How Did Student Loan Debt Reach $1.4 Trillion? Blame Russia (Sort Of)

There are other reasons, but the era of the student loan began with the launch of Sputnik.

American consumers owe mountains of debt, but one of these mountains looms large over all the others: student loans. It’s astonishing to consider: Add up every auto loan in the country, and total student loan debt is bigger. Add up every credit card bill in the country, you only get about three-quarters of the way up the student loan mountain. Only mortgage debt is greater, but those with mortgages have homes to show for their debt. These days, many Americans aren’t really sure what they got in return for their oppressive student loan bills.

There is little disagreement that adult life in America without a college degree is a struggle, and it’s only going to get harder as the economy continues to modernize and manual labor continues to be devalued. So it’s imperative that America figures out how to educate its young people without bankrupting them — but it’s important to understand how we got here.

A History Lesson

In some ways, you can blame the Russians. Sputnik, and the Space Race, specifically. The federal government first got into the student loan business as a direct result of the USSR’s successful launch of Sputnik into orbit, and widespread fear that America was losing the Space Race. In fact, the law that created student loans was called The National Defense Education Act.

America has lent money to teenagers ever since, with the good intentions of helping them compete in the global economy. Today, some 44 million Americans owe student loan debt — a majority of college students graduate with at least some debt, and the class of 2016 had an average student loan debt of $37,000.

But even before the National Defense Education Act went into effect, America had committed to helping young kids who showed promise get college degrees. The federal government’s first real foray into pushing people towards college was The Servicemen’s Readjustment Act — the GI Bill — passed at the end of World War II. Colleges swelled as America repaid some of its debt to the Greatest Generation through free or discounted college.

By the 1950s, there were calls to extend what was generally considered a wildly successful program. But three terms in a row, a Senate-passed measure to increase federal funding for college died in the House. Then, on October 4, 1957, the Soviets sent shock waves through the country with their successful launch of Sputnik into space. That day Sen. Lister Hill (D-Alabama), chair of the Education and Labor Committee, read a memo from a clerk with a clever idea.

“Perhaps if they called the education bill a defense bill they might get it enacted,” recounts a Senate history page on the subject.

Hill latched onto the idea and National Defense Education Act was born.

Despite widespread public opinion demanding government action “in the wake of Sputnik” (the Senate history page’s words), House members were still resistant, calling federal college grants “socialist.” Other critics worried that the legislation interfered with the long-held principal that states and local communities were responsible for schooling. As debate progressed, supporters in the Senate offered a compromise: Much of the aid offered would come in the form of low-cost loans instead of grants.

That argument won the day. Dwight Eisenhower signed the National Defense Education Act in September 1958, 11 months after Sputnik’s launch. Uncle Sam was now a bank for college students.

Uncle Sam Becomes a Direct Lender to Students

NDEA loans are generally considered precursors to subsidized loans that became known as Perkins Loans.

That because it wasn’t long before the NDEA was expanded, and its inherent encouragement of defense-friendly subjects dropped. An amendment to the law signed by Eisenhower in 1964 increased funding, raised borrowing limits, and struck the provision that special consideration should be given to students who showed proficiency in math, science, engineering, or foreign languages.

By 1968, America had spent $3 billion extending student NDEA loans to 1.5 million undergraduate students.

In other words, Uncle Sam’s role as a direct lender for higher education was fairly well established by the time Lyndon Johnson’s Great Society ideas took hold. In 1965, the Higher Education Act included a further expansion of both loans and grants, this time aimed at lower-income Americans. The HEA established what we now know as the Free Application for Federal Student Aid (FAFSA), and directed the Department of Education to administer lending. Thus, the Guaranteed Student Loan (precursor to the Stafford Loan) was created.

HEA loans were different than NDEA loans in an important way, however. Students borrowed from banks, with the federal government acting only as a guarantor. That made Uncle Sam a co-signer, expanding the kind of funding available. (Since then, Congress has vacillated between preferring the co-signer role, and the banker role. Today, most federal loans are direct loans, but that could change again.)

Not surprisingly, college attendance soared, more than doubling from 1960 to 1970 (from 3.5 million to 7.5 million).

The Higher Education Act requires reauthorization every five years, each one a chance for Congress to change the law. Many of those provisions have been intended to expand the opportunities afforded by it. The 1972 Equal Opportunity in Education Act, known as Title IX, was passed to prevent discrimination based on gender. That same reauthorization also created the Student Loan Marketing Association (Sallie Mae), designed to encourage lending. In the 1980 reauthorization of HEA, PLUS loans were created, ultimately allowing parents to borrow money from Uncle Sam to pay for their kids’ college.

As Enrollments Rise, So Do Tuitions

Each loan expansion meant college attendance continued to expand, hitting 10.8 million by 1983. Today, it’s 20 million.

With more customers, and more funding, it should be no surprise that college tuition has soared right along with them. According to the College Board, annual tuition at a public (state) college averaged $428 in 1971-72.  This year, it’s $9,648. During that same span, private tuition rose from $1,883 to $33,479.

So it should be no surprise that a chart showing the total outstanding student loan debt looks like a picture of the steep side of Mt. Everest. In 1999, former students owed $90 billion. By 2011, that figure had grown to $550 billion, an astonishing 550%. Since then, student loan debt has more than doubled … again.

In fact, student loan debt is the only kind of consumer debt that has grown since the recession.

Other Factors in Rising Tuition Rates

It’s important to note, however, that while one theory holds that the history of ever-widening availability of credit has led directly to higher tuition costs and higher debt, that’s not the only possible explanation. Higher education advocates also point to reduced state government spending on state colleges. As one example, Ohio State received 25% of its budget from the state in 1990. By 2012, that percentage had fallen to 7%. Students, often via borrowed money, must pay the difference.

F. King Alexander, president of Louisiana State University, painted a bleak picture in testimony before a Senate committee during 2015. More generous federal loan programs created in the 1950s and 60s had an unintended consequence: They nudged budget-crunched state governments towards a dark solution.

“State funding for higher education sits currently around 48% to 50% below where it was in 1981,” he said. “It was assumed that any new federal funding policies would simply supplement state funding, not replace it.”

But, today, states are ”getting out of the higher education funding business, to the point that the federal government has now become the primary funding source,” Alexander said. And while schools, states, and the federal government argue about the higher math of higher education, many students are left with personal education budgets that just don’t add up. To put a fine point on it, attorney and student loan expert Steven Palmer offers this sobering example:

“In 1981, a minimum wage earner could work full time in the summer and make almost enough to cover their annual college costs, leaving a small amount that they could cobble together from grants, loans, or work during the school year,” he says in a blog on the topic. “In 2005, a student earning minimum wage would have to work the entire year and devote all of that money to the cost of their education to afford one year of a public college or university.”

A Longstanding (But Growing) Problem

It’s important to note that burgeoning student loan debt — and the inherent problems those bills present to borrowers and their families —  did not go unnoticed until recently. In fact, back in 1987, a New York Times article summarized the issue in a paragraph that sounds an awful lot like something Vermont Sen. Bernie Sanders might have said during the 2016 Democratic Party primary races.

The growth of the problem is affecting not only individual lives, some authorities believe. They say the burden of debt is also chasing many students away from poorly paid public service jobs and forcing others to defer the start of a family and the purchase of a home or car, with economic and social consequences that have not been measured … Such cases worry education officials and other experts, who say that record borrowing for college threatens the financial stability of a generation of young people and their families.

At the time the article was written, the average debt for public college graduates was $7,000 ($15,000 in 2017 dollars). Since then, college tuition has risen at about four times the rate of inflation, and student debt, right along with it.

How Do We Fix Those Inherent Problems?

President Donald Trump did discuss the student loan problem on the campaign trail; his most significant proposal involved slightly more expensive, but also more generous income-based repayment plans for debtors. His plan would require 12.5% income contributions, but provide loan forgiveness earlier. The timetable for such a proposal is unclear.

The newly-minted head of the Department of Education, Betsy DeVos, said during confirmation hearings that the (then) $1.3 trillion in student loan debt is “a very serious issue,” but didn’t indicate support for any particular solution. In her testimony, there is this tea leaf:

There is no magic wand to make the debt go away. But we do need to take action. It would be a mistake to shift that burden to struggling taxpayers without first addressing why tuition has gotten so high. For starters, we need to embrace new pathways of learning. For too long, a college degree has been pushed as the only avenue for a better life. The old and expensive brick, mortar, and ivy model is not the only one that will lead to a prosperous future.

A comprehensive solution will almost certainly require another reauthorization of the Higher Education Act. The last reauthorization was signed by George W. Bush in 2008. It has been temporarily extended since then — Congress punted on a reauthorization during election season, which means it is overdue for another overhaul. DeVos told the Senate that she’s ready to get to work on that.

“I look forward to working with Congress and all stakeholders to reauthorize the Higher Education Act to meet the needs of today’s college students,” she said. The Education Department did not immediately respond to Credit.com’s request for comment as to whether there were any updates regarding DeVos’ plans since she testified.

Many issues remain on the table: Stakeholders are already arguing about enforcement of new rules against for-profit schools and the future of government direct lending vs. “co-signing” for borrowers. But the $1.4 trillion, 70-year-old problem is now an elephant in America’s living room — and no administration can make debt like that simply disappear.

What Can Students Do? 

While solutions to the systemic student loan problem are unlikely to come to fruition overnight, there are some steps struggling borrowers can take to stay current on their payments — and to preclude that debt from harming their credit. (You can see how your student loans may be affecting yours by viewing two of your free credit scores, updated every 14 days, on Credit.com.)

Federal student loans borrowers, for instance, can apply for a deferment or forbearance if they’re temporarily unable to repay those bills post-college. They can also apply for an income-based repayment plan that can help lower monthly payments to an affordable level. Private student loan borrowers may also have these options available to them, but it varies by lender and there may be fees attached to certain requests. (It’s best to ask about these options ahead of time — you can find more about vetting private student lenders here.)

There are also ways to lower the cost of your college education before and while in school. These options include looking into scholarships and grants, working part-time while taking classes and attending community college for few years before transferring to a four-year institution — more on how to pay for college without building a mountain of debt here.

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5 Things to Think Twice About Putting on Your Credit Card

Want to keep your credit card debt in check? Avoid charging these five things.

Credit cards are useful financial tools. They can fund large purchases, build credit and help consumers establish financial independence. But they can also get cardholders into major financial trouble when used improperly. Not all credit card purchases are created equal, and some should be completely sidestepped to avoid unmanageable credit card debt.

Not only can that debt stress you out, it can hurt your credit scores, which can limit your ability to get future credit for things like a mortgage or an auto loan. You can see how your current debt is impacting your credit using our free credit report summary. It provides you with two of your credit scores, completely free and updated every 14 days, plus a summary of how you’re managing your credit in five key areas.

Here are five ways you probably don’t want to use your credit card if you want to be better equipped to manage your credit card balance.

1. Pay Monthly Utilities

Paying monthly utility bills may be especially appealing to cardholders with rewards credit cards — after all, those bills are another way to maximize rewards. In that scenario, it could make sense to pay your bills using a credit card.

But many companies charge convenience fees to pay with a credit card, so you’ll end up paying more than necessary. If you can’t pay off the bill balance in full each month, you could end up paying a lot in interest charges. As interest accrues and your bills continue to stack up, it could become very easy to fall far behind.

If you’re having trouble paying your bills, you might be better off reducing your spending or working with your service providers to come up with an alternative payment plan.

2. Pay College Tuition

There are many ways to pay for college. Student loans, scholarships and part-time jobs can all fund your education. These options are either free or far cheaper than using a credit card. If you wince at the idea of taking out a student loan, remember that a loan will come with much lower interest than a credit card payment. What’s more, most student loans are deferred until after graduation, while you will making monthly payments on your credit card debt almost immediately.

3. Settle Tax Debt

If you find yourself with an unexpected debt to the IRS, it could be tempting simply to charge it. This is usually a bad call.

Paying the IRS with a credit card may result in a convenience fee, and unless you can pay off the balance immediately, you’ll wind up paying interest on that debt quickly. The IRS offers a number of solutions for taxpayers with substantial tax debt, including repayment programs and settlements for less than the original amount owed.

4. Take Out Cash Advances

Cash advances let you take out cash against your credit card balance, but can be far more expensive than the ATM fee you’d pay using your debit card. The cost varies, but some credit cards will charge you a one-time cash advance fee and even an ATM fee if applicable. What’s more, most cards charge a higher APR for cash advances, and you start accruing interest immediately.

The only time a cash advance may make sense is in the case of an emergency where your only alternatives are over drafting at your bank or taking out a payday loan. Even then, it’s a good idea to try to avoid all these scenarios.

5. Charge Your Business Startup Expenses

If you’re starting a new business, you may have a lot of upfront expenses. But the problem with using credit cards to fund your startup is that it could take years for your business to succeed and turn a profit. During that time, you could end up paying thousands of dollars in interest. And if your business fails you’ll still be stuck with credit card debt.

You may be better off finding alternate sources of funding, which could include small business loans or investors.

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4 Secrets Colleges Don’t Want You to Know That Could Save You Thousands on Tuition

saving-on-college-tuition

When you’re a student on a budget, you’re aware of how important saving can be. And if you’re in the process of deciding which college to attend, or you’re already enrolled somewhere, it helps to keep in mind that there are things you can do to lower your tuition bill, especially if you start early.

College debt in the U.S. is at an all-time high, and, according to a 2016 Gallup poll, nine out of ten college admissions directors of private colleges (and 51% at public colleges) say they’re losing potential applicants because of fears about accumulating student loan debt. If you’re one of those students who is worried about how you’ll pay for college, we have four tips to help you make your college education a bit less of a financial burden.

1. Negotiate the Price

Students shying away from applying to certain schools because of the potential debt burden just might give you bargaining power. Few people know that they can haggle the price of college tuition, especially if another school is offering you a better deal. Private colleges typically compete with less expensive, state-subsidized public universities, and many private schools offer “incredible financial award packages to attract good students,” Cordell Reynolds, a certified College Planning specialist and owner of College-Cents in Plano, Texas, said.

“Many colleges can be compelled to increase their initial grantor scholarship offer, especially if they are competing with another school for the student,” Reynolds said. “Don’t be afraid to ask for more money.”

2. Do What You Can to Graduate in Four Years

If this sounds difficult, you aren’t alone — at most public universities, only 19% of full-time students graduate within four years, according to a report from Complete College America, a nonprofit group based in Indianapolis. Each extra year you stick around campus can cause an added hit to your wallet when you factor in the fact that you’re spending money on tuition as well as not drawing in much (if any) income. But this is where some advance planning can really benefit you.

“To ensure you graduate in four years, it’s important to research schools, majors and graduation rates together and be realistic about how long you will be in school,” Adrian Ridner, CEO of Study.com, said. “Be aggressive about staying on track and be aware of the implications of changing majors or delaying prerequisite courses. If you do fall behind, get creative and explore alternative credit options, like competency based exams or online courses. These self-paced options can help motivated students catch up fast.”

Beyond that, diligently investigate a career, Reynolds said. College is a great time to shadow a professional to see if you’d like to do what they do. It’s also time to get internships which can lead to great mentors and job opportunities when you need them most. Once you find your career path and know what courses are really important to landing your dream job, everything can be easier.

“By discovering the appropriate career path early on, students can create a true four-year graduation plan, which will save thousands intuition,” Reynolds said. “In addition to this, they will also open up the opportunity for career-specific scholarships and tuition reimbursement programs.”

3. You Might Not Need to Go to an Ivy League School

“Many employers require that you have a degree in order to obtain a position, but most will not care where you went to school,” Ridner said, pointing to a 2014 Gallop poll that found 84% of employers think the amount of knowledge a candidate has in the field is most important, while only 9% say where the candidate got their degree is most important. “In fact, even Google has stated that where you went to college doesn’t matter as much as your ability to bring new ideas to your position. So, if an expensive school will be a financial burden, it’s likely not worth the cost,” Ridner said.

Of course, the alumni network, on-campus recruiting and credibility of the Ivy League degree might give some grads an edge, so it’s a good idea to weigh those things against the debt you might take on. And if you have a special career or field in mind, such as investment banking or private equity, it’s a good idea to research what school qualifications employers in your industry look for in terms of education.

4. Transfer Credits

Whether you attend an Ivy or state school, you might still be able to shave thousands off of your tuition through CLEP and AP exams. Check with the college or university you’re considering to find out which courses might be transferrable from high school, less expensive community colleges and online course providers.

“While over 2,000 schools accept alternative credit, most students do not even realize this is an option,” Ridner said. “Students can save thousands with online courses and competency based exams and get the same degree from the same school for a lot less.”

Be Savvy About Student Debt

Before you decide which school is right for you, it’s a good idea to think about your financial future. If you can go somewhere that offers you more scholarships, or consider any of the options above, you may be able to save yourself a lot of money (and headaches) in the long run. Plus, having a reduced debt burden after graduation can not only help your wallet but may impact your credit. Having good credit can help you save money with lower interest rates and better terms and conditions when applying for a car loan or mortgage in the future. (You can see how your credit is currently doing with a free snapshot of your credit report on Credit.com.)

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Is Grad School Worth It?

graduateschool

Q. I’m thinking of going back to school for my Master’s, but I’m not sure my eventual higher salary will be high enough to make it worth it. How can I decide? — Potential student

A. Going beyond four years of college can be a costly endeavor, and you’re correct to view it as an investment.

Like any investment, there are risks, and you need to determine if this one is worth it.

“We find ourselves in a time when undergraduate degrees have become the equivalent of the high school diploma of the past,” said Steven Gallo, a certified public accountant with U.S. Financial Services in Fairfield, New Jersey. “It seems that graduate school has become a necessity for anyone trying to get ahead in the workplace, the problem being the cost and ultimately the return on your investment.”

In an effort to make the calculation, Gallo said you need to do some research.

Start by looking at your field of study. Compare the average salary difference between candidates with undergraduate degrees and those with a Master’s degree.

Braden Schipke, a certified financial planner with The GenWealth Group in Maplewood, New Jersey, said you should determine a reasonable salary increase after completing your degree. Then, use the salary level, along with a yearly percentage increase for annual raises, to project how much you would make each year until you retire.

“Adding all of the salary figures up will give you an idea of your future lifetime earnings potential,” Schipke said. “Now perform the same exercise using your current salary to project your future lifetime earnings without the degree. Does the difference between the two figures justify the additional cost for your added education?”

You also need to take a look at the actual tuition and associated expenses, like off-campus housing, required to obtain your Master’s degree, Gallo said.

Don’t only look at the tuition costs, but examine the cost to borrow the funds, including the interest rate. If you have the funds saved, Gallo said, you need to examine the opportunity cost of using those savings to pay for your degree rather than having the funds invested.

Gallo said you should be sure to consider the related costs such as time commitment and earnings lost due to time spent on studies and class time. This obviously would vary depending on whether you are planning on attending school on a full- or part-time basis, he said.

Once you have all this information, Gallo said, it becomes a mathematical calculation to come up with the potential return on investment (ROI).

Don’t forget to include the intangible costs involved as well, such as time away from family or friends and the ever-changing job market, Gallo said.

Finally, consider your age and how long you plan to work, Schipke said.

“Generally speaking, it pays to have more working years until retirement so you can realize a greater benefit from a salary increase,” he said.

[Editor’s Note: Remember, your credit should be be in tip-top shape before you apply for a loan, including any private student loans you may be considering. You can see where you stand by checking your two free credit scores, updated monthly, on Credit.com.]

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