Debt Creates Long-Term Burdens for Student Borrowers

March 15, 2013— -- The number of students who graduate from college saddled with significant debt is growing, and the process of repaying loans can be contentious for all involved.

The Consumer Financial Protection Bureau said on Thursday that it wants to regulate the companies hired by lenders to maintain records, collect payments and report to creditors and investors.

Students, who have no say over which company services their loans, complain that the companies treat them poorly, but the companies counter that they are dealing with an increasing number of borrowers who either cannot or will not repay their loans.

The bureau wants to supervise companies that handle more than a million student loan accounts. It is also concerned that private loan repayment options are limited and often come with high interest rates.

According to the bureau, there are more than 38 million student-loan borrowers, who combined owe more than a trillion dollars in outstanding debt. In the 2007-2008 academic year, nearly 40 percent of undergraduates and 43 percent of graduate students took out loans. As of 2011, there were more than $8 billion in defaulted private student loan balances. While federal loans often come with income-based repayment options, private loans are typically less flexible.

Reuters reports that, according to the Federal Reserve Bank of New York, 6.7 million borrowers were at least 90 days delinquent on their repayments.

The situation isn't just a problem for lenders who want their money back. According to the bureau, distress among borrowers could also negatively impact the economy. Debt may limit consumption as people tighten their belts and devote more money to loan repayment, which could affect everything from homeownership to car sales.

Meanwhile, college costs continue to rise. States and local governments have reduced the amount of funding they give to colleges, and schools have turned to students to make up the lost funds.

According to a 2012 report from the Center for American Progress (CAP), minority students are particularly likely to graduate with debt.

"African American and Latino students are especially saddled with student debt, with 81 percent of African American students and 67 percent of Latino students who earned bachelor's degrees leaving school with debt. This compares to 64 percent of white students who graduate with debt," reads a 2012 report.

Latinos are also more likely than whites or blacks to be unemployed when they graduate, which makes paying back loans especially difficult.

The situation is even worse for students at for-profit colleges, which disproportionately attract minority students. For-profit colleges are mostly owned by publicly traded companies and private equity firms. Much of their funding comes from federal student loans, but federal regulations mandate that 10 percent of their revenue come from other sources. The colleges often target veterans because veterans' benefits count toward fulfilling that requirement

"Students at non-four-year, for-profit colleges have seen the largest increase in student loan debt among any group of student borrowers," according to the report. "In 2001, 62 percent of freshmen at these schools took out student loans—and just eight years later, that number jumped to 86 percent. These trends are a result of a lack of oversight of private lenders and the marketing practices of these loans by for-profit schools in particular."

According to Tobin Van Ostern, deputy director of Campus Progress, the youth-focus arm of CAP, for-profit schools also target minorities who are eligible for federal funding and then encourage them to obtain private loans as well.

Unfortunately, Van Ostern said, many of those students don't exhaust their federal loan options before turning to private loans.

For-profit schools have the highest dropout rates, and their dropouts have the highest rates of unemployment among all college dropouts.

Van Ostern thinks the bureau's proposal to increase regulations "is a good step," particularly for minority students who may come from families that are unfamiliar with both the college loan process and loans in general.

"Latinos highly value education and they understand the positive impact it can have on life," he said, "but they're not going or they think they're not able, and the reasons are usually financial."

The center argues that students are driven into accepting the first job offer they receive, even if it's low-paying or not in their field, because they must start repaying loans after graduation. As a result, the center says, this may reduce the number of young people who decide to start their own businesses because they are already struggling to repay debt.

Minorities are also less likely to graduate in four years, Van Ostern said, meaning they often need to take out additional loans to cover more years of school.

While a Pew Charitable Trusts project reports that most Americans earn more than their parents, it's worth noting that they're only talking in absolute terms. The study doesn't take into account the fact that it costs more money to live now than it did 50 years ago, and incomes haven't necessarily kept pace. Where a single income used to support many families, now it often takes two.

The sequester could also make the situation worse. While Pell Grants, which provide federal financial aid for students, will not be impacted this year, the program could see cuts in 2014. A reduction could increase the number of students seeking private loans. Other federal grant programs, such as the Teacher Education Assistance for College and Higher Education program, which provides money to students studying to teach in high-demand fields such as math or science, could be limited, as could federal work-study programs.

And yet it has become increasingly difficult to find well-paid work without a college degree. College graduates are twice as likely to find work as those with only a high-school diploma, according to the Bureau of Labor Statistics.

The bureau is currently seeking feedback on their proposal to regulate servicing companies. Go here for more information.