Student Debt Recent Titles in the CONTEMPORARY WORLD ISSUES Series Solar Energy: A Reference Handbook David E Newton Prescription Drug Abuse: A Reference Handbook David E Newton The Minimum Wage: A Reference Handbook Oren M Levin-Waldman Juvenile Justice: A Reference Handbook, second edition Donald J Shoemaker and Timothy W. Wolfe The Global Water Crisis: A Reference Handbook David E Newton Youth Substance Abuse: A Reference Handbook David E Newton Global Pandemic Threats: A Reference Handbook Michael C. 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Lewis Copyright © 2017 by ABC-CLIO, LLC All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, except for the inclusion of brief quotations in a review, without prior permission in writing from the publisher Library of Congress Cataloging-in-Publication Data Student Debt: A Reference Handbook Library of Congress Cataloging in Publication Control Number: 2016042007 ISBN: 978-1-4408-4487-4 EISBN: 978-1-4408-4488-1 21 20 19 18 17 1 2 3 4 5 This book is also available as an eBook ABC-CLIO An Imprint of ABC-CLIO, LLC ABC-CLIO, LLC 130 Cremona Drive, P.O Box 1911 Santa Barbara, California 93116–1911 www.abc-clio.com This book is printed on acid-free paper Manufactured in the United States of America Contents Preface, xv Background and History, Introduction, 1958: National Defense Student Loan Program, 1965: The Higher Education Act—Loan Guarantees, 1972: Education Amendments, 10 Ascendance of Student Loans within the Financial Aid System, 11 Sallie Mae, 12 1978: Middle-Income Student Assistance Act, 13 1980s: Student Loans Become the Dominant Paradigm in Financial Aid, 14 Changing Perceptions of Student Loans, 17 Conclusion, 27 References, 28 vii viii Contents Problems, Controversies, and Solutions, 39 Introduction, 39 Following Borrowers, Protecting Creditors, 41 Defining the “Problem” as One of Repayment Strain Leads to Narrowly Focused “Solutions,” 45 Tweaks around the Margins Rather Than Fundamental Reconsiderations, 54 Information as the Answer, 56 Putting a Lid on Student Borrowing—Is “Nothing” Better Than Student Debt?, 59 Channeling Momentum for Good, 61 Free College?, 62 How about a Bailout?, 65 Conclusion, 69 References, 76 Perspectives, 91 Introduction, 91 Student Debt: How Did We Get Here and Why Should We Worry?: Mark Huelsman, 92 Student Loans and Bankruptcy in the United States: Rajeev Darolia, 100 Advice from Our Side of the FAFSA: Scott and Mandy Sponholtz, 105 Developing a Mind-Set for Paying Off Student Debt: Phil Schuman, 111 Contents ix Education: Still Valuable, Just Not Equitable: Melinda Lewis, 115 The College Conundrum—Does Student Debt Cancel Out the Value of Higher Education?: Aaron Conrad, 132 Profiles, 145 Introduction, 145 Researchers, 145 Beth Akers, 145 Sandy Baum, 146 Meta Brown, 147 Rohit Chopra, 148 Rajeev Darolia, 149 Jason Delisle, 150 Rachel E. Dwyer, 151 Susan Dynarski, 152 William R Emmons, 154 Richard Fry, 155 Sara Goldrick-Rab, 156 Darrick Hamilton, 157 Donald E Heller, 159 Robert Hiltonsmith, 160 Jason N. Houle, 161 Mark Huelsman, 162 Bridget T. Long, 163 Ben Miller, 165 Laura W. Perna, 166 Fabian T Pfeffer, 167 Glossary 289 Debt Aversion Reluctance to acquire financial debt Debt-to-Income Ratio The percentage of monthly gross income that goes toward paying debts Default Occurs when the borrower does not meet the repayment terms of the promissory note Missing payments for 270 days, or approximately months, is considering defaulting on most federal student loans Deferment A temporary delay of loan payment obligations that is allowed when certain conditions are met The government pays the interest during the deferment period for the following three types of federal student loans: Direct Subsidized Loans, Subsidized Federal Stafford Loans, and Federal Perkins Loans Unsubsidized and Direct PLUS Loans continue to accrue interest during deferment; unpaid interest is then added back to the principal balance when the deferment period ends Delinquent The status of a loan for which payments are not received when due Loans remain delinquent until payments are made current through payment, deferment, or forbearance Direct Loan Federal loans borrowed directly from the U.S Department of Education by eligible students or parents at participating institutions The William D Ford Federal Direct Loan program makes these loans Examples include Direct PLUS Loans, Direct Consolidation Loans, and Direct Subsidized Loans Direct PLUS Loan A type of direct loan borrowed from the U.S Department of Education for which the borrower (students or parents of dependent students) remains responsible for the interest even if the loan’s status changes (e.g., during deferment or forbearance) Earnings Potential The total amount of money one has the potential to earn in his or her occupation Earnings Premium Typically defined as the difference between median earnings of individuals with bachelor’s degrees and those with only high school diplomas; a measure of the 290 Glossary marginal value of the educational attainment, then, for individuals’ earnings Economic Mobility The ability to move to a different level of economic status In other words, to improve or worsen one’s standard of living Educational Attainment Highest level of education an individual has completed; in the aggregate, the average level of education completed in a particular population Entrance Counseling A session that new borrowers are required to take to learn information about their rights and responsibilities prior to receiving their first federal student loan; an effort to increase consumers’ understanding of the terms and conditions of their student loans Exit Counseling A session that half-time or recently graduated student borrowers are required to take to learn information about loan repayment such as when repayment begins, what servicing options are available, and what responsibilities they have Extended Repayment Plan Some loans from the Direct Loan program and the FFEL program allow borrowers to make lower monthly payments (may be fixed or graduated) over a longer period of time than the Standard Repayment Plan Federal Family Education Loan (FFEL) Program The FFEL program utilized private lenders who made loans that were guaranteed by the federal government The loan types available through the FFEL program included Subsidized Federal Stafford Loans, Unsubsidized Federal Stafford Loans, FFEL PLUS Loans, and FFEL Consolidation Loans In 2010, the FFEL program was replaced by the Direct Loan Program (see definition) so all federal student loans are now made by the U.S Department of Education rather than private lenders Federal Work-Study A student aid program where the federal government provides students who have financial need with part-time work to help them pay their educational expenses Glossary 291 Forbearance Temporary suspension or reduction of student loan payments for up to one year Forbearance may be granted by the lender when one cannot make payments due to qualifying circumstances but is not eligible for deferment Interest accrues for both subsidized and unsubsidized loans during forbearance and is added to the principal balance to be paid following the forbearance period For-Profit College or Proprietary Education Educational institutions operated by private, profit-seeking businesses (in contrast to public institutions or private, nonprofit institutions) Free Application for Federal Student Aid (FAFSA) The free application used to apply for all federal student aid, such as federal grants, loans, and work-study Graduated Repayment Plan Repayment plan that starts with lower monthly payments that then increase as an individual’s salary increases Income-Based Repayment (IBR) A repayment structure that bases the monthly payment amount on a percentage of the borrower’s income, in order to ensure a level of affordability Also called income-driven repayment, of which IBR is technically a type, the term has become synonymous with any type of student loan that bases repayment obligations on a borrower’s income Income Contingent Repayment (ICR) The monthly repayment amount is based on the borrower’s income, the total amount owed, and the borrower’s family size Loan Forgiveness The federal government excuses the borrower’s responsibility to repay some or all of the remaining loan balance Part of most income-based repayment plans, and a benefit provided to students participating in some targeted recruitment or other incentive programs Loan Guarantee The promise by the guarantor to assume the debt obligation of a borrower if that borrower defaults 292 Glossary Loan Servicer A third party that collects and applies payments to loans, handles customer service, and performs administrative tasks associated with the loan on behalf of the lender Master Promissory Note A binding legal contract that lists the terms and conditions for loan repayment as well as the rights and responsibilities of the borrower It can be used to provide one or more federal loans for up to 10 academic years Need-Based Financial Aid Financial aid determined based on the assets and income of the prospective student and his or her family, rather than measured academic ability or special talent Need-based financial aid is designed to bridge the gap between a household’s own resources and the price of college access Net Worth Total assets minus total liabilities Perkins Loan A program through which students with financial need can obtain low-interest federal student loans Postsecondary Education Education continued after high school Predatory Student Lending Providing loans without regard for the borrower’s ability to pay or the risk of default Often characterized by the issuance with loans with unfavorable servicing terms, high costs, and/or unclear consumer disclosures Public Service Loan Forgiveness A federal program through which certain types of public or nonprofit employees may have their student loans forgiven A particular type of loan forgiveness Relative Debt The debt-to-asset ratio tells you the percentage of total assets that were financed by creditors, liabilities, or debt Risk-Averse Used to describe students unwilling to borrow money for college even though the expected return of a college degree may outweigh the cost Standard of Living The level of material goods and services associated with living in a specific socioeconomic class Glossary 293 Standard Payment Plan Paying a fixed amount toward a student loan for a standard amount of time (generally 10 years but may be up to 30 years for a consolidated loan) Subsidized Loan A type of loan that is provided based on financial need, issued with more favorable terms than unsubsidized loans During times where the borrower is in school, or in a deferment or grace period, the federal government assumes responsibility for paying the accrued interest of subsidized loans The exception is for Direct Subsidized Loans issued between July 1, 2012, and July 1, 2014, where a borrower is responsible for paying interest that accumulates during a grace period and any unpaid interest amounts are added to the principal balance of that loan Subsidy Cost The money that needs to be set aside at the point of student loan issuance in order to cover the costs to the government over the life of the loan Work-Study See “Federal Work-Study.” This page intentionally left blank Index Access Group, 172 – 173 Akers, Beth, 145 – 146 associate degrees, 200 Baum, Sandy, 146 – 147 Brown, Meta, 147 – 148 Center for Responsible Lending, 173 Center on Assets, Education, and Inclusion (AEDI), 173 – 174 children’s savings accounts (CSAs), 73 – 74, 123 – 124, 174, 262, 296 – 297 post-college financial health, 74 social/emotional skills, 73 wilt, 73 Chopra, Rohit, 148 – 149 College Board, 252, 147 college costs/affordability, 40, 64, 92 – 95, 105 – 106, 133 – 134, 157, 160 – 161, 172, 179, 201, 203 – 204, 206, 213, 214, 217, 225, 230 – 231, 268, 288 non-tuition/indirect costs, 60, 63 – 64, 108, 120, 122, 204, 288 working, while in college, to pay for, 92, 106 – 107, 109 College Opportunity for a Better America Act (2003), 205 college-saver identity, 73 – 74, 123 college selection, 106 student satisfaction with, 106 Conrad, Aaron, 132 Consumer Financial Protection Bureau, 24, 26, 149, 222, 240, 244, 254 Darolia, Rajeev, 149 – 150, 256 295 296 Index Debt.org, 182 – 183 Delisle, Jason, 150 – 151 Demos, 160, 162, 175, 197 – 200, 203, 267 Durbin, Richard, 219 Dwyer, Rachel, 151 – 152 Dynarski, Susan, 152 – 154 economic mobility, xix, 73 – 74, 94, 168, 174, 205, 276 – 277, 290 Education Trust, 175 – 176 Emmons, William R., 154 – 155, 264 Federal Family Education Loan, 9, 16, 284 – 285 Federal Reserve Bank, 64, 148 – 149, 153 – 155, 176 – 177 of New York, 176 Federal Work Study, 290 financial aid, xv, 4 – 5, 10 – 11, 14 – 15, 27, 40, 292 asset-based, 74 – 76, 122 – 124, 174, 261 – 263, 296 free application for Federal student aid, 105, 134, 153, 178, 217, 285, 291 merit-based, 14 – 15, 66, 118, 134 need-based, 9, 14, 45, 61, 119, 134 Pell Grants, 9, 16, 76, 93, 124, 147, 176, 198, 213 – 214, 216 tax credits as, 10, 151, 225 unmet need within, 16, 60 financial education/literacy, 111 – 113, 172 for-profit colleges, 23 – 26, 119, 151, 172 – 173, 180 – 181, 200, 222 – 223, 238, 242, 252 – 254, 263, 291 Corinthian Colleges, 23 – 26 free college, 25, 62 – 64, 74, 122, 204, 274 Fry, Richard, 155 GI Bill, 72, 74 – 75, 180, 283 Goldrick-Rab, Sara, 156 – 157 graduate school/students, 40, 59 – 60, 119, 133, 135, 137, 173, 258 – 259, 262, 270, 280 Great Recession, 17 – 23, 27 – 28, 148, 154, 161, 168, 200, 203, 210, 252 – 253, 264, 268, 276, 285 Hamilton, Darrick, 157 – 158 Hamilton Project, 183 Hechinger News Service, 186 Heller, Donald E., 159 – 160 higher education access to, 5 – 6, 8, 13, 27, 40, 43 – 44, 46, 61 – 62, Index 297 94 – 95, 117, 153, 159, 164, 166, 172 – 173, 175, 176 – 177, 179, 182, 184, 213, 216, 267 completion of, 60, 95, 117, 121, 152, 159, 165, 174, 271, 288 spending on, 5, 7, 14, 17, 63, 201 – 203 and the cost shift, 11, 201, 203, 268 stratification of, 11, 60, 62 – 63, 117 – 119, 186, 259 Higher Education Act, 8 – 9, 107, 146, 211, 215, 217 – 218, 223, 284 – 285 reauthorization of, 146, 215, 217 – 218 Hiltonsmith, Robert, 121, 160 – 161, 267 – 268 historically-black colleges and universities, 61 Houle, Jason N., 161 – 162 Huelsman, Mark, 92, 162 – 163, 268 Huffington Post, 186 income-based repayment (or income-driven repayment), 40, 43, 45 – 53, 68, 120 – 122, 150 – 151, 234 – 235, 258 – 259, 291 income-share agreements, 122 The Institute for College Access and Success, 177, 269 Johnson, Lyndon Baines, 8 Kamenetz, Anya, 171 Kennedy, Edward, 210, 213 Kuhn, Thomas, 21, 28, 71 Lemann, Nicholas, 172 locus of control, 112 – 113 Long, Bridget T., 163 – 165 Middle-Income Student Assistance Act, 13, 284 Miller, Ben, 165 – 166 Million Student March, 25 Morse, John F., 5 – 6, 8, 17 National Association of Student Financial Aid Administrators, 178 National Center on Education Statistics, 178 – 179 National Defense Student Loan Program, 4 – 6 New America, 150, 179 – 180 Nixon, Richard, 10 Obama, Barack, 17, 180, 224 – 225, 228 Pay-it-Forward, 122 Perna, Laura W., 166 – 167 298 Index Pew Research Center, 69, 155, 265 Pfeffer, Fabian T., 167 – 168, 276 racial inequality, xv, 3, 67, 96 – 97, 169, 198 – 199, 250 – 251, 259, 262, 264, 266, 273, 279 return on degree, 21 – 22, 51, 64, 72, 115 – 116, 120, 174, 261, 265 education paradox, 69, 121 risks associated with, 19, 146, 262 servicing, 41 – 45, 49, 55, 149, 245 – 246, 255 Rolling Jubilee, 24, 184 – 185 St John, Edward P., 170 – 171 Sallie Mae, 12 – 13, 50, 55 – 56, 66, 284 Sanders, Bernie, 25 Schuman, Phil, 111 Shapiro, Tom, 168 – 170, 279 Sponholtz, Scott and Mandy, 105 student debt average per student, 3, 21, 64, 119, 165, 199 – 201, 206, 213, 220, 231, 251 and college completion, 72, 95, 121 gender differences in, 152 effects on long-term financial well-being, 4, 22, 39, 47 – 48, 72, 135, 155, 174, 249, 262 – 264, 295 effects on the workforce, 46, 53 – 54, 72, 205 – 209, 212, 234 entrapment, 137 – 138 by family income, 60, 119 – 120, 152, 163, 198 – 199 and financial hardship, 3, 42, 250 and homeownership, 116, 148 – 149, 153, 252 – 253, 260, 269 – 270, 272, 279 home equity, xix, 22, 121, 267 by institution type, 119, 163, 200, 269 in the military, 245 – 246, 255 among older adults, 4 outside of the United States, 64, 202 protest movement against, 23 – 24 psychological effects, 136, 140 – 141, 280 – 281 by race, 3, 67, 97, 119 – 120, 163, 198 – 199, 250, Index 299 259 – 260, 268, 274 – 275, 279 – 280 treatment in bankruptcy, 39, 41 – 45, 55, 100 – 103, 173, 185, 219, 221 – 222, 257 undue hardship exception, 102 student debt crisis, 184 Student Loan Affordability Act, 222 – 223 Student Loan Certainty Act of 2013, 224 student loans aversion, 57, 166, 265, 289 cost of administration, 13, 45, 49 counseling about, 57 – 58, 173, 183, 227, 242, 290 debt letters as, 111 – 112 default, 8, 24, 39, 41 – 42, 44 – 46, 50, 53 – 56, 58, 102 – 103, 121, 153, 161, 177, 184, 226, 287, 289 delinquency, 39, 44 – 46, 120 – 121, 134, 220, 256, 289 direct, 16 – 17, 43, 46 – 47, 109, 208, 214 – 215, 222, 226 effects on credit scores, 22, 139 forgiveness, 43, 45 – 46, 51 – 54, 59, 68, 173, 205 – 209, 212, 214, 235, 236, 240, 291 – 292 guarantees, 8 – 9, 12 – 13, 16, 214, 284, 291 increasing role for, within financial aid, xv, 11, 16 interest rates, 5, 16, 43, 50 – 51, 55 – 56, 108 – 109, 114, 139, 212, 220, 221 – 2, 224 – 225, 241, 246, 275 limits on, 7 – 8, 15 – 16, 40, 59 – 60, 107, 284 – 285 origination fee, 13, 220 Parent PLUS, 15, 61, 284, 289 private, 9, 12 – 13, 16 – 17, 41 – 44, 50, 55, 66, 101 – 102, 149, 181, 214 – 215, 220 – 222, 240, 254 – 255, 284, 290 repayment of, 43 – 48, 52, 54 – 55, 57, 68, 109, 113 – 114, 120, 150 – 151, 153, 178, 183, 242 length of period, 47 – 48, 51 – 52, 68, 96, 105, 120 300 Index Stafford, 16, 208, 222 – 223, 284 – 285, 289 underwriting, 58 Undergraduate Student Loan Calculator, 183 United States Student Association, 185 – 186 Veterans Education Success, 180 – 181 Warren, Elizabeth, 26, 50 – 51, 240, 245 – 246 Woodstock Institute, 181, 253 Young Invincibles, 181 – 182 About the Authors William Elliott III is an associate professor at the University of Kansas (KU) and founder of the Center on Assets, Education, and Inclusion (AEDI), a research center in KU’s School of Social Welfare He also serves as a faculty director of Asset Building for the Center for Social Development at Washington University in St. Louis, Missouri, and as a nonresident senior research fellow for New America’s Asset Building Program He is a member of the advisory board for the initiative to develop a Human Needs Index at the Center on Philanthropy at Indiana University and was previously a visiting scholar at the Federal Reserve Board of Boston Elliott has received research funding from such sources as Ford Foundation, Charles Stewart Mott Foundation, W.K Kellogg Foundation, Lumina Foundation, and Citi Foundation Elliott is a leading researcher in the field of children’s savings, college matriculation and success, and college debt He has written extensively on the relationship between assets and children’s educational outcomes and is author of many peer-reviewed, well-regarded articles on these topics In the area of student debt, Elliott has investigated the effect of student debt on long-term financial health (“Unequal Outcomes: Student Loan Effects on Young Adults’ Net Worth Accumulation,” 2014; “Is Student Debt Jeopardizing the Long-Term Financial Health of U.S Households,” 2013), as well as the effect of parents’ college savings on reducing student load debt (“Student Loan Debt: 301 302 About the Authors Can Parental College Savings Help?,” 2014) Elliott recently coauthored the book The Real College Debt Crisis: How Student Borrowing Threatens Financial Well-Being and Erodes the American Dream (Elliott & Lewis, 2015) The book portrays the contrasting personal experiences of the authors’ college journeys: one who borrowed money to finance an education that would lift him out of poverty, and the other who was fortunate to have financial support from family to pay for college and, then, saw a greater and more immediate return on her degree In addition, the book includes data regarding the effects of educational debt on future net worth, the analysis of policy options that have been offered to reduce the burden of student debt, and the discussion of asset-based solutions, such as Children’s Savings Accounts (CSAs) Dr. Elliott has another book under contract (with Oxford Press) regarding CSAs that will feature research he is directing, which examines outcomes from CSA programs around the country Dr. Elliott’s work has been integral to the initiation of CSA programs such as Kindergarten to College (K2C) in San Francisco and Promise Indiana, which began in Wabash County His work has been featured by popular news outlets, such as the Washington Post, U.S News, and PBS News Hour, and highlighted by other respected researchers, including the Federal Reserve Bank of St. Louis He was the recipient of the 2014 National Award for Distinguished Recent Contribution in Social Work Education and the 2016 University of Kansas Scholarly Achievement Award Elliott received a bachelor’s degree in philosophy from Geneva College and a master’s in social work and PhD from the George Warren Brown School of Social Work at Washington University in St. Louis Melinda K Lewis is the assistant director at the Center for Assets, Education, and Inclusion (AEDI), and associate professor of practice at the School of Social Welfare, at the University of Kansas Her work with AEDI includes conducting research and translating findings into policy changes, specifically About the Authors 303 around the role of assets in addressing educational inequities and improving upward mobility Recently, Lewis coauthored the book The Real College Debt Crisis: How Student Borrowing Threatens Financial Well-Being and Erodes the American Dream In addition, Lewis has coauthored articles for academic journals, including an article discussing the research and policy implications of the effect of student debt on financial well-being (“Student Debt Effects on Financial Well-Being: Research and Policy Implications,” 2015), as well as numerous research reports for AEDI, particularly regarding CSAs (“Latino Immigrant Families Saving in Children’s Savings Account Program against Great Odds: The Case of Prosperity Kids,” 2016; “Saving and Educational Asset-Building within a Community-Driven CSA Program: The Case of Promise Indiana,” 2016) She frequently presents on student debt, CSAs, and educational inequity Prior to her current roles at the University of Kansas, Lewis worked as a nonprofit policy advocate, grassroots organizer, and community researcher Lewis has a Bachelor of Social Work from the University of Kansas and a Master of Social Work from Washington University ... Substance Abuse: A Reference Handbook David E Newton Global Pandemic Threats: A Reference Handbook Michael C. LeMay Same-Sex Marriage: A Reference Handbook, second edition David E Newton DNA Technology:... of an undergraduate student s financial aid package The Guaranteed Student Loan (GSL) program, which in 1992 was renamed the Federal Family Education Loan (FFEL) program, was created as part... loans to students, and established a National Teachers Corps In part, HEA represented a Background and History 9 shift toward the liberal idea that education, particularly higher education, was