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When It Comes to Borrowing for College, It Pays to Do Homework

September 3, 2019
By Bill Schackner

When It Comes to Borrowing for College, It Pays to Do Homework

For generations, families setting out to pay for college have followed a predictable path that starts with deciding what a student wants to study, where to enroll and then how to finance it all.

But for years, Dan Wray has told parents they’ve got it backward.

Mr. Wray, an account executive with the Pennsylvania Higher Education Assistance Agency, who helped put five kids of his own through college, preaches the idea of ‘‘reverse engineering your financial happiness.”

It starts with deciding beforehand how much debt a student can absorb after graduating with a particular degree. It’s likely 12% or less of the graduate’s first-year’s gross income, he said, based on historical data about loan payments that do not cause great difficulty or default.

“I would start them out with that goal,” he said. “Then I would ask, ‘How do we get there?’’’

He and other experts say completing an exhaustive search for grants, scholarships and other “free money” should come before any borrowing. There are good reasons why — 1.5 trillion of them, in fact.

That number, in dollars, roughly represents the total student loan debt nationally, according to the Federal Reserve Bank of New York.

Pennsylvania students who take out loans graduate with the second-highest average debt in the nation, according to the Institute for College Access and Success and its Project on Student Debt. The $36,854 average indebtedness they face is surpassed only by Connecticut, where the average debt is $38,510.

Nationwide, average debt among graduates is $28,650, according to the institute.

Make no mistake, loans are a useful tool for millions of college students to complete a degree. But millions more struggle to satisfy payments.

Too much debt can be the difference between buying a house or renting, or the difference between getting married and putting off family plans until much later, Mr. Wray said.

In fact, a million loan payers face the worst-case scenario — default — according to a June report from the institute.

“Policymakers have tried to reduce loan defaults by cutting interest rates and creating new repayment plans, and reducing monthly payments does reduce defaults,” said institute President James Kvaal. “But the massive scale of the loan default crisis makes clear there is a lot more work to do.”

The same students who enter college with greater impediments are the likeliest to default, said Lindsay Ahlman, a policy analyst and the report’s author.

It is a daunting problem for the nation, no doubt. In some cases, it has crippled households.

Those who struggle most

But there are misperceptions about debt, too.

Although it’s little comfort to someone graduating with a huge loan, experts including Susan Dynarski of the University of Michigan argue that provocative stories about six-figure loans are not the norm.

Less than 5% of students owe $100,000 or more.

Of them, many are pursuing graduate education such as medical or law school or have loans structured in a way that defers paying principal but can compound interest, Ms. Dynarski told an Education Writers Association conference last year.

Those who struggle the most, she said, tend not to be enrolled in expensive private schools. Rather, it’s those attending for-profit and community colleges, who often are from households with lower incomes. Similarly, default rates are highest at for-profit schools and community colleges, and lowest at elite four-year campuses.

Dollar amounts most likely to trigger a default can be a surprise, too.

Citing Federal Reserve data, Ms. Dynarski, a professor of public policy, education and economics, said 34% of students owing $1,000 to $5,000, who began repayment in 2009, defaulted by 2014.

That’s almost double the share — 18% — who carried loans surpassing $100,000.

Decoding the cost

Some lay responsibility on less-than-shrewd family decisions.

Others point to the way financial aid is awarded, including jargon that can leave families unsure how much money is an outright gift or must be repaid.

In a June 2018 paper titled “Decoding the Cost of College,” New America and uAspire outlined a confusing and sometimes misleading process evidenced by review of thousands of financial aid award letters.

In their study, the organizations found that:

• Among 455 colleges providing an unsubsidized student loan, there were 136 unique terms for loans, including two dozen that made no mention of the word “loan”;

• Within a subset of 515 cover letters, about a third offered no cost information to put the financial aid award in context;

• Seven of 10 letters lumped aid together without explaining how grants, scholarships, loans and work study differ;

• Less than half the institutions — 194 — specified what the student would have to contribute, and those that did had two dozen ways to calculate it.

Politicians have noticed

Those who go into debt in college, only to leave without a degree, can have it even tougher: juggling payments without benefit of a better-paying job.   

Not surprisingly, student debt has become a marquee issue for 2020 presidential candidates. It has fueled debate about the social and economic benefits of unburdening a generation of college-goers versus what it might cost the public to do so.

Sen. Bernie Sanders, I-Vermont, announced a sweeping proposal to cancel all student debt, an initiative that would be financed by taxing Wall Street.

His announcement in June followed an earlier initiative by Sen. Elizabeth Warren, D-Mass., to eliminate nearly all debt based on household income: canceling $50,000 in debt for those making less than $100,000 and lesser amounts for those making up to $250,000.

That plan would be paid for by implementing a 2% fee on fortunes exceeding $50 million.

In Pennsylvania, the issue has gotten the attention of politicians, too.

One response is legislation dubbed the PA Student HELP (Higher Education Loan Protection) Act, which was introduced in the General Assembly in March.

It would refinance high-interest student debt using up to $1 billion in bond financing. Approximately 28,000 students could benefit, say the bill’s early sponsors, Sens. Vincent Hughes, D-Philadelphia; Lindsey Williams, D-West View; and Katie Muth, D-Montgomery.

It would save $10,000 over a 20-year repayment period by shaving about 2% off the blended federal loan repayment rate of 6.25%, they said. Students with private loans of $50,000 at 10% interest could save even more, as much as $43,000, they assert.

The legislation also would let employers hoping to entice and retain talented workers contribute to 529 accounts that could be used to lower student debt.

Help from employers

In corporate America, meanwhile, helping students pay off loans is emerging as a new perk.

In 2018, employer-provided student loan repayment was found in 4% percent of companies. That grew to 8% this year, according to a survey released in June by the Society of Human Resource Management.

Employers know the stress that loans place on employees, said Gregory Poulin, co-founder and CEO of Goodly, a San Francisco-based company that provides software to employers so they can supplement a student’s monthly payment with one from the company.

The payments, such as $1 a day or $100 a month, are applied directly to the loan’s principal, shortening the repayment period. It can be a powerful retention tool.

“For a lot of employees, especially younger ones, loans are the biggest financial barrier they face,” Mr. Poulin said.

Trying not to stress

At Carlow University, senior Gabrielle Kluger from New York has a work study job this summer in the admissions office. She tries not to stress about whatever debt she will leave campus with and believes the investment ultimately is worth it.

Among fellow students, “a lot of them do stress about it,” she said. At the same time, “This was our choice.”

Mr. Wray, from PHEAA, said interest on loans can range from 4.53% for a federal direct student loan for undergraduates to 7.08% for the PLUS loan program, often made to parents or to graduate students. Private rates can be variable based on factors including credit rating, he explained.

Like other experts, Mr. Wray notes the importance of filling out every year the Free Application for Federal Student Aid, even if current circumstances suggest little to no aid would be available. 

His agency is involved with financial aid nights and FAFSA sessions to assist families. The agency is promoting a new initiative, the PA Forward Student Loan Program, to make borrowing more affordable.

But, he said, families should be focused first on the free money. Borrow “only as a last resort,” he said.

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