Student debt burden and financial challenges in higher education

Student Affairs

One of the most important links for success in the upcoming decades for the U.S. is higher education. Its not only beneficial for the country at large but it is what differentiates the average from the well-off or successful as a higher education degree can almost guarantee earnings totaling to more than $1,000,000 over a lifetime and is clearly valued more then the normal high school degree. The downside in the American society in current times is that the overall academic expenditures for higher education are leaving the students under heavy student debts (King and Bannon, 2002).

A whopping 40% of the students that graduate with a higher education degree have an unbelievably high debt that mainly leaves them in dire states as the monthly revenue is 8% less then what they have to monthly spend in returning the debts, utilities, etc. The Department of Education's National Postsecondary Student Aid Study (NPSAS), in one of their recent reports highlighted that with the rise in expenditure for getting a higher education degree in the last two decades, more and more students are relying on student loans to help them cover their tuition fee, and hence the amount of debts are increasing speedily. Another study showed that a surprising 64% of the graduates will be indebted with students' loans by the end of 2009 and that these loans will have more than doubled to approximately $16-17000 by that time (King and Bannon, 2002).

The most common denominator found here is that the students who had financial troubles before or after graduation were the ones who were left with heavy student debts. The fact of the matter is that students who have unsteady financial backgrounds have limited options of getting financial support and normally have to support their families after they have graduated. A study conducted in 1999-2000 confirmed this as by the end of the year 1999 44% of the graduates with student debts were from families with annual earnings of nearly $100,000 or more and nearly 71% of graduates with student debts were from families with annual earnings of $20,000 or less (King and Bannon, 2002). Also, there are certain groups of students that face heavier students' debts then other groups like the Hispanic (58%) or the African-Americans students (55%) (King and Bannon, 2002).

Recent history of the student debt

There have of course been numerous improvements made in the past decade in the student loan procedures (like a reduction in the default rate), there are, nonetheless, severe glitches in the overall system. The improvements made have merely been a result of the new centralized system that has been setup. The default rate, for instance, in 1990 was a whopping 22% where the student loans were allocated a total of $13 billion. But if one takes in account the statistics from then till now we see a clear pattern of student loans increasing in number while the default rate decreasing in percentage. The difference became so wide that by the end of 1998, the student loan amount was up to $38 billion. If this continues, the country might witness another record making default rate (Fossey, 1998). Another concern is that the students with rising demands of everyday life and business are finding it harder and harder to manage their debts; this could increase the default rate back into the late-teen percentage as opposed to the 10-11% it is at now (Fossey, 1998).

The government has changed its loan giving procedure in the recent years which has been a leading cause for the rise in concern of repayment. Previously, students received finances without interest for their academic years. Now more than 1/3 of the students receive subsidized loans that have increased with the added interest during their academic years. This simply means that a student who had received subsidized financial loans had to pay interest in addition to the finance borrowed to pay for the tuition (Fossey, 1998). This is of course not helped by the fact that more students are now dependent upon the student loan system and the amount of loan that they are borrowing is a lot more than what students of the previous generation had borrowed. A study conducted by General Accounting Office (GAO) showed that by the end of the academic year of 1992-93, the total student loans borrowed by college graduates amounted to a total of $10,000 which was 30% less then the total of $13,000 that the graduating students owned by the end of the academic year in 1995-96 (Fossey, 1998). David Campaigne and Don Hossler, in one of their recent studies, supported that the revenues generated and the debt owed was not on equal turf for most graduating students and that the overall debt ratio between 1985 and 1991 grew from 6.23% to 9.52% of total earnings (Fossey, 1998).

One of the recent solutions brought forth by the congress was that the student loans can be repaid over an extended period of 25 years. This, while on the surface seems to help the students handle the burden a lot better and does decrease the default rates, in effect it actually is increasing the amount of money that will be repaid as the more years that are taken up to repay the debt the more interest will be added to the total amount (Fossey, 1998). This glitch is not the only reason that the 25-year repayment period is futile. When considering the practical side of things, the fact still remains that the students opting for the 25-year repayment period might have to repay their students loans right into their middle age; some might even have to continue paying off their student debt after they have retired from regular work (Fossey, 1998).

The GAO carried out another analytical report in 1997 and showed tremendous concerns for the student loan program, its administration and structure and referred to the student loan section as a "high risk" zone. It highlighted some of the most drastic faults in the overall setup and went on to conclude that "the financial interests of the U.S. taxpayers are not well served (Fossey, 1998)." The report also highlighted some of the most obvious fraudulent and negligent elements in the program especially in the loan structure of the proprietary school segments. Negligence or inefficient work was also one of the main highlights of the report as they pointed out that more often the disqualified or evasive students were given loans without any logical reason to back up the action (Fossey, 1998).

One of the main shortcomings that were highlighted in the GAO report was the lack of efficient and updated facts and data on the overall procedure of providing student loans and/or keeping a record of the student loans given. The report pointed this out a lot more then any other problem and also went on to say that this level of inefficient and undependable record was one of the main reasons why the U.S. Department of Education was having problems coming up with accurate academic and student loan costs. Also, the report highlighted that the Department of Education had no way of checking for the authenticity of any of the cost details given to them (Fossey, 1998).

Other obvious flaws in the program that have helmed the increase in the percentage and amount of student loans are: one, the design of the loan scheme puts all the financial burden on the central authorities hence the loaners don't feel a need to reduce the default rate; two, the loans are mainly given to the students who have unsteady financial backgrounds or attend proprietary foundations. It would be unfair to say that the Department of Education has turned a deaf ear to these concerns but the fact of the matter is that they are not coming up with effective and successful solutions for the problems aforementioned (Fossey, 1998).

The parameters of the current dilemma

The most recent predicament is that the higher education debt is not the only one that is increasing speedily, the overall secondary academic expenditure is also increasing at a swift pace. Nellie Mae Corporation is one of the most successful student loan providing corporations in today's time. According to their analysis the overall student loan after graduation is between $18-19,000. Their analysis shows that the overall figure of student loans increased by a whopping 66% from 1997 to such a high number after the loan-inclined student support became the main source of college funding instead of the grant-inclined support. The downside is that secondary or college graduates who go through such high debts do not earn as much as a higher education graduate does and hence they find it even harder to repay this debt (Franke-Ruta, 2003).

These insane level of debt ratios have transformed the average American in the 20s and 30s of today's time from being merely adventurous, aspirating leaders and corporately risky to tackling inflexible, unsatisfactory careers and worrisome finances. One of the victims of such a life: Gabriel Schnitzler, 26 and Yale university graduate, with a total student debt of $106,000 says that "It colors every little decision you make." Gabriel is an employee of a small business and agrees with the results of numerous reports that highlight that irrespective of the increase in the overall opportunities for work, the overall living expenditures, student loans, utilities etc. leaves most graduates in a dire state of (Franke-Ruta, 2003).

Another Nellie Mae report conducted in 1998 showed that nearly 40% of the graduated lawyers and doctors and 25% of graduates of private institutions were earning far less money than what they owed monthly to the students loan agencies. The report also shows that out of the total graduate lawyers and doctors, nearly 41% paid off 13% of their salaries to the student loan agencies to relieve their debts and all 41% felt like this was a huge weight on their shoulders. This burden was even more obvious on the African-American debtors and low income earners by the end of 2002 (Franke-Ruta, 2003).

Numerous reports carried out showed that there was a group of students who did not feel the weight of paying back student debts. Calculations showed that these were the students who got respectable jobs where they could earn up to $30-32,000 immediately after they had graduated. The statistics show that the estimated start by the end of the year 2001 was calculated at $26,600 for the college graduates. This figure increased if the graduates had received higher education or had specialized in a sector. The main thing to note here is that the higher the level of income one individual has means that the individual has more money to dispose as he sees fit. The surprising tally here is that if the average debt to be paid in a month is $1,000 or around that figure than the graduate would have to earn a hefty annual income of $100,000 which is extremely difficult and very uncommon for a newly graduate to earn (Franke-Ruta, 2003).

This figure or tally was even more difficult and burdensome for other students who were simple college graduates and were not specialized in any specific discipline. The students from the faculties of humanities, art or music can be included in this group. The expenditure of these departments is not less than any other department contrary to popular belief and still leaves many of the students with demanding and difficult financial situations to tackle after graduation. The income generated from careers in these fields is not extra-ordinary. In fact, recent statistics show a very clear decline in the income generated from employees working in relative fields of the arts or humanities departments as well as show low level of job security or stability (Franke-Ruta, 2003).

In addition, most students also account for credit card defaults and debts, which further obscures the dilemma of student debt. Studies have shown that nearly half of the college freshmen and more than ninety percent sophomores use their own credit cards (Franke-Ruta, 2003). Students have got to make responsible decisions about their finances if they are to successfully cope with their educational debts and loans. Wasteful monthly credit card expenditures will not assist their cause at all. They have got to plan out their debt retirement early on during their college years and look for alternative approaches which are available to them.

The best alternative approaches to the problem: Debt consolidation

Getting rid of debt is one of the main issues graduating students face when they are on the verge of acquiring their degree. These students have several good options to choose from; however, the most effective option for these students is debt consolidation as it gives the most benefits to students. First of all, it quite often decreases their interest rates. Students quite often end up getting one interest rate instead of getting several different ones, which are quire high in comparison. Debt has been a major source of depression, anger, stress, lack of concentration and sleeplessness for students. Acquiring one interest rate and knowing what is coming their way helps students overcome these mental challenges as they can now plan their debt-elimination strategy (Dragon, 2007).

Another benefit that debt consolidation has to offer is that students are not responsible to make different payments each every month, which differ not only in amounts but also in their due dates. Using debt consolidation students just have to focus on paying one company on a single day of the month and the amount too does not vary month to month. This makes elimination of debt much easier and relaxing (Dragon, 2007). Fiset (2007) asserts, "Debt consolidation means combining all your several debts, usually unsecured debts into just one account resulting in one payment each month instead of several payments. This goes to the debt Consolidation Company who will disburse it among your creditors (Fiset, 2007)."

In addition, most debt consolidation companies teach students valuable lessons on managing their debts, budgeting on a monthly and annually basis and overall financial management. This helps students learn from their mistakes and stay debt free in the future. As Dragon (2007) writes, "We all make mistakes, learning from them and knowing how to manage your finances properly, is the best way to ensure that you never become submersed in debt again. Again, debt is a part of every day life, knowing how to manage it and living within your means can be one very positive benefit of debt consolidation (Dragon, 2007)."

Handling Debt Consolidation

Most students during their schooling years are not worried about debt problems since most companies giving student loans do not compel them to pay their debts until after they have left college. Therefore, most students come to face the harsh realities of debt payments soon after they enter the real world. Most students possess credit cards and make regular monthly payments and thus maintain a healthy credit history. However, some students fail to maintain their good credit records after their graduation as they face the burden of paying huge sums of student loans they had acquired during their college years. Complications escalate even further when students come across employers who look at student's credit history to ascertain whether they will hire him/her and the pay scale they should offer them (Arnold, 2007).

Faced with such challenges students look towards ways to maintain their good credit history. Some of these students wisely end up taking the option of loan consolidation. One of the best things about loan consolidation is that students cannot use the money in other places as the debt consolidation company does not pay cash to students. Another benefit of student load consolidation is that as long as students are paying their debt consolidation company on time, they are able to maintain their credit score and record (Arnold, 2007).

The main aim of these debt consolidation programs is to allow students flexibility to pay less on a monthly basis. Students who enroll in these programs have the benefit of paying a lot less than their counterparts who are utilizing other options available to them. Arnold (2007) suggests, "Don't allow yourself to be at a disadvantage in today's job market by having this huge debt hanging over your head. Look into a college loan consolidation program to give yourself the financial breathing room you need as you venture into the real world (Arnold, 2007)."

Debt consolidation companies work towards decreasing the monthly payments, as well as, the interest rates and any other fees that students have to pay by negotiating with the loan companies. Sometimes, these companies are so successful that the student loan companies agree to cut down on the principle amount. This situation works both ways as the students are relieved from paying huge amounts of payment every month and the creditors avert situations where they receive no payments at all. Creditors are eager to negotiate with professionals (debt consolidation companies) as they are able to look at all the angles and offer solutions keeping in mind the interest of the creditors as well as their clients (Fiset, 2007).

The competence of the student's ability to pay the loan determines the extent to which the creditors will decrease their principal amount and/or interest rates. The debt consolidation company evaluates the income and expenditure of the students before they start to negotiate with their clients. This evaluation forms the basis of any future agreements made between the creditors and the debt consolidation companies. The creditors will stop those threatening phone calls and postal mails manipulating these fresh graduates to start paying their debts. Furthermore, these students usually are able to pay off all their debts in almost half the time when compared with students who do not take up load consolidation as an option (Fiset, 2007).

Furthermore, since debt consolidation companies cater to other forms of loan defaults as well, students who take these programs and are able to make their payments on time can consider future assistance from these companies should they end up in trouble again. These companies can also help students in areas other than educational loans, if students are in need of such assistance. However, it is important for students to choose the right debt consolidation firm. They should thoroughly inspect the fees required by these companies and how much it will cost them before they sign on for such programs.

Most debt consolidation companies force students to stop credit card use and make their monthly payments on time each and every month. These conditions assist students in avoiding further pitfalls and getting entrapped in debts once again. Students are not only able to meet their daily living expenses but also save money for emergencies. Furthermore, these companies make sure that loaners are paying on time each month, which ensures that their credit report is not reflecting bad scores and they are able to maintain a credit account which is in their favor (Fiset, 2007).

Conclusion

There are a variety of issues that are of importance to practitioners within student services. However, the most pressing problem facing students today is the burden of educational loans they have to pay back with interests after their graduation. This paper highlighted recent history of this issue and also discussed its current parameters. In addition, this paper highlighted alternative approaches being used by students to successfully pay back their debts. This paper found that the most effective approach for students available today is loan consolidation as it offers unmatched benefits and advantages.

In the end it is safe to say that the dilemma of student debt is growing every year as more and more students enroll in colleges to acquire higher education. The problem of debt cannot be handled by the private sector alone and it is important for the federal government to step in and take drastic steps to minimize this growing threat. Higher education has got to be made more reasonable and inexpensive. The government has got to increase the need-based assistance, as well as, decrease the cost of overall student lending. The government should also increase grant assistance to support students coming from low-income families so that they can acquire decent college education without getting trapped in debt. Similarly, the government should also cut down the price of acquiring loans by setting an upper limit on the interest rates. In addition, it can give students a flexible time period and payment options to pay back those educational loans. These steps are imperative for minimizing and/or eliminating the student debt problem (King and Bannon, 2002). Giving speeches at expensive corporate parties will not solve the problems; concrete steps will have to be taken at the earliest.