Student Loan Debt Crisis

21st Century Generational Thief 

American higher education has long been considered the best in the world. But concerns about the cost and quality of a college education, lackluster completion rates, and ballooning student debt have raised questions about the sustainability of our traditional approach to postsecondary education. Can the policies and institutions that served us so well for most of the 20th century answer the demands of the 21st without fundamental reform?

The exponential cost of higher education has facilitated an environment where students looking to better themselves for the future become targets of predatory lending; finding themselves with insurmountable debt and an inability to create wealth after graduation.

Crippling debt is far too common among millennials and the younger generations, which prevents them from being able to adequately save or to purchase a home. This leads to students being forced to delay moving out of their parent’s homes longer, while making it unnecessarily difficult to achieve the American dream of home ownership.

As the federal government continues to neglect the issue of rising student debt, it is crucial for the state of Texas to become a champion of keeping the American dream alive by making it practical and affordable for recent college graduates to own their first home.

Declining Homeownership

Regardless of which Millennial housing trends persist, there will likely be increased demand for public housing assistance in the future. Poor credit scores, high debt-to-income ratios, and stagnating incomes economic realities many Millennials currently face will make qualifying for private mortgages difficult, even as the generation approaches its early 30s. Of Millennials who want to buy houses, whether in cities or suburbs, many will need help from the Federal Housing Administration, which secures private-mortgage financing for riskier buyers by assuming some of the risk a bank would otherwise hold. The type of homes Millennials decide to buy and the rate at which their financial situations improve will be major determinants of future demand for federal home-buying assistance.

According to recent research, studies conducted under the joint authority of the American Student Assistance® and the National Association of REALTORS® evaluated the surveys’ findings which correlated with student loan borrowers who are currently in repayment. The 2017 report focuses on younger millennials (born 1990 to 1998) and older millennials (born 1980 to 1989).  The study shows that twenty-eight percent of current homeowners with student loan debt are also facing housing hurdles and are unable to sell their existing home and buy another property. These homeowners face a variety of problems: 21 percent believe it is too expensive to move and upgrade to a new home, four percent have problems with their credit caused by student loan debt, and three percent are underwater on their home. Moreover, forty-two percent of those with student loan debt of more than $100,000 and 33 percent of older millennials are in a situation where they would rather sell their home and purchase another home but cannot

Furthermore, among non-homeowners, 83 percent believe their student loan debt has delayed them from buying a home. Among older millennials, 86 percent believe their student loan debt is delaying them from buying a home. Among non-homeowners who believe their student loan debt is delaying their ability to purchase a home, 85 percent believe the cause is the inability to save for a down payment because of debt. Seventy-four percent of those who are delayed don’t feel financially secure enough and 52 percent can’t qualify for a mortgage due to debt-to-income ratios.

Forty-eight percent of younger millennials can’t qualify for a mortgage due to debt-to-income ratio compared to fifty-seven percent of older millennials.

INITIATIVES

Reduce Tuition Cost

The federal government’s expansive role in student lending has inserted perverse incentives into the marketplace. Students are encouraged to take on large amounts of debt regardless of which institution they attend or their chosen field of study, and the evidence suggests that such practices encourage colleges and universities to raise their tuition prices. As borrowing increases through federal programs – and as debt builds – some policymakers propose to extend loan forgiveness, which transfers this debt from individuals or families to the American taxpayers, most of whom do not hold bachelor’s degrees themselves. The Government Accountability Office recently projected that loan forgiveness programs will cost taxpayers $108 billion over the next 10 years. Recent research suggests that federal involvement may be doing more harm than good. Economists at the Mercatus Center and the Federal Reserve Bank of New York have found a connection between federal student aid and increases in college tuition. Such research adds support to the Bennett Hypothesis, which posits that greater access to federal student aid encourages colleges and universities to raise their tuition prices. As more Americans than ever before pursue higher education as a means of upward mobility, policymakers must review whether current policies are helping students to afford a college education – or making tuition more expensive for all. The current trend of increasing student loan debt should concern all Americans. As students turn to the higher education system for more opportunities, this investment comes with significant financial burdens for both students and taxpayers. Restoration of the private lending market could put downward pressure on the increasing price of tuition as universities would no longer consider the availability of federal financing to be guaranteed. Private lending that considers a student’s ability to repay before granting a loan encourages students to make wise financial and academic decisions as they consider how to pay for their education. Elimination of the PLUS loan program, along with other needed reforms, would be an important first step in clearing the way for restoration of the private lending market.

“With Newly Passage of the Federal Tax Reform Bill,  it is imperative upon the state to find ways to reduce higher tuition cost.”

Affordable Homes Communities

Millennials are not buying houses at the same rate as generations past. Only 9 percent of 29–34-year-olds entered a first-time home mortgage agreement during 2009–11, compared with 17 percent a decade earlier.  Homeownership rates among Americans under the age of 35 are currently at 36.5 percent, compared with 41 percent two decades ago.  Various explanations account for the fall in homeownership among young adults in the United States, many relating directly to the housing bust of 2007 and the Great Recession that followed. Since the days of the subprime “NINJA” (no income, no job, no assets) loans, lending standards are stricter. Today, purchasing a home requires a down payment, a good debt-to-income ratio, and a solid credit score—three things many Millennials do not have. High levels of unemployment and underemployment, coupled with high levels of student loan debt, are problematic in both saving for a down payment and meeting debt-to-income requirements. In addition, high levels of debt (and default on debt) lower credit scores, a problem that especially affects younger people who have had less time to build credit and often less time to recover from past credit transgressions.

Property Tax Credit for Student Loans

These reforms to the federal student loan programs would go a long way toward restoring market discipline — and reasonable pricing — to higher education. As outstanding student loan debt continues to rise, Congress must address the root causes of high college tuition, not kick the can down the road for future generations to pay off. Federal student lending has dug our country into the ground.  We should stop digging and start looking to the private market for the ladder to upward economic mobility.

Adapt and Support the Recommendation from the American Student Assistance®

Increase financial education for college students: 

It is disappointing, although not uncommon that our K-12 education system isn’t the best at developing thorough understanding of finances among students. Unlike core subjects such as science and math, there is no mandate for financial literacy or management skills, which results in minimal exposure to the importance of understanding money, debt, and the movement of money within our society.

Colleges can help minimize borrowing by providing classes to students that details the importance of financial responsibility, such as budgeting and prioritizing bills. Additionally, the loans being disbursed can be used as a teaching tool to explain concepts such as principal, interest and capitalization. This will lay the groundwork for students to be more educated consumers for the future, while embracing the fundamentals of fiscal responsibility in the present.

It is imperative that we do not continue to encourage the practice of taking on additional debt without understanding intricacies of a loan agreement, as well as making the determination if borrowing money makes sense or not given potential earnings after graduation. If we do not empower our students with financial knowledge, they will be prone to making unwise decisions that will create a cycle of endless debt both during, and well after college. Giving students a realistic outlook of what their earnings may be after graduation, as well as the breakdown of paying back the money that was borrowed, including any interests or fees that may be part of the original loan agreement.

Increase awareness of income-based repayment options and special homebuyer allowances: 

Federal student loans come with a variety of repayment plans that lower monthly payments to make room in a borrower’s budget for other monthly expenditures, such as a mortgage. In addition, mortgage lenders have recently announced changes debt-to-income ratio calculations that can help ease restrictions on prospective homebuyers who are still paying off their student loans.

Unfortunately, borrowers are all too often kept in the dark about these options, which should be outlined to them by their loan servicer; the private companies working on behalf of the federal government to collect student loan payments. Specific payment plans should be recommended after a holistic assessment of every individual’s entire financial situation so that the money is paid back as quickly as possible without being detrimental to the borrowers’ budget.

The student loan and mortgage industries should work together on public awareness campaigns and cross- training for frontline staff so that borrowers receive the most up-to-date advice on actively managing all their debt. In addition, I also look forward to putting initiatives together with the help of my colleagues in the capitol to educate young people at an early age on the details of borrowing and repaying student loans.

It is our obligation that we ensure our students are not set up for failure, and that pragmatic initiatives in both the private and public domains are put in place to give clarity to the such widely misunderstood and complex topic that is the contractual agreement of a loan. If we instill basic principles of sound money management, we can make students better equipped to be financially cognizant.

Create tax incentives for employer- provided student loan reimbursement:

Although more employers are beginning to offer student loan reimbursement benefits, estimates show that only about 4% of employers nationwide have such programs. Meanwhile, in a recent ASA survey, roughly 80% of workers said they would commit to their employer for five years if they assisted in paying off their loans. Employers could boost their retention rates while significantly improving morale if they were to offer this benefit, but for many businesses it is financially impossible.

Tax incentives like the ones currently in place for retirement benefits and tuition reimbursement, could help tip the scales for employers; there are currently multiple bills at the state and federal level that would put this into place. The ideal solution would be for a federal law to be passed which provides relief to the most borrowers, however if it is up to the states, Texas must step up and make the necessary changes to make it practical and incentivize employers to provide loan reimbursement.

If the federal government will not create the incentives necessary to make it practical for businesses to provide such assistance, we can work towards passing state law which promotes such reimbursement. I look forward to finding equitable solutions that both makes financial sense for the employer, and helps the employee pay down debt in a much more effective manner. We must work across party lines to pass legislation that benefits us all and gives more financial power to employees, which in turn gives them a stronger economic position.