, so you want to borrow as little as possible. This means doing some legwork and budgeting in advance. Although there is a maximum amount of federal student loans available that is determined by the school’s tuition rates and local cost of living, you don’t want to take the max. Many student debt horror stories come from those who borrowed the maximum amount and used the amount not needed for tuition to fund living expenses. Although many college programs may advertise high starting salaries for fresh graduates, the reality is not as rosy: recent college grads only make about half of what they expect ($55,000 per year versus about $100,000 per year).
You can minimize the amount you need to borrow by applying for all available scholarships and grants! Unfortunately, many students each year end up borrowing money when they didn’t have to. From the high school graduating class of 2021, only 57 percent filled out the FAFSA, meaning many did not get the invaluable Pell Grant. Many do not apply for federal student aid (including grants) or scholarships because they automatically assume they are ineligible.
Needs-based grants and scholarships can allow higher levels of family income than many students assume, may be flexible if there are few applicants, and take the number of siblings into account. There are also exceptions to federal student aid limits based on extenuating circumstances. The bottom line? Fill out those applications for grants, scholarships, and student aid rather than taking the “easy path” and taking out a bigger loan.
Repayment begins six months after graduation, so make sure you’re being a good student and working toward a goal of getting hired. Different repayment plans are available, so explore them before you get that tassel! Students graduating into lower-paying fields may benefit from a graduated repayment plan or a revised pay-as-you-earn repayment plan (REPAYE). There are also federal student loan forgiveness programs after ten years of repayment for graduates working in the public sector (government) or nonprofit organizations.
However, just like with grants and scholarships, it is up to the student or graduate to apply for these different options. As with all things related to personal finance, being diligent and proactive is key! It is often more difficult to try to switch loan repayment plans after repayment has begun than to do it beforehand.
If you go to graduate school immediately after your undergrad, your student loan repayment will be delayed as long as you are in grad school. It is good to know this fact, but don’t forget that you will have to pay interest on all student loans for graduate school as well. Most of the student debt horror stories ($100,000+ in debt) come from those who went to graduate school, law school, or medical school. Graduate school can be invaluable for your career, and an awesome life experience, but don’t take out more student loans blindly. Federal student loans for graduate school are unsubsidized, meaning they cost more than loans for your undergrad.