Examining the Future of Student Debt

Last week, the Student Loan Ranger attended a compelling panel titled "Making College Cheaper and Better," hosted by the New America Foundation.

The panel included student debt luminaries, with introductory remarks by Jamie P. Merisotis, president and CEO of the Lumina Foundation, whose Goal 2025 project aims to increase the proportion of Americans with high-quality degrees and credentials to 60 percent by the year 2025.

The New America Foundation's Kevin Carey and Jordan Goldman, founder and CEO of Unigo, discussed the disruption education technology startups could pose to the traditional educational model. And Robert Gaines, special assistant to the chancellor at Elizabeth City State University, described how a college composed almost entirely of low-income and minority students has far exceeded its predicted graduation rate by creating a "culture of students first."

[See why low-income students should still apply to college.]

However, the panelist with the most clear takeaway advice for students and parents was Stephen Burd, a senior policy analyst in the Education Policy Program at the New America Foundation, who discussed his new article, "Getting Rid of the College Repo Man." The Washington Monthly article uses two in-depth profiles, of Gregory McNeil and Kayleen Hartman, to vividly illustrate the difficulties borrowers can have repaying student loans and the difficulty of enrolling and staying in income-driven repayment plans.

McNeil is a 49-year-old veteran living in a cramped veterans' home whose only income is Social Security disability payments he began receiving after quadruple-bypass heart surgery. After being discharged from the Navy, he took out $15,000 in federal student loans to study electronics at a for-profit school. Despite the school's claims of helping its students find work, he was never able to find consistent work in his field and pay off his loans.

Unable to discharge his loans in bankruptcy, harassed by federally-hired debt collectors, and with his career ended by heart surgery, McNeil now lives in fear that even his meager Social Security will be seized, even though he'll never have enough money to pay off his student loans.

McNeil's story is a compelling illustration of the perils of default. Unfortunately, in this depressed economy, 13.4 percent of student loan borrowers who entered repayment from Oct. 1, 2008, to Sept. 30, 2009, had already defaulted within three years, according to the Department of Education's recently released three-year cohort default rates. That's more than one in eight.

[See how student loan debt is affecting generations of Americans.]

Numbers like these are one reason the Student Loan Ranger urges student loan borrowers to utilize the protections available for federal loans, such as deferment, forbearance, and income-driven repayment plans like Income-Based Repayment (IBR).

Unfortunately, even sophisticated borrowers who know about IBR can have trouble enrolling and staying in the program. Burd wrote about Kayleen Hartman, a 2011 graduate of Georgetown University Law Center who wants to be a human rights lawyer. She has struggled for over a year to consolidate her loans and enroll in IBR and has become delinquent on her loans.

The Obama administration has begun to address some of these problems with significant but under-the-radar reforms that include a streamlined application process for income-driven repayment plans, accessible at www.studentloans.gov.

Ultimately, Burd argues that a better long-term solution would be a new student loan repayment plan that will help put the college repo man out of business. The plan would emulate Australia, New Zealand, and the United Kingdom, which have successful and long-standing repayment systems based solely on income. The Internal Revenue Service would collect payments via automatic payroll withholdings or, for the self-employed, as part of their income tax return.

A system like this could virtually eliminate default and, as a salutary side benefit, obviate the need for collection agencies. Serendipitously, Kevin James, another panelist and a legislative assistant to Rep. Tom Petri (R-WI), revealed that the congressman is drafting legislation to create such a system. The Student Loan Ranger will keep you updated as the legislation progresses.

In the meantime, if you or someone you know gets into trouble with their student loans, the National Consumer Law Center's website, Student Loan Borrower Assistance, might help. And, to ensure you don't get into trouble in the first place, learn how to use income-driven repayment plans and other helpful federal programs like Public Service Loan Forgiveness by downloading our free manual and signing up for one of our free webinars.

Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works' educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.