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Resetting the Trillion-Dollar Student-Loan Debt Problem

Resetting the Trillion-Dollar Student-Loan Debt Problem

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Students enrolled in our nation’s colleges and universities are borrowing at increasing rates, and the amounts they are borrowing are also growing. Here’s how refinancing can help.
Students enrolled in our nation’s colleges and universities are borrowing at increasing rates, and the amounts they are borrowing are also growing. Here’s how refinancing can help.

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Published by: Center for American Progress on Nov 20, 2013
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1 Center for American Progress | Resetting the Trillion-Dollar Student-Loan Debt Problem
Resetting the Trillion-Dollar Student-Loan Debt Problem
By David A. Bergeron, Elizabeth Baylor, and Joe Valenti November 21, 2013
Introduction
In ever-increasing numbers, sudens enrolled in our naions colleges and universi-ies are borrowing o mee educaional expenses. As college coss rise, so oo does he amoun each suden is borrowing. While ederal suden loans can be consolidaed, hese and privae loans canno be refinanced. I refinancing o suden loans were avail-able, borrowers could see significanly reduced monhly paymens; lenders󲀔including he ederal governmen󲀔could see increased repaymen raes; and we all could see more economic aciviy, as a porion o each suden-loan borrower’s income could be spen in oher secors o he economy or saved or larger purchases. In his issue brie,  we review a number o proposals pending beore Congress and recommend a number o elemens ha need o be included in a plan o permi suden-loan refinancing.
Student-loan debt in America
Our higher-educaion financing sysem has become increasingly dependen on deb. Daa rom he Deparmen o Educaion illus-rae he precipious growh o deb over recen years. In he 2011-12 academic year, 40 percen o undergraduaes borrowed under ederal suden-loan programs󲀔an increase o 18 percen since 2004 and 15 percen since 2008. More roubling is he ac ha among hose bor-rowing, he average amoun borrowed in 2012 was nearly $7,800, up 44 percen rom he 2004 amoun o $5,400 and up 26 percen rom he 2008 amoun o $6,200.
1
 (see Figure 1) Tese figures represen  jus one year o borrowing; oal borrowing levels or degree comple-ion are likely o be subsanially higher.
$8,000$10,000$6,000$4,000$2,000036%33%30%39%27%24%
FIGURE 1
Federal student-loan borrowing in 2004, 2008, and 2012
Source: Center for American Progress analysis of 2003-04, 2007-08, and 2011-12 National Postsecondary Student Aid Studies. See National Center for Education Statistics,
National Postsecondary Student Aid Study 
 (U.S. Department of Education, 2013).
Average amount borrowed2004 2008 201240%35%34%Share of borrowing$5,401$6,201$7,796
 
2 Center for American Progress | Resetting the Trillion-Dollar Student-Loan Debt Problem
Federal Direct LoansFederal Family Education Loans
DefermentForbearanceDefaultOtherRepaymentRepayment
FIGURE 2
Rates of repayment, deferment, forbearance, and default in federal student-loan programs
Source: CAP analysis of U.S. Department of Education data. See Federal Student Aid, “Direct Loan and Federal Family Education Loan Portfolio by Loan Status,” available at http://studentaid.ed.gov/about/da-ta-center/student/portfolio (last accessed November 2013).
Consider his: I ook 23 years or ederal suden-loan programs o lend heir firs $100 billion. Now, he ederal governmen lends subsanially more han ha each year, and more han $1 rillion in ederal suden loans are ousanding.
2
 O hose ousanding loans, only 60 percen o borrowers in repaymen were acually making heir scheduled paymens. Te remaining 40 percen were in deer-men, orbearance, or deaul, indicaing ha he  borrowers are in disress.
3
 (see Figure 2)Flucuaions in suden ineres raes and growing evidence o borrower disress in ederal suden-loan programs and he porolios o privae loan provid-ers sugges ha new and aggressive policy soluions should be enaced, ensuring ha repaymen erms remain manageable and sudens are able o make progress in reir-ing heir deb. Allowing sudens o refinance heir loan deb and ake advanage o newly esablished lower raes could reduce he number o sudens in disress.Furher daa released by he Deparmen o Educaion provide clear evidence o he difficuly ha many graduaes are having in repaying heir suden loans.
4
 Repaymen raes measure he share o sudens in a program ha are able o make paymens on heir loans ha reduce he principal balance by a leas $1 in a given year. Te Deparmen o Educaion examined 1,930 associae’s degree programs a or-profi insiuions o higher educaion and ound a median repaymen rae o 29 percen. Tis rae means ha ewer han 3 in 10 sudens were able o make paymens ha reduced heir loan balance and ha hal o he programs measured a ha degree level had an even lower rae. O 732 or-profi bachelor’s degree programs measured, he median repaymen rae was 38 percen, while he 4,567 undergraduae cerificae pro-grams a all ypes o possecondary insiuions had a median rae o 39 percen. Graduae degree programs a or-profi insiuions had median raes ranging rom 43 percen o 47 percen. Te program level wih he highes median rae󲀔71 percen󲀔was he pos-baccalaureae cerifi-cae level a all ypes o possecondary insiuions.
5
(see Figure 3)
Source: CAP analysis of U.S. Department of Education data. See U.S. Department of Education, “Negotiated Rulemaking 2013 -- Gainful Employment Session 1 Materials, Repayment Rate Calculations,” available at http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/ gainfulemployment.html (last accessed November 2013).
FIGURE 3
Median repayment rates in programs that lead to gainful employment by degree level
Undergraduate CertificateAssociate's DegreeBachelor's DegreePost-Baccalaureate CertificateMaster's DegreeDoctoral DegreeFirst Professional Degree39%29%38%71%47%43%46%
 
3 Center for American Progress | Resetting the Trillion-Dollar Student-Loan Debt Problem
Te Deparmen o Educaion also calculaed he deb-o-earnings raios or graduaes o programs ha mus, under he Higher Educaion Ac o 1965, lead o gainul employ-men in a recognized occupaion o ensure ha suden borrowers earn enough money o suppor he level o deb needed o pay or heir educaion. Te programs are orga-nized by Classificaion o Insrucional Programs, or CIP, codes, which are designed o rack fields o sudy in possecondary educaion. An analysis o programs a all levels by CIP code idenified five areas in which sudens had he mos rouble achieving earnings ha covered heir deb. In hese areas o sudy, mos programs were unable o pass he  bare-minimum hreshold ha would allow sudens enrolled in hem o coninue o be eligible or ederal suden-aid programs, and even ewer programs had low levels o deb ha would allow sudens o conribue o he economy.
TABLE 1
Areas of study with the highest debt-to-earnings ratios
6
CIP code categoryShare of programs with a low level of debt Share of programs that meet the Department of Education threshold
Communications, journalism, and related programs9 percent36 percentCommunications technologies and technicians and support services14 percent28 percentParks, recreation, leisure, and tness studies0 percent11 percentPersonal and culinary services29 percent33 percentVisual and performing arts11 percent22 percent
Te Federal Reserve Bank o New York has become increasingly concerned abou he levels o suden-loan deb. In addiion o he $1 rillion in ousanding ederal suden loans, he bank esimaes ha more han $200 billion in privae educaion loans are ousanding. Inormaion rom one lender suggess ha more han 9 percen o all loans in repaymen are delinquen, wih 4.6 percen delinquen by more han 90 days. An addiional 3.5 percen o loans in repaymen are in orbearance, and anoher 3.4 percen are charge-offs󲀔hey have been delinquen or so long ha financial insiuions no longer expec o collec hem and consider hem losses. Tis accouning suggess ha more han $34 billion o ousanding privae loans󲀔15.9 percen󲀔are disressed. An analysis by he Consumer Financial Proecion Bureau esimaed ha 7 million people are in deaul rom a ederal or privae suden loan.
7
 As we observed in our repor, “A Comprehensive Analysis o he Suden-Loan Ineres-Rae Changes ha Are Being Considered by Congress,”
8
 suden-loan ineres raes have significanly flucuaed in recen years. Tis flucuaion reflecs he changes in he cos o capial and in servicing suden-loan deb overime. In ha analysis, we suggesed ha refinancing opions could be provided o permi exising borrowers o move ino he new approach o seting ineres raes. Tis would allow borrowers ha currenly have ineres raes as high as 8.25 percen o move down o he newly esablished rae. We suggesed ha i would be possible o deray some o he cos o refinancing by assessing

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