The cost of a four-year college education is skyrocketing such that it is almost unreasonable to expect an average middle class family to afford without student loans. In fact, according to the Consumer Financial Protection Bureau (CFPB), 67% of bachelor’s degree recipients used student loans to pay for their education. As a result, the total outstanding amount of student debt surpassed $1 trillion in 2012.
Students are not only borrowing more money than ever before, they are also defaulting more frequently than ever before. A new study by FICO found that in 2013 university student borrowers were at a much higher risk of defaulting on their loans than in previous years. According to this study the student loan debt was $17,233 and the default rate was 12.5% in 2005, but it grew to $27,253 and 15.1% in 2010. Due to the estimated $1 billion of defaulted federal loans in 2010-11, universities such as Yale, Pennsylvania, and George Washington are now suing graduates. These startling statistics bring to light the financial challenges students are facing both in terms of financing college and repaying their debt.
Although the problem has many roots, the recent growth of for-profit colleges has exacerbated the issue. A study by the Senate Health, Education, Labor and Pension Committee revealed that students attending for-profit colleges have thousands of dollars more debt than students attending not-for-profit colleges. Another study showed that students who attended for-profit universities are much more likely to be unemployed compared to students who attended not-for-profit colleges.
The CFPB, the consumer protection agency established by the Dodd-Frank Wall-Street Reform and Consumer Protection Act, has begun to examine ways to protect students from burdensome student loan debt. In 2012, the Federal Deposit Insurance Corporation (FDIC) and CFPB sued Higher One, a company that was handling financial aid disbursement in New Haven, Connecticut; the suit alleged that Higher One was charging students unfair insufficient-fund fees. Higher One agreed to $11 million in restitution to settle the agencies’ claims.
Recently, in order to protect university students from other unfair and/or predatory financial products, CFPB announced that it was launching an inquiry into the impact of financial products marketed to students through college and universities. Specifically the CFPB wants to learn about student identification cards that double as debit cards, cards used to access scholarships and student loans and school-affiliated bank accounts. CFPB is asking students, families and people affiliated with higher education institutions to provide input on their experiences. In particular, CFPB wants to know:
- What information schools share with financial institutions when they establish these relationships;
- How campus financial products are marketed to students;
- What fees students are being charged to use these products;
- How schools set up marketing agreements with financial institutions; and
- Student experiences using campus financial products in their day to day lives.
Additionally, CFPB has created a webpage that explains to students what to expect when shopping for loans and how to seek out the best value for a student loan.
While CFPB’s actions are steps in the right direction, they do not address the primary problem: crippling debt from student loans. When our societal path to success includes obtaining a bachelor’s degree from a prestigious university, it is no surprise that the total outstanding student debt is more than $1 trillion. Even the smartest, thriftiest, most careful loan seekers can wind up with overly burdensome debt post-graduation if they are unable to obtain high-paying employment. Higher education has become far too expensive. We cannot continue to allow such costs to exceed inflation if we want to have a highly educated workforce. Similarly, we need to ensure that there are more public colleges and universities that offer equivalent educations to those of private institutions. There also needs to be a focus on creating jobs with salaries that will allow graduates to repay their debt. Thus the question is not what to do, but how do we do it?