NEWS

New initiatives target loan debt

‘Pay As You Earn’ program caps loan charges for graduates, allows full payment forgiveness

The Obama administration announced new initiatives late last month aiming to help students better understand their school loans and reduce the burden of repaying them.

The proposal for the “Pay As You Earn” program would allow student borrowers to cap their loan payments at 10 percent of their discretionary income, and some could be eligible to have their remaining balance forgiven after 20 years. About 1.6 million borrowers will be eligible for the program in 2012, according to a White House press release.

Other initiatives include reducing the cap for all borrowers from 15 percent of their discretionary income to 10 percent starting in July 2014. Programs will also be launched to inform students about financial aid options at different institutions as well as options to consolidate different student loans into one monthly payment.

The national student loan default rate was 8.8 percent overall and 7.2 percent for public institutions in 2009, according to data released by the U.S. Department of Education in September. The UA’s student loan default rate for master’s or doctorate degree was 4.1 percent in 2009, according to the Deparment of Education.

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Though this rate is below the national average, it’s up 95 percent from 2005.

“During the recession, there shouldn’t be an increase in default, but there is an increase in default,” said Bryan Scott, assistant director of loans for the UA Office of Student Financial Aid.

The average undergraduate at an Arizona university had $19,946 in debt in 2009-2010, according to a 2010 report from the Arizona Board of Regents. The average graduate student had $42,097 in debt.

Mihai Samartinean, a first-year law student in the UA’s James E. Rogers College of Law, said he knew he would have to take out loans to pay for tuition.

“There’s no way around it,” Samartinean said. “There’s no way to cover it with just scholarships.”

Samartinean decided to go to the UA for his undergraduate career because he knew he could cover his expenses with scholarships and by working. But taking out loans is stressful with a lack of high-paying jobs available upon graduation, he said.

“It’s a constant worry,” Samartinean said. “It only gets more expensive every year until you pay it all off.”

Students must complete online entrance counseling before taking out these loans, according to Scott. The Office of Student Financial Aid previously offered in-person counseling but did not find much student interest, he said.

Though students may have trouble paying back these loans, they have to “work to get themselves to default,” Scott said.

Lenders are willing to work with students on repayment and deferment plans, Scott said. Defaulting requires students to not only neglect to pay back their loans but also avoid the lender, he said.

“I tell students, ‘These are the ones you want to talk to. They’ll do anything to help you from going into default,’” said Scott, adding that his office is waiting for specific details from President Barack Obama’s plan to see how it will affect students.

But loan debt can take a toll on students’ well-being, said Joyce Serido, assistant research professor in the Norton School of Family and Consumer Sciences and co-principal investigator of Arizona Pathways to Life Success for University Students. The project surveyed about 2,000 UA freshmen in spring 2008 about their financial behaviors and has continued with follow-up surveys throughout the past several years.

The economic recession may be negatively affecting students’ financial behavior, Serido said.

In the last survey in fall 2010, about one-third of students made progress in improving their financial behavior, Serido said, but about 40 percent of students’ behavior got worse.

“Many of these students are taking on more responsibilities,” Serido said. “Kids found they would have to pick up the slack for their expenses.”

The survey also found that the 40 percent of students without debt had better psychological health than those with debt, Serido said.
New loan initiatives may help in sparking a dialogue between students and parents about what loans are reasonable to take out, Serido said. Simplifying the system could help with these conversations, she said.

The potential new cap on how much students are required to pay back each month could help make loan debt more manageable, Samartinean said.

“I definitely think it’d be beneficial,” he said. “There’s no way around paying back loans.”


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