ANTHONY DANIELS IS THE CHAIRPERSON of the National Education Association's student program but is saddled with nearly $58,000 of debt in student loans from his undergraduate and master's programs. He's considering getting out of teaching. With payments of roughly $600 a month and an interest rate of 11.71 percent, he just can't afford the payments on a teacher's salary, typically starting at less than $30,000. "The passion is here," Daniels said, "but I just can't afford it."
Daniels, in a way, is lucky. At least he managed to get a degree. About one in five students at a four-year college or university end up dropping out, and financial stress is a prime cause. At community colleges, that number is one in four. The drop-out rate among white students at 43 percent is high, but the rate is even higher among Hispanics (56 percent) and blacks (61 percent). Debt burdens hit hardest at those with the steepest climbs into the middle class. Without a degree, there's little hope of earning enough income to pay back loans.
Debt levels have been increasing over the last several years. Once, student loans were labeled by financial advisers as "good debt" incurred in service of increased earning capacity. But today the average student graduates with a debt load of more than $19,000, more than double the average debt in 1993 of $9,250. In 2005, the average student took 10 years to pay off college loans. Debt has become economically crippling--a drag on the disposable incomes of young adults and a deterrent to the enrollment or completion of college educations for students from non-affluent families.
Federal grant and direct loan aid is a much better deal than commercial loans, but the process of applying for federal aid is byzantine. The multipage application is daunting in comparison to seemingly friendly "sign here" private loans.
The private, for-profit student loan industry was created by The Higher Education Act of 1965, which Congress has been working to renew since 2004. The act set up a system of subsidies for the banking industry. Even if students defaulted on their loans, banks were virtually guaranteed repayment from the government. At the time, state universities were close to tuition-free, and student loans were a niche product used by a small number of students attending private universities. Excluding loans from parents, only about a third, 34.3 percent, of students in 2004 graduated without some kind of debt.
The private lending industry represents a needless middleman, extracting profits from federal funds that should be helping students. The industry has been afflicted by scandal, with some lending companies giving kickbacks and stock options to financial-aid offices employed by colleges and universities.
Because of the political power of the lending industry, the conservative Republican presidency, and the reluctance of fiscally cautious Democrats to increase net spending, reform has been largely blocked.
The College Cost Reduction and Access Act of 2007 produced meager and disappointing results. The maximum Pell grant award, the best shot at help for low-income students, will only increase by an average of $218 per year over the next five, when the maximum award will be worth $5,400. What's more, only about 22 percent of students who apply for the Pell grant ever receive the maximum. The act did cut the interest rate of federally subsidized loans, like Stanford loans, in half--from 6.8 percent to 3.4 percent. Furthermore, the law caps loan payments at 15 percent of discretionary income. The act also expanded loan forgiveness programs for those who spend 10 years or more in a public service profession, like teachers or soldiers. But what the legislation didn't do was make the Pell grant worth what it was in 1965, when it covered nearly all higher education costs. What the act didn't do was increase the amount of direct loans; it relies instead on an inefficient private loan system that saddles students with large debt burdens. …