How to Avoid Being a Victim of the Student Loan Crisis
As of Wednesday July 17, 2013, the amount that students owed in federal loans rose above the $1 trillion mark. This number taken in seclusion is staggering and is certainly cause for concern among families looking to send their children to college. After all, who wants their loved ones to join the legions of students who are more likely to default on their loans than graduate?
There are, of course, many reasons why this so-called Student Loan Crisis has come to be. Two of the most obvious are the state of the national economy and skyrocketing tuition rates. A third, which the average middle-class American doesn’t even consider, is for-profit universities. So, before delving into this relatively silent culprit, let’s examine the first two causes.
In the first case, “The Great Recession of 2008” made it more difficult for families to pay for college. With lost jobs and income, disappearing or depleted assets, and an implosion of the housing market, most people had fewer personal resources from which to draw the money needed for school, so they turned to loans. Unfortunately, after completing their education, the tough economy prevented freshly-minted graduates from finding well-paying, if any, jobs. The youth unemployment rate soared over 18% in 2010 and still hasn’t declined below 16% today, a sharp difference from 2000, when only just over 9% of youths were unemployed. Of those who are working, 284,000 hold minimum wage jobs. This means that fewer young people are able to repay the loans that they took out for their college education.
In the second case, colleges have continued raising their tuition costs at a rate that is practically 2.5 times that of general inflation. An education that had cost $5,000 in 1985 should cost around $10,990 in today’s dollars if we raised tuition at a rate of 115%, the general inflation rate compounded over 28 years. Unfortunately, tuition has risen at 498% since 1985, leading families to pay approximately $33,000 for the same institution now. That means, every year, students and their parents must allot a much greater portion of their savings to pay for a college education.
Now, let’s get back to the silent culprit: a third major cause of the Student Debt Crisis is the rise of for-profit colleges. In 1992, a change in federal regulation allowed for-profit educational entities to call themselves institutions of higher education and thus collect federal dollars. As a result, the sector exploded, producing well-known players like the University of Phoenix, Strayer University, and Devry University. What the government didn’t take into consideration then was the lack of accountability that these organizations had, except to their shareholders, leading to poor learning outcomes and excessive student borrowing. In a 2012 Senate report, the Committee on Health, Education, Labor and Pensions documented what Senator Tom Harkin of Iowa described as “overpriced tuition, predatory recruiting practices, sky-high dropout rates, billions of taxpayer dollars spent on aggressive marketing and advertising, and companies gaming regulations to maximize profits. These practices are not the exception – they are the norm; they are systemic throughout the industry, with very few exceptions”. In fact, the students who attend for-profit colleges account for 13% of the student population, but roughly 47% of the student loan default rate. That doesn’t speak well to for-profit universities’ missions, and explains why the Student Loan Crisis has reached epic proportions.
So what can you do to avoid becoming part of the Student Loan Crisis?
First, get educated about federal student loans and the college financial aid system. That way, you will know what all of your options are, select colleges that fit your budget, and avoid taking out loans you cannot afford to repay. Second, start saving your money. Although some families believe that having cash assets will decrease the amount of money they receive in need-based aid, it is generally better to have the money than to have to borrow it and repay it with interest. Finally, if you are a non-traditional student looking for flexible class times, compare the extension schools of traditional not-for-profit colleges with for-profit universities. You may discover that they have online courses for the degree that you seek at a much lower price.