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8 Crucial Student Loan Trends to Watch Out For in 2020

Category: B2B News

Love or hate student loans, they’re here to stay. Student loan trends look grim, however, as analysts say, it will only get bigger in the coming years. More students demanding college education means more student loans. It will also mean more won’t be able to pay them back, will default, or can’t discharge them.

There are some promising proposals to tackle student loans in the coming years, however. We can, for example, look at some of the ideas that US lawmakers are drawing up. It’s also worthwhile to preview the sweeping changes proposed by the 2020 presidential race candidates, who have higher education at the forefront of their platforms.

student loan trends

Student loans are a huge problem in the US. It has ballooned 213% [1] from the 1980s to 2018 and has become second only to home loans as the biggest consumer debt saddling ordinary Americans. And there are various ways student loan debts aren’t just crippling people for three decades running after they graduate—they’re also taking a toll on the national economy.

Some student loan news are making the rounds lately, however. This includes the 2020 presidential race rhetoric, which has placed student loans in America front and center of the debates. They are citing the sobering school statistics that are plaguing the nation’s 45 million student loan debtors and how student loans have jumped in only a decade. The chart below explains the trend.

Source: Federal Reserve

Proposals to end student loans or at least make them manageable are floating about. This ranges from Sen. Bernie Sanders’s (I-VT) idea to cancel all outstanding student loan debt and make college free for everyone to Joe Biden’s more conservative two years of free community college. There are also pending bills in Congress, such as the College Affordability Act, which can help reduce college costs and are, surprisingly, supported by both parties.

Whatever the case, these proposals have merit in light of the student loan crisis. One thing is for sure: student loans aren’t just personal problems. They’re a national problem, and these eight trends may offer some hope.

1. Forgiveness of Student Loans

One of the biggest things in student loans this year is the proposal to forgive all student loans—all $1.6 trillion of it.

This comes in the wake of the campaigns by Senators Bernie Sanders and Elizabeth Warren (D-MA), wherein they present some form of student loan forgiveness as part of their presidential campaign platforms. The latter wants to cancel 75% of all student loans, while Sanders wants to cancel all of it [2]. Educational loan forgiveness used to be on the back burner. The 2016 campaign changed all that, pushing it in the public limelight. Today, most candidates in the presidential race have some form of free college or student loan forgiveness proposals.

But it’s not all rainbows and butterflies on this front. Betsy DeVos, the Secretary of Education, opposes loan forgiveness [3] across the board. The main issue is that loans, by their very nature, should be paid. Canceling all debt means leaving the creditors high and dry, with no one left to pay the cost. And it doesn’t help that it would be unfair to those who had already paid theirs.

Sanders countered that additional tax may pick up the slack, especially a tax on Wall Street speculation, but this may run to over ten years.

Key Takeaways

  • Some presidential candidates, including Bernie Sanders and Elizabeth Warren, are proposing student loan forgiveness.
  • The former wants all student loans forgiven, the latter about 75% of it.
  • US Secretary of Education Betsy DeVos is against these proposals, however, because canceling $1.6 trillion in student loan debt doesn’t magically pay the outstanding balance.

2. Updated Public Service Loan Forgiveness

Public Service Loan Forgiveness, or PSLF, is a perk offered to employees of qualified government or non-profit organizations. This means that you can receive forgiveness on your remaining direct loan balance after making at least ten years (or 120, once a month) qualifying payments while working full-time for these organizations.

The problem is applying for public service loan forgiveness is a nightmare. As of December 2018, only 640 applications out of the cumulative total of 132,000 [4] for public service loan forgiveness have been approved. This means a rejection rate of over 99.5%.

public service loan forgivness approval rate

President Trump has repeatedly called to end PSLF. Instead, he wants to restructure all student loan forgiveness under a general and arguably simpler income-based repayment plan. His idea is to forgive federal student loans for undergraduate borrowers after they have paid 15 years of student loans. This is great for debtors who are in their 15th year, as most Americans with the average student loan debt by age are in their 30s.

Contrast this with current federal income-based repayment plans, which may forgive loans after 20 and 25 years of repayment (for undergraduates and graduate school, respectively). This plan also caps student loan payments at 12.5% of net income.

Betsy DeVos is backing this proposal but surprisingly, even at the other end of the campaign, Joe Biden agrees that the current iteration of PSLF is broken. He proposes to create a program [5] that relieves $10,000 in student loan debt for each year of community or national service for up to 5 years (for a maximum of $50,000 debt relief). If you work for the government, an NGO, or a school, you would automatically be enrolled in this program.

Key Takeaways

  • Public Service Loan Forgiveness (PSLF) is a program that can forgive your direct loan balance after working for a qualified government or nonprofit organization for at least 10 years.
  • President Trump wants to restructure PSLF for a simpler approach.
  • Other government officials, including Betsy DeVos and Joe Biden, back the idea that the PSLF is currently broken.

3. Removal of Origination Fees on Loans

Student loans come with origination fees. These fees are the amount you pay to process your loan, usually expressed as a percentage of the total loan. Unfortunately, it’s also deducted from the loan total. For example, a loan of $10,000 with an origination fee of 4% means $400 will be deducted from your total, leaving you with $9,600. This $400—the origination fee—will go to the federal government.

Even worse, origination fees don’t stay at $400. You still pay annual interest on them, even if you haven’t really benefited from it. For a student who graduated in 2018 with an average of $28,565 in student loan debt [6], a 4% origination fee means $1,142 over four years, plus interest. And good luck if you’re looking to pursue an expensive degree, as their origination fees will be correspondingly higher.

Source: Credible.com

This is why House Democrats are proposing a sweeping change with the College Affordability Act (H.R. 4674) [7]. This will eliminate all hidden fees in student loans, including origination fees. While this proposed bill may cost over $400 billion over 10 years, its benefits may yet prove to outweigh its cost.

At the moment, federally subsidized and unsubsidized loans have an origination fee of 1.062%. This may yet be removed in the coming years if the House passes CAA, which has promising bipartisan support.

Key Takeaways

  • Origination fees are fees you pay to the federal government (or to a lender) to process your loan, deducted from the principal.
  • Current origination fees for student loans stand at 1.062%.
  • New proposals want to remove origination fees entirely, including the College Affordability Act.

4. Income-Based Repayment

IBR is one of the two categories of student loan repayment schemes that CAA proposes (more on this below), although it’s been in existence for years. At the moment, you can avail of two kinds of income-based student loan repayment: PAYE (Pay As You Earn) and REPAYE (Revised PAYE). As mentioned above, under PAYE or REPAYE, your student loan will be forgiven after 20–25 years of qualified payments.

The operative word is, of course, “qualified.” Over the years, PAYE and REPAYE requirements have become more and more esoteric. As a result, repayments and qualifications have lagged over the last few years. Even time-tested ways on student loan repayment aren’t as effective as they once were.

This is why Biden wants to simplify income-based repayment. In his proposal [5], he categorizes graduates as either making over $25,000 a year or those making less than this amount. For the former, the IBR is capped at 5% of your net or discretionary income over $25,000. After 20 years, the balance of your federal student loans will be forgiven.

For those making less than $25,000, however, you would owe no payment and no interest.

number of federal student loan borrowers

Key Takeaways

  • Income-based repayment (IBR) is one of the few ways to pay back your student loans. This program means you can use a portion of your discretionary income every month toward your student loan debt.
  • There are two major types of IBR—PAYE, and REPAYE—but their application approvals are lagging, and thus, payments.
  • Simplification of IBR is in the works, notably with Biden’s proposal.

5. Student Loan Refinancing

One of the surprising student loan debt facts is that student loans are second only to mortgages [8] as the biggest credit category that Americans avail of. Mortgages, however, can be refinanced, but student loans can’t be. Technically you can, but only with a private lender and not with the federal government.

That is, until the CAA comes along, which is one of its provisions [7].

There are several great reasons to refinance your student loans, similar to why you want to refinance a mortgage. It can give you a lower interest rate, lower your monthly payment, and thus, help you pay off your student loans faster. That said, it may not make sense for you to refinance if you’re in a certain situation—such as bad credit, for example, though there are ways to still make a loan even with one.

Source: Experian, 2018

Key Takeaways

  • Student loans are second only to mortgages as the biggest consumer debt saddling Americans.
  • Mortgages can be refinanced, however, unlike student loans, allowing the debtor to pay them off much more easily with more favorable terms and interest rates.
  • The College Affordability Act may change this, however, allowing debtors to refinance their student loans with federal or private lenders.

6. Review of the Higher Education Act

The CAA won’t stop with just refinancing your loan and slashing hidden fees like origination fees. It will also do other things, like making community colleges tuition-free and simplifying student loan repayment. In effect, it will review the Higher Education Act of 1965 by updating it to 21st-century educational needs and realities [9].

[insert graphic here]

Let’s look at the first one: making community colleges free. The CAA proposes several partnerships between the federal government and the state level to pick up the cost of college. For example, the federal government may subsidize two-thirds of the cost, with the state picking up the rest. Other ideas include providing federal funds to states that reduce or eliminate community college tuition as sort of an incentive.

The CAA also offers updates to Pell Grants [10] by allowing them to cover room and board and other fees. Some provisions also include earning college credits while they’re still in high school, which can reduce their total college fees. This can work in concert with discounted fees, which, trends in higher education show, 40% of students would choose over a school with low tuition to begin with.

In addition, the CAA also overhauls student loan repayment by consolidating them into two: the standard loan repayment scheme and an IBR. With the latter, borrowers can automatically re-certify their income after each year, which can save paperwork and time.

Interestingly, the CAA does not mention the relatively outlandish proposals offered by the 2020 presidential candidates. For example, there is no mention whatsoever of free college, which Sen. Sanders proposes, or cancellation of student debts, which both Sanders and Warren are putting forward.

cost of college affordability act

Key Takeaways

  • The College Affordability Act is a 21st-century overhaul of The Higher Education Act of 1965.
  • Interesting provisions of the CAA include making community colleges free, where the federal government subsidizes a significant part of the tuition, and the state picks up the rest.
  • It will also consolidate ways to pay back student loans into just two and empower Pell Grants to cover more than just tuition fees.

7. Loan Discharge in Bankruptcy

Most people believe that you can’t cancel or at least reduce your student loan debt by declaring bankruptcy. This is because Congress has made it so much harder to discharge your debts via bankruptcy. After all, they’re looking at a standard called “undue hardship.” This means your debts can only be discharged if you’re disabled and your disability prevents you from working. More often than not, however, it’s up to the court to decide if your situation constitutes one.

But the tables are turning. In January this year, Chief Bankruptcy Judge Cecelia Morris discharged a student loan debt [11] amounting to $220,000 for one borrower due to Chapter 7 Bankruptcy. She says that the federal bankruptcy court in New York can and will discharge student loans if an undue hardship threshold is met—and that discharging student loans is not only possible but can also be a way to get back on your feet.

That said, bankruptcy isn’t really preferable, and will most likely be everyone’s last resort when it comes to dealing with (or discharging) student loan debts. After all, bankruptcy is a glaring red mark on your credit history. But if worse comes to worst, research shows that bankruptcy may help 1 in 2 borrowers [12] to reduce their student loan debt or even erase it.

Key Takeaways

  • Discharging student loans due to bankruptcy is thought to be a myth because it rarely happens.
  • State and the federal government only do this when the debtor has an “undue hardship,” i.e., a disability that prevents one from earning income.
  • A watershed ruling by a New York Bankruptcy Judge, Cecelia Morris, however, shows that student loans can and will be discharged by bankruptcy without the borrower going through hoops to do it.

8. Free College

Sen. Sanders’ idea for his “College for All Act” entails the federal government giving each state at least $48 billion in exchange for making higher education completely free. And you’d probably think universities nationwide, including these 12 most expensive universities in America, won’t like it. It turns out it’s a mixed bag.

$48 billion is no joke, but they would have to meet a few requirements and follow a few restrictions. These include maintaining a higher standard of education, relying less on adjunct faculty, and continuing need-based financial aid. They would also have to show that they can cover each student’s college cost, especially for those in the poorest families (with annual household incomes of $25,000 or less). Restrictions include not using these funds to raise school administrator salaries. Another is that it can’t be used to fund new non-academic buildings.

While all students would benefit from this program, this proposal is especially beneficial to lower-income students [13]. They would also give historically Black colleges and universities (HBCUs) and minority-serving institutions (MSIs) a boost in terms of qualifying for the program. The act can allocate up to $1.3 billion annually to nonprofit universities and colleges, where at least 35% of the student population is from a low-income household. These qualifications mean about 200 higher education institutions would fit right into the program.

Support in Other Fronts

Not all Democratic lawmakers and Democrat voters support this bill, however, and it’s even less for Republicans. However, one staunchly Republican state, Tennessee, is already practicing a form of free college. Called the Tennessee Promise [14] (and later an expanded program called the Tennessee Reconnect), it guarantees two free years of community college or technical school to high school graduates.

This program is highly dependent on available state funding, however, and in this case, Tennessee’s lottery reserve fund. Lawmakers are looking to adopt this program, at least in principle, to make college more accessible to everyone. And for a good reason: studies show that Tennessee has the 16th lowest [15] average student loan debt.

Source: US Department of Education

Key Takeaways

  • The College for All Act proposed by Bernie Sanders will make higher education free and cancel all outstanding student loan debt.
  • The proposal will call on the federal government to provide $48 billion to each state in exchange for making all school fees free for students.
  • There is, however, already a pilot program in Tennessee with its “Tennessee Promise” program. This plan makes community colleges and technical schools free for all high school graduates.
  • Proponents of free higher education are looking to incorporate the principles of the Tennessee Promise principles into their own proposals.

Where are all those student loans heading?

Student loans are part and parcel of the American higher education landscape. Whoever wins in the 2020 presidential race, however, it’s sure that college education—and by extension, student loans—will likely change, whether for good or ill. And it remains to be seen whether these changes are minor or major.

These changes, however, take note of the fact the education in America is highly cost-prohibitive. American students spend twice as much [16] as OECD countries do on college education. One driver of exorbitant college costs is demand even while state and federal funding are drying up. The rising costs, however, have made the advantage of a degree less important than it was 10 or 20 years ago.

This is why even the White House and Congress are waking up to the stark reality that unless this broken system is addressed, fewer and fewer Americans would have access to post-secondary education. These trends show some promise. Unless lawmakers act together for what’s good for students, student loan trends will only get worse and American education will remain a dream.

Or a nightmare, for those 45 million Americans mired in student loan debt.

References

  1. ^ Student Loan Hero: Millennials Have It Worse
  2. ^ CNBC: Bernie Sanders Has a Plan to Cancel All Student Debt
  3. ^ Fox News: Betsy DeVos Responds to Democrats’ Calls to Erase Student Debt
  4. ^ Federal Student Aid: Public Service Loan Forgiveness Data
  5. ^ Joe Biden: Beyond High School
  6. ^ LendEdu.com: Average Student Loan Debt by School by State
  7. ^ Education & Labor Committee: The College Affordability Act
  8. ^ Experian: Consumer Debt Study
  9. ^ Congress.gov: H.R. 4674 – The College Affordability Act (full text)
  10. ^ Federal Student Aid: Pell Grants
  11. ^ United States Bankruptcy Court: Case No. 18-35379 (CGM)
  12. ^ Jason Iuliano: An Empirical Assessment of Student Loan Discharges and the Undue Hardship Standard
  13. ^ Bernie Sanders: Supporting Historically Black Colleges & Universities and Minority Serving Institutions
  14. ^ TN.gov: Tennessee Promise
  15. ^ TICAS.org: Student Debt and The Class of 2014
  16. ^ OECD.org: Education at a Glance 2019 – United States
Nestor Gilbert

By Nestor Gilbert

Senior writer for FinancesOnline. If he is not writing about the booming SaaS and B2B industry, with special focus on developments in CRM and business intelligence software spaces, he is editing manuscripts for aspiring and veteran authors. He has compiled years of experience editing book titles and writing for popular marketing and technical publications.

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