Changing the Student Debt Game

With college graduates each owing an estimated average of $26,000, the quest for affordable education rages on. But while tuitions get higher and interest on student loans pile up, there is help out there that many don’t know about -- and there are new initiatives in the pipeline trying to slow the surge in student debt that has left Americans owing more than $900 billion collectively.

“There are some really great programs out there to help students who can’t afford their monthly student loans,” said lawyer and student loan expert Heather Jarvis. “But [these programs] are somewhat limited in their effect because they are overly complicated and student loan borrowers find it difficult to navigate the system.”

The programs Jarvis is referring to are Pay As You Earn (PAYE) and Income-Based Repayment (IBR). Aside from the more well-known loan-forgiveness programs that are available mostly to teachers, government employees, volunteers and others with service-based jobs, PAYE and IBR are both income-based and designed to help anyone without a lot of money pay down their student debt by capping monthly payments to make them more affordable.

In both repayment plans, which can be hard to decode, the government looks at a person’s debt-to-income ratio, and if what is owed is high in relation to what is earned, the government may assist in payments. Pay As You Earn, which is available only to new borrowers who took out federal direct loans caps monthly loan payments for former students at 10% of their discretionary income for 20 years. If any debt remains after that time period, it is forgiven. Income-Based Repayment is easier to qualify for, said Jarvis, but borrowers pay 15% of their discretionary income for a 25-year period.

Fewer than 7% of federal direct loan borrowers who are repaying their loans took advantage of the plans as of June 30, according to the Federal Student Aid website.

In a memorandum in June 2012, President Obama acknowledged the need to streamline the process and ensure that people know about these programs.

“Too few borrowers are aware of the options available to them to help manage their student loan debt,” said Obama.

“Student loan borrowers are relying on loan services like Sallie Mae to get advice about their debt.... but people need to understand that they personally need to advocate for themselves independently.”

- Heather Jarvis, student loan expert

As of right now, however, the programs remain so little publicized that the Obama administration plans to email millions of borrowers over the next month in an effort to get more people enrolled.

“Right now, student loan borrowers are relying on loan services like Sallie Mae to get advice about their debt,” said Jarvis. “But you have to realize their interests are not aligned with borrowers so people need to understand that they personally need to advocate for themselves independently.”

A spokesperson for Sallie Mae strongly denied that allegation.

"In fact, our interest is aligned with the borrowers. We are only successful when our customers are successful," said a spokesperson for the loan service provider.

Deciding whether or not to take the plunge into student debt may appear not to be worth it. But if you look at the statistics, skipping out on school (and its expensive price tag) does not seem to pay off either.

According to the Georgetown Center on Education and the Workforce, by 2020, two-thirds of all jobs will require a post-secondary education, and the Bureau of Labor reports there is an undeniable correlation between higher earnings and a certain level of education.

“Higher education is necessary,” said Zakiya Smith, strategy director at the Lumina Foundation, a private foundation focused on accessible education. “Without a college degree, there is less opportunity -- and as time goes on, college attainment will continue to become more imperative."

As of right now, the price that a student pays for education makes it almost impossible not to accrue debt. But initiatives in a number of states are trying to make a dent in the problem for future generations.

In Oregon, legislation has recently been passed to explore a novel way to fund college in the future. The plan, called “Pay it Forward, Pay it Back,” gives students the option to pay 3% of their annual salaries for 24 years, instead of putting money down or taking out student loans.

“It’s outside of the box,” said John Burbank, the executive director of the Economic Opportunity Institute, a non-profit organization where the idea originated. “Everyone has skin in the game. Everyone is contributing the same percent of their income.”

The concept has bi-partisan support with states including Maine, Massachusetts, Maryland, Michigan, Pennsylvania, New York, New Jersey and California all showing interest in the idea, which focuses on borrowers having a long-term financial responsibility instead of having, in many instances, crippling debt.

“It’s a good thing that they are exploring it,” said Jarvis. “It helps to distribute cost in a way that's fair and I think people should embrace the idea because it could be an important part of the solution.”

Competency-based education is another concept that is gaining traction. This idea throws out the notion of curriculums based on credits and time spent, instead focusing on how much you know and could mean fewer years in school (and less tuition).

“It’s not based on how long you’ve been in school or where you learned the information -- but how competent you are,” explained Smith. “And with so much pressure from the general public to have education cost less, we think this could be very effective.”

The Lumina Foundation has been a big supporter of the approach, recently announcing a $1.2 million grant to support an evaluation of the University of Wisconsin’s competency-based program. And with an estimated 37 million Americans with some college experience but no degree, student loan experts like Jarvis are energized about the prospects.

“There is nothing magic about the credit hour, and it could save students money,” said Jarvis. ".... I think it would be naïve to think that successful institutions would rush to make any big changes, and change is always slow to work on campuses. But it’s certainly exciting. It has a lot of potential.”