Student Debt: An Overview

Like most graduates of America’s tertiary institutions, individuals such as Candace have found it increasingly difficult to retain adequate employment in order to budget her financial resources to support her lifestyle and meet her student debt obligations. The realization that the American dream she so desperately seek has seemingly become unattainable, and the realization has weighed heavily on her; draining her both physically and mentally; sapping her will and purpose; challenging her resolve to make her student debt payments on time to avoid late fees- which was an added burden by itself, and to eventually do the impossible, pay off her student loans. Candace situation is not unique, and is repeated thousands of time each and every month in most household across America; it is the epitome of a broken and oppressive system of debt, leveraged against student loan borrowers with no immediate solution in sight. Her greatest pride would have been to leave her graduation with her degree in hand, but while graduation was gratifying, the reality is that she could never truly possess her degree until she has satisfactorily address her outstanding loans.

Significant to the overall progress and status of the U.S economy is the continued wellbeing of the leadership role America enjoys in the global marketplace which serves as a beacon of opportunity, and a destination where dreams are realized, and success stories abound. The pessimists may disagree and have argued that the central theme to success- a sound education, has threatened this dream and indeed the livelihood of the American people. Like most forward-thinking individuals who are concern with the spiraling student debt, and the lack of quantitative solutions, it is time to finally agree with the pessimists; for unless pivotal action is taken, America’s status on the international stage will be compromised, its people disenfranchised and its educational system serving as a millstone around the neck of its economy; pulling down the dreams of many along with the opportunities afforded to all; to the lowest echelon of international standards. These problems can be resolved to the satisfaction of all parties involved, be it loan holders, financial institutions who provide and service these loans, government agencies, employers and citizens. Everyone is touched and affected in a profound way by the student debt crisis.

The purpose of this proposal on solving the riddle of student debt is for financial institutions and government to present legislation forging a new direction by categorizing student loans as any other equity investment. I will present readers with irrefutable evidence that efficient debt management, prudent investments and auditory measures that institute accountability and transparency, are key parameters to assist in solving the debt management dilemma. As an amateur scholar I will include sources that will support the integrity of my work to establish my credibility on the subject of student debt and the supporting systems, and provide evidence of the immeasurable degree of hardship and sacrifices student borrowers face in meeting the requirements for basic repayment options. The ideas of Fletcher (2013), Stiglitz (2012), Mian and Sufi, and Gobel (2010), who are respected authorities on the topic of student debts will greatly assist in establishing my credibility. In the quest to live up to one’s potential, individuals have sought to maximize their potential by embracing the educational opportunities available in this country. A sound educational system is therefore imperative to the development of an individual and to the

nation’s success as a whole. Gmur and Schwab (2014, January) of the World Economic Forum succinctly wrote “A critical factor to a country’s economic prosperity will be the extent and quality of education and skills training for their population. Education is a compelling indicator and a powerful instrument of human progress”. It is therefore imperative for government and private sector interest to maintain our educational system at the highest standards. The rising student debt must therefore be addressed and solutions implemented quickly.

The first problem is that student debt has hit the American economy like an unchecked tsunami; unrelenting, yet; unlike a tsunami it has never receded, but has continued unchecked for decades without any meaningful attempt at providing measurable and varied solutions to ensure the credibility of its financial system and the divestment of its student loan portfolio. Our government must provide a framework and foster the proper climatic conditions to ably assist the financial sector and serve as the conscience of the people. Fossay(1998), Condemning Student Debt: College Loan and Public Policy, points to the burden of the growing student debt, and the shift from grants to direct loans for student borrowers. This directive has single-handedly caused upheavals within the educational sphere and a deterioration of our educational standard. Confidence in our educational system must be renewed, and a systemic cleansing of draconian policies that have hindered progressive ideas to enhance student loan delivery features, and the requisite repayment plans.  Through legislation such as the Loan Forgiveness Act (2012) H.R 4170, government has provided some relief for most graduates. However, with the high number of student loans, more government contribution is needed which can be measured, and viable alternative explored along with uncensored oversight of the financial structure of student loans, and the services provided in streamlining individual’s payment options. Today total student loan debt in America has passed the $1.5 trillion mark and has outpaced credit cards debt and automobile debt.

As seen quite recently, another situation arose when congress passed the bipartisan Student Loan Certainty Act, but on closer examination it is an added problem; instead of providing the much-needed relief ailing student borrower need, this bill in essence magnifies the problem as it seeks to pay our national debt on the back of our students. Even as Americans manage consumer debt to a nine percent increase from 2004 to 2013 the student debt tripled to $986 billion after adjusting for inflation, this according to the Cincinnati Enquirer’s analysis of Federal Reserve Bank of New York data (Peale 2013). Student debt is at present 8.8 percent of all consumer debt and continues to grow. Part of the solution in addressing student debt, lies in legislative efforts as presented by Fletcher (2013), where student repayment options are based on criteria such as individual debt, income and family. Two such options, the Contingent Repayment Plan and the Pay as You Earn (P.A.Y.E), has given borrowers sound choices to take decisive action, resulting in some measure of relief.

Student Debt Sections III, IV and V

A financial garrison: this simple utterance described the student loan portfolio as the quintessential vehicle of change envisaged to transform the student debt behemoth into a dynamic entity where investments thrive and each player; student borrower, entrepreneur, banker, and politician is able to reap the benefits of their efforts. Owing to the barriers encountered by students and investigators during routine enquiries, the first order of business in dissecting the maze of bureaucracy surrounding the student debt repayment choices is the provision of navigational tools to better search out different payment options available to students, and to provide a format that will ably assist them in exploring these options. Fletcher (2013) gives supporting evidence of the hindrances to data access and the ineptness of agencies such as the Consumer Financial Protection Bureau when queries are made by borrowers as to the availability of personal loan information and viable alternatives.

Critical assistant is need within the Board of Education and supporting government agencies; restructuring of the present system requires levels of accountability incorporated in every feature associated with the loan process; showing transparency, continuity and fairness in the allocation and servicing of loans while providing information readily at a moment notice to affected individuals. Part of this process is the provision of available repayment options if borrowers are negligent or late with payments and are seeking alternatives or wish to restructure their loans to accommodate financial stress or success.

     The decentralization and divestment of the financial student loan holdings is the vehicle of change by which the student and the economy will be best served. The financial benefit of student loans to financial entities is staggering. Since 1999 the growth of student debt has been phenomenal, an ever increasing trove of investment earnings, creating wealth for financial institutions and their stakeholders; yet depriving borrowers of needed equity from their investments. This vulgarity is displayed in the numbers that show that student loan has grown 511% since 1999. The chart below shows the New York Federal Reserve Data for household debt. The red line shows the cumulative growth in student loans since 1999.The blue line shows the growth of all other household debt except for student loan over the same period.

Financial institutions must place a value on the investment of loans to student borrowers when they acquire them for education, and the ensuing value it commands in today’s market. This “equity”, like the difference in housing cost when you purchase as against present market value, should be available to borrowers to be withdrawn or invested as they see fit. This investment must be treated like any other investments; earning interests; providing revenues and subjected to financial laws and penalties. This would also provide growth within the economy. This investment could also be in the form of annuities, where an investment in one’s education is treated as a lump sum payment, invested for the future to be drawn at a later date if the beneficiary so choose. The chart below shows student loan investment in dollars on the left (y-axis) in yearly loans and the growth in equity investment compare to growth in real estate. It is noted that equity in student loans are more profitable.

The preceding chart data is presented below in a more explicable manner to reflect the disparity in interest rates as it affects student loans in comparison to real estate investments. The blue line shows the growth investment rate over time in student loan equity compared to real estate, and what individual students would gain if their loans were treated as equity investments. The graph shows an investment in education from a low of $10,000 per year to a high of $70,000 over a three year period.

The view of many individuals wanting to see relief of student debts, or to experience such a relief themselves have driven the majority of students to seek loan forgiveness as the best option to curtail this unchecked wave of indebtedness. While this is a great solution it is seen as an injustice to those who have already paid the price for achieving their educational goals by paying off their loans. However, it is believed that many will debate the requirement for the process of loan forgiveness to repay those who already paid in a percentage scheme of refunds and to then decide how much of the current loan holder’s total debt to be forgiven if not in their entirety. The reasons to support a measure of student loan cancellation/forgiveness must take into consideration the following points.

• Working class families and low-income earners should not have to compete in an economy where college education is necessary to enter/participate in a biased job market
• College completion will be enhanced as a result of loan forgiveness/cancellation since individuals will be better able to manage educational goals to compete with peers from more financially robust status.
• Existing racial inequalities in higher learning institutions plays a key role in the increase in student debt
• Low-income families/earners should ideally be the targeted group as they are the students who are challenged the most

Conclusions

My submission of this recommendation for student loan debt to be treated as an equity investment is the solution to my proposal that a professionally and efficiently managed educational system is pivotal to the importance of the American presence in the global marketplace. While this is by no means the total solution to our student debt dilemma it is a trendsetting and futuristic approach to student debt management which levels the playing field for all players. Financial institutions must show empathy towards distress loan holders and must operate in a clear, ethical and socially responsible manner. This investment plan will forge a more profitable alliance and create new investment opportunities while making student both affordable and profitable to our most treasured asset; our people. Let us strive to treat our student and future entrepreneurs with dignity and respect; and let us once again return America to its former glory; a land where dreams come through.

References

Gobel, R. (2010, March) Graduation debt: How to manage student loans and live your life

http://www.collegefo.org/expert=corner/graduate-debt-with-reyna-gobel/

Loan Forgiveness Act (2012). H.R.4170 Bipartisan Student Loan Certainty Act. (2013)

https://www.govtrack.us/congress/bills/113/hr1911/text

  Gmur, M & Schwab, K. (2014, January). The World Economic Forum

http://www.studentdebtrelief.us/news/student-loan-forgiveness-act-pass-h-r-4170-now/