Student Loan Forgiveness: A Solution That Creates New Problems?

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When momentous events occur, people commonly talk about what they were doing when they found out. As such, I remember exactly what I was doing when the Great Recession of 2008 started happening.

I had just moved to New York with a little bit of money and filled out about a million job applications when I was hired to work for legal recruiters on Wall Street. My first day was September 15, 2007. I remember sitting down to my new desk and my bosses rushing in yelling, “Lehman Brothers collapsed! Lehman Brother’s Collapsed!” It was all I could do not to ask, Who are the Lehman Brothers? (Clearly my English literature pedigree did not prepare me for the world of law and finance.)

As the months went on, things got scarier. Companies all around us were shutting down and everyone was worried about losing their jobs. The busiest city in America stopped in its tracks, leaving just about everyone in a daze. I started thinking of a backup plan in case I lost my own job. Of course, normally a backup plan would be to find a new job. But at the time, there were few to no new jobs to be had. So where did my brain go next? Grad school.

Luckily, I never lost my job so I never had to make that decision. But many did – and now the entire higher education system and the programs planned to make it more affordable could suffer because of it. Read on to find out why.

How Grad School Became a Band Aid for Unemployment

The Great Recession of 2008 left young professionals and new graduates with few options. Unlike their more experienced counterparts, young professionals couldn’t rely on years of skills and connection building to weather the storm. (That’s not to say that experienced professionals didn’t also lose their jobs – nearly everyone suffered through the Great Recession.) But for people not that long out of school, going back to school for a graduate degree seemed only logical at the time.

For me, I always harbored a hope of attending graduate school after a few years of work experience anyway, which made that solution seem even more more natural. I wasn’t alone in this thought. As reported in CNBC, graduate school applications grew 4.5% per year from 2002-2012, nestled in with the timing of the economic crisis. Not a huge problem until you consider the concurring increase in tuition, also reported in CNBC:

“Average tuition and fees at several top-tier business schools were close to $59,000 for the 2012-2013 school year, according to a U.S. News & World Report survey, up more than $6,000 from 2010.

Debra Stewart, president of the Council of Graduate Schools, said that on average, graduate school tuition increased 14 percent from 2004 to 2012…”

What that means is students in graduate school who faced higher costs will also now face many more years of repayment; and some fields (such as education, social work, and work in the public sector) don’t come with high enough paychecks to match these costs. Something had to be done to mitigate the increase in adults who couldn’t get themselves out from a pile of student loan debt. Without a solution, young professionals wait years to do things like get married and buy homes – which leads to even more trouble for the economy later.

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Student Loan Forgiveness Becoming a Tricky Solution

The government has been working for years to find a solution to the rising cost of student loan debt – but now it looks like the solutions they found could be causing new problems. What am I referring to? Student loan forgiveness programs that allow graduates to stop paying on their loans if they pay consecutively for a certain amount of years.

I have to admit that I’m a big fan of these programs. Things like Pay As You Earn and the Public Service Loan Forgiveness program allow people to turn their debt payments into something they can actually manage versus going into total default. But all good things can be put at risk if taken advantage of – in this case by colleges increasing their prices with the knowledge that more aid is available and students seeking higher degrees solely on the premise that they can get them for free or cheap.

To prevent the problem from escalating, The Obama Administration is proposing things like a cap of $57,500 forgiven per student and an extension of the required repayment years. The Wall Street Journal talks about why:

“The move reflects concerns in the administration not just about the hit to the government, but over the risk that promising huge debt forgiveness could make borrowers and schools less disciplined about costs. Colleges might charge more than they would otherwise, leading students to borrow more…

Dorie Nolt, a spokeswoman for Education Secretary Arne Duncan, said the proposals are meant to ensure the “neediest borrowers” benefit and to protect the program from ‘institutional practices that may further increase student indebtedness.’”

If programs are taken advantage of, then the help set out for those in need suddenly can become unavailable to all. These moves aim to make sure that doesn’t happen.

The Need for More Education on the Cost of Student Loans

There are many stories of people signing on the dotted line for massive student loans so they can receive their education. I was one of those people! While I don’t regret it for one minute, I was able to keep my costs relatively low, which resulted in manageable payments. But financial aid offices might be getting too good at marketing student loan solutions – without fully explaining the consequences. As a rule, student loan forgiveness programs should be used by those in need – not an incentive to obtain a higher degree.

Image Credit: Jorge Quinteros

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  • Meghan

    The limit is the undergraduate student loan limit. It’s not a figure that the government thinks is the reasonable cost of education for many of the positions that are sorely needed in the public sector. The VA isn’t getting any doctors with $57k and some change. At some point, the administration seems to have forgotten that people with graduate degrees are needed and can make more in the private sector. I understand the concerns outlined in this article but I also have more student loan debt than the new limit would allow, work for the government, and they seem to need me. Many of my colleagues are using Pay as you Go and PSLF and none of us took out extra loans. I suppose tuition could be artificially inflated but the percentage of students who have enrolled thus far in PAYG has been much lower than expected so far, based on what I have read. It seems like the government is starting to add up the lost income. They’re charging 6.875% on my loan and many others. That’s a lot of money.