Expert: In U.S., Student Loans Trump Credit Card Debt
MICHEL MARTIN, host:
This is TELL ME MORE, from NPR News. I'm Michel Martin.
It's the beginning of the school year. Those college students have probably been back at the books for a couple weeks now, which means that those term bills are not far from anybody's minds. So we're going to spend some time today talking about the cost of education. In a few minutes, we'll hear about a new model for financing education that originated in Latin America, and it's just making its way to the U.S. That's in just a few minutes.
But, first, Mark Kantrowitz. He is publisher of FinAid.org. It's a financial aid information and advice Web site. He's crunched the numbers and he says that student loan debt has hit a record high and Americans now owe more for student loans than they do for all credit card debt combined. He's here to talk about why the numbers keep growing, and how unemployed grads can cope with paying back student loans. Mark, welcome. Thanks for joining us.
Mr. MARK KANTROWITZ (Publisher, FinAid.org): Thank you for having me.
MARTIN: My first thought was: Are you kidding me? How did this happen? And is this a relatively recent phenomenon, this student loan debt exceeds credit card debt?
Mr. KANTROWITZ: Well, we just found out that in June of 2010, for the first time, student loan debt exceeds credit card debt. This is partially due to a decrease in credit card debt. It peaked at 975 billion in September of 2008, and has been decreasing quite steadily since then. On the other hand, student loans have been increasing steadily year after year with more than 300 billion additional student loan debt over the last four years. And it reached 830 billion this past June, as well, crossing the credit card debt for the first time.
MARTIN: Why do you think that is? Obviously, fundamentally, people who can are paying down credit card debt as quickly as they can. Why is it escalating on the student loan side at the same time it's decreasing on the credit card debt side? So why is it escalating on the student loan side?
Mr. KANTROWITZ: Well, the need-based grants, such as the Pell Grant, have not kept up with increases in college costs. The maximum Pell Grant this fall will be $5,550. It will not increase next year. College cost will continue to increase, and student loans are the main avenue for absorbing that increase.
MARTIN: Are you concerned about this?
Mr. KANTROWITZ: I'm concerned that the debt at graduation is growing faster than incomes. I'm also concerned that in response to this, more families are choosing longer repayment terms, such as 20, 25, or even 30-year repayment terms. So they will still be paying back their own student loans when their children enroll in college.
MARTIN: We often hear about good debt and bad debt, right? And people are accustomed to having this conversation - well, good debt is an investment, you know, buying a house. Bad debt is, you know, buying shoes or, you know, clothes or using it to go, you know, out to dinner or partying, and things like that. And I think that people have perhaps been accustomed to thinking of educational debt as good debt. And is that a useful construct, or do you think that that also is of concern?
Mr. KANTROWITZ: Well, education debt generally is good debt because it enables you to obtain a job that has high enough of a salary that you can pay back that debt. But you need to be careful to not borrow excessively. A good rule of thumb is to not borrow more than your expected starting salary for your entire education. If you do that, you'll be able to repay the debt comfortably in 10 years. If you borrow more than twice your expected starting salary, you're going to be at very high risk of defaulting on your student loans.
MARTIN: And I also think it's worth mentioning that student loan debt is not subject to bankruptcy protection like credit card debt. So even if you declare bankruptcy, for the most part, right, your student loan debt, you will still owe.
Mr. KANTROWITZ: Both federal and private student loans are accepted from bankruptcy discharge. You can't get these loans discharged, except if you can prove undue hardship, which is a very difficult standard. Less than one percent of borrowers who had student loans, who filed for bankruptcy, were successful in getting the student loans discharged in bankruptcy.
MARTIN: What is the answer to all this? I mean, as we know, tuition at private institutions and some public institutions have been escalating at a far greater clip than the rate of inflation overall, and that the grants that people can get, the value of those is not increasing at a fast clip. What should people do?
Mr. KANTROWITZ: Well, as a society, we need to put a priority on investing in higher education. It not only provides benefits to the individual, such as a lower unemployment rate, higher salaries, better health, better civic participation, but it's also a good investment for the federal government.
And if we were to double the maximum Pell Grant this year, it would pay for itself within 10 years. The number of low and moderate income students who graduate would increase by about 200 to 300,000 a year. The federal income tax revenue from those students who then get better paying jobs will more than pay for the cost of those grants.
MARTIN: You know, one of the concerns I have here is one of the rules of thumb that you gave us is that people should not borrow in total an amount that exceeds their expected starting year salary. So if you're going to be an associate at a fancy law firm, that might be fine. But if your goal is to be a kindergarten teacher, or to be a social worker, it seems like you're caught between a rock and a hard place. On the one hand, you need a college degree to qualify, but they don't pay very well. So what's going to happen?
Mr. KANTROWITZ: I mean, debt-to-income ratio for a teacher might be two to one, or even three to one. There is some good news. Congress last year introduced income-based repayment, which bases your monthly payment on your federal student loans to a percentage of your discretionary income. And if you're going into a public service field like teaching or public librarian or fire, police or EMT, you can get public service loan forgiveness, which will forgive the remaining debt - and this is just for the federal loans - after 10 years of full-time employment in a public service job.
But still, the increasing debt is of concern. And a couple of points of good advice: First of all, try to minimize your debt. Live like a student while you're in school, so you don't have to live like a student after you graduate. You should save for college as soon as possible. It is literally cheaper to save than to borrow. You should also search for scholarships and grants on free Web sites, because every dollar you win in scholarships is a dollar less you will have to borrow.
You should borrow federal first, not just to qualify for public service loan forgiveness, but also because the federal loans are cheaper, more available and have better repayment terms. You don't need to be poor to qualify for federal education loans. The unsubsidized Stafford Loan and the Parent PLUS Loan are available without regard to financial needs.
If you must apply for a private student loan, apply with a credit worthy cosigner, because that will increase your chances of getting the loan and it'll usually result in a lower interest rate and lower fees on the loan.
And after you've graduated, you should look at all your different types of debt and accelerate repayment of the most expensive debt first. And that's the debt that has the highest interest rate. That's usually credit cards and private student loans. With the federal loans, make the required payment, but don't accelerate the repayment, unless you have enough money to do so.
MARTIN: We appreciate that good advice. And before I let you go, do you mind if I ask: Did you have student loans?
Mr. KANTROWITZ: I didn't have any student loans. I was one of...
MARTIN: You did not.
Mr. KANTROWITZ: No. I was one of those kids who won a gazillion scholarships to college, and I actually graduated with more money than when I started because I was working full time during the summers.
MARTIN: This wasn't your story. So how did you get interested in this issue?
Mr. KANTROWITZ: Well, I've always been interested in paying for college, and I started off helping some students at a program that was originally called the Rickover Science Institute with a list of scholarships and fellowships for math and science students. There were no books at the time.
Prentice Hall heard about that pamphlet that I had been putting together and asked me to write a book about it, which came out in July of '93. Right about when the Web was starting to become popular, I started answering questions by email by posting the answers to a Web page and a collection of frequently asked questions. And that was the genesis of the FinAid site, first officially launched in June of 1994.
Mr. KANTROWITZ: And the site took on a life of its own, and I quit my job as a research scientist in 2000 to focus on the FinAid and FAFSA Web sites full time, because I figured it would do more good to help children pursue a college education than to build a better Web search engine.
MARTIN: Financial aid expert Mark Kantrowitz is the publisher of FinAid.org. He joined us from member station WQED in Pittsburgh. Thanks so much for joining us.
Mr. KANTROWITZ: Thank you for having me.