THE NEW LOST GENERATION: Part 3

By Darryl Holliday

Student loans have been advertised as the sort of debt that will always yield a return on investment. However, as the housing bubble showed, “good debt” isn’t always as reliable as it sounds.

Experts fear an ever-accelerating cycle of default rates, tuition hikes, unemployment and unprecedented student debt could emerge as a financial mire for members of Generation Y.

According to an October report from the independent group The Education Sector titled, “Affordable at Last: A New Student Loan System,” the amount that students borrow to finance postsecondary education has grown “by every available measure” during the last 15 years. For example, between 1993 and 2008, the percentage of bachelor’s degree recipients who borrowed for their education grew from 49 percent to 66 percent, with average total debt at graduation increasing more than 50 percent.

The underlying policies that make up the system are overly complicated and little understood by the average undergraduate, simultaneously entering adulthood. Young adults who anticipated a brighter future are now clamoring for relief.

The crisis resembles the recent collapse in home mortgages.

“With the investment in housing, as the prices were going up they did not see the downside—they didn’t see the risk. Housing prices could not continue to rise,” said Deborah Kelly, adjunct assistant professor of economics at the University of San Diego. “I think there’s a similarity with student debt.”

Along with a mostly consistent rise in tuition nationally in recent years—an increase of 150 percent since 1996 in Columbia’s case—it’s no wonder so many, including Kelly, see student loans as the next bubble.

One increasingly popular long-term solution that could also aid graduates in the short-term is an income-contingent loan system. The proposal runs counter to the current standard repayment system, in which all students repay loans in fixed amounts.

A modified form of this already exists. The Income Based Repayment program, which took effect in 2009 after being enacted by Congress in 2007, is designed to lighten the debt load for some students. The program includes a cap on monthly repayments to less than 15 percent of disposable income. Furthermore, if a student makes these payments for 25 years, the remaining balance is forgiven.

By executive order, President Obama is taking the IBR program one step further. On Oct. 26, he announced that, as of 2012, the effective cap would be reduced to 10 percent and that forgiveness would kick after 20 years rather than 25.

But, according to Andrew Gillen, research director at the Center for College Affordability and Productivity, the forgiveness aspect of the program simply treats the symptoms rather than the disease.

“There’s no way that students are going to be able to pay back that money, but at the same time, we don’t want to do a loan forgiveness thing,” Gillen said. “As for taxpayers, this is basically a ticking time bomb. The taxpayers are going to eat a lot of the cost.”

According to Gillen, a re-examination of the loan program is needed in the interest of creating a program geared to how much students can repay—otherwise known as income-contingent repayments.

“The most promising [solution] is reconsidering the way we think about loans when we talk about investments in education,” Gillen said. “We aren’t really asking those types of questions.”

An income-based system could replace multiple financing means with one loan, one interest rate and one payment program based on income level and/or chosen major. The system would aim to significantly reduce default by allowing borrowers to pay a percentage of what they make.

But the debate surrounding the education system and rising debt, which could eventually fall onto taxpayers, hints at a deeper issue.

“We basically don’t know what we want college to be,” Gillen said. “There’s a big issue in determining what the outcomes are.”

While the idea of across-the-board forgiveness, as advocated by some in the Occupy Wall Street movement, is incendiary and unprecedented, the idea of using targeted loan forgiveness to encourage graduates to take particular career paths is already in practice.

The federal Stafford Loan Program was designed to incentivize people to enter public service in return for forgiving students loans

After 120 payments have been made. It is available to those entering a wide range of fields including social work, library science, education, law enforcement, public safety, child care and elder care.

The nonprofit Young Entrepreneur Council is extending this principle to new grads who hope to launch startups.

Its $10 million Gen Y Fund, announced in October, would provide them with seed money and pay for up to three years of student loan payments.

For many of Columbia’s graduates, who work day jobs to subsidize their art, a detour into public service with the added benefit of loan forgiveness might have saved them thousands of dollars. But few enter the arts with such a practical frame of mind.

Jourdan Robles said she barely had a job when she graduated from Columbia. The theatre alumna has been babysitting since she moved to Chicago and now works as a nanny in addition to working toward

her art.

While she said she loves her job—taking care of a 13-month-old girl nearly full time—her desire to continue in the arts has manifested itself in a recent position as an art coordinator intern at her church. Her husband, a caterer, is also following through on his music degree with an audio tech internship at the same church while he works on an album.

“What we both see in our jobs is that it affords us the freedom to do what we want,” Robles said.

However, the couple’s budget is still tight. Nearly all of Robles’ income from nannying—approximately $1,200 per month—goes toward both her and her husband’s loans while his income covers their living expenses.

“If we run out of funds by the end of the month, we have to get creative with groceries,” Robles said. “I’m not a budget person at all—it’s just not how my brain works—but my husband is, so I’ve just gotten on board.”

As with her student loans during college, responsible spending, research and planning has helped Robles manage her finances as it relates to her job post graduation.

As for other recent grads, employment will be key to individuals staying above water and avoiding default when it comes to their repayments. But larger policy shifts can help make the loan system more equitable for everyone involved.

Despite the issues surrounding college, education experts across the board maintain that students aspiring to attend a higher education institute should do so.

“As a student, all you really need to know is if you’re capable of graduating college, and if the answer is yes, then you should go,” Gillen said. “Go to a college you can afford [and] don’t borrow excessively.”

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