Many in US saddled with college loans

US student loan debt sits above $1.5 trillion, has become issue in presidential campaign

Josef, a software engineer at a major corporation, borrowed a total of $35,000 to pursue a college degree.

He considers his decision a wise one. "I was able to complete higher education sooner than if I planned for it differently," said Josef, who asked that his last name not be used.

The degree helped him land a job with decent pay, which gave him the ability to pay back the student loans. It worked out better than working part time for low wages and prolonging the degree timetable.

More than 10 years after graduating from college, Josef has paid off 75 percent of the loan.

Oliver, a software developer in another big company, greatly regretted taking a student loan.

"My parents pushed me to pursue medical school, and I borrowed $70,000 for it. However, two years later, I realized I really hated it and quit medical school," he said.

Oliver, who also asked that his last name be withheld, was able to get a decent job with his undergraduate degree. However, he said he got nothing in returns from the loan. He feels daunted by the prospect of paying off the debt — with a monthly payment of close to $400, it will take him 25 years. On average, people pay off student loans in 18.5 years.

Student debt has become a major issue for many. According to the latest statistics published by Student Loan Hero, US student loan is estimated at $1.56 trillion spread among 45 million borrowers.

For the Class of 2018, 69 percent of college students had taken out student loans, and they graduated with an average debt of $29,800. Meanwhile, 14 percent of their parents took out an average of $35,600 in federal Parent PLUS loans.

Large student loans have been attributed to the millennials' delaying marriage, buying homes and having children, so much so that some officials as well as top Democrat presidential candidates are calling to reduce or even forgive the massive student loans.

More progressive Democratic candidates Bernie Sanders and Elizabeth Warren are the most generous in their policy proposals – they want to eliminate some or all current student debt and provide free college for all Americans.

A. Wayne Johnson, who was chief operating officer of the Office of Federal Student Aid, said the federal government should forgive a big chunk of student loans before he quit his job last month.

After watching climbing student loan defaults, he said a majority of student debt will never be repaid.

Johnson proposed to forgive $50,000 in loans for each student and give people who have paid off their student loans a tax credit of $50,000.

"That's a lot of money to forgive. Such forgiveness is unfair to people who are more financially responsible and chose not to go to more expensive schools," said Joyce Beebe, a fellow in public finance at Rice University's Baker Institute for Public Policy. "It would over-encourage people to take more risk borrowing student loans in the future."

If any group should be given some consideration for student loan help, Beebe said it should be the college graduates of the classes of 2008 and 2009, when the global financial crisis made it very hard for them to land a job. "They were very unlucky to be caught in such a huge economic downturn," she said.

Beebe said the government should educate and encourage people to be more cautious about loans and their future earning ability.

"The students don't have to pay back the loan while they are in school. However, once they graduate, the clock starts ticking. The federal government doesn't want students to default on those loans, which are very hard to get rid of. Even if one files for personal bankruptcy, the student loan usually still stays with the borrower," said Beebe.

Student loans should be treated as an investment decision, and hence, with careful consideration, she said.

"Statistics show that roughly 40 to 50 percent of student don't finish their education after registering for post-secondary education within six years. Even for students who complete their training, successful careers and high-paying jobs are not guaranteed.

"Students can spend or borrow a substantial amount of money for an education that might not improve their long-term earnings," she said. "People need to be more careful borrowing money."

One phenomenon is that people who did not complete a degree or went to for-profit schools are much more likely to default on student loans, and the two groups tend to overlap, Beebe said.

According to Student Loan Hero, 48 percent of borrowers who attended for-profit colleges default within 12 years, compared to 12 percent of public college attendees and 14 percent of nonprofit private college attendees. For-profit college students also tend to borrow more.

According to Beebe, for-profit colleges often target lower-income students and overpromise the value of their degrees. Some of them are involved in lawsuits or have been shut down. For-profit college attendees tend to be the first generation of college students in their families and children of minority groups.

More informed and wiser decisions could help high school graduates make better financial decisions, and increase their earning potential and ability to pay off the loans, Beebe said.

For example, when it comes to returns on education, public and private nonprofit colleges offer better returns than for-profit colleges.

Citing the work of economics Professor Raj Chetty at Harvard University, who focuses on income inequality, social mobility and higher education, Beebe said a college education still helps people advance in society.

According to Chetty's research, children from low-income families have a better chance to improve their socioeconomic status by going to mid-tier public schools than Ivy League or flagship public colleges, due to easier access and less costly tuition.

California State University in Los Angeles, Pace University in New York, Texas-Pan American and Texas-El Paso are among the top universities in terms of mobility rate – defined as the fraction of its students who come from a family in the bottom fifth of the income distribution and end up in the top fifth.

Beebe suggests that financial literacy classes, which can present a more realistic picture of reality, be offered to high school students. Being fully informed would help them make better choices, reduce risky loan decisions and become more financially successful.

In other words, when it comes to student loans, the same slogan applies – buyer beware, said Beebe.