Neck Deep

Three tales of student debt

by by David Adler

illustration by by Becca Levinson

"Comes out to about $30,000,” she says with a sigh. “And it’s all on my shoulders.” Mali’o Kodis B’14 is among the 36 million student borrowers who look forward to a future of debt. So far, she has managed to navigate the maze of federal loans, scholarships, and university financial aid to make it through her first two years at Brown University. But sitting on the floor of her dorm room, she wonders what her future of debt will hold. “I have access to so many great things, but at what cost?”

The current student loan process is three-tiered. First, there are grants, scholarships, and university financial aid packages that help to bring down the cost of education without piling debt on students. Next, students apply for federal loans, comprised of subsidized loans—for which the government will pay interest during the student’s education—and unsubsidized loans, for which they will not. However, the ceiling on federal loans for students is relatively low: federal loans cannot exceed $7,500 annually. So, students have look to the third option of private loans—which come with high interest rates and hidden fees—to fill out the rest of their tuition and costs of living. Upon graduation, students have an average of six months to begin repayment.

On October 26, President Barack Obama announced new regulations for federally subsidized student loans. Under his new program, there are two differences: lenders can charge a graduate a maximum of 10 percent of his monthly income, down from 15; and federal debt will be forgiven after 20 years, down from 25.

The most obvious flaw in Obama’s program is that it addresses only a fraction of the debt of a minority of students. The plan will affect about five percent of student borrowers: it only deals with income-based repayments (IBRs), failing to address plans where payments are based on a fixed number of dollars. The changes also leave untouched the $26,000 in private loans that the average student incurs, notwithstanding the federal loans addressed by Obama. In the face of these numbers, Obama’s plan appears to be nothing more than a Band-Aid; the wounds of student debt run far deeper than federal aid.

The undergraduate
Mali’o’s matriculation to Brown University required financial acrobatics. “There were state scholarships, national scholarships, financial aid from the university, federal loans.” Growing up in a low-income, single parent household in Hawaii with two older brothers, Mali’o often doubted that she could compete with wealthier applicants from across the nation. But after being accepted through Brown’s need-blind admission process—in which the university admits American students without knowledge of their financial situation—she was determined to go there no matter the cost. “With that kind of opportunity, you don’t say, ‘Well, I can’t afford it, so I should just stay in-state.’” She worked closely with Brown’s Office of Financial Aid, dedicated to assisting her in her effort to pay Brown’s $54,370 annual fee.

Yet even Mali’o, who has navigated the complex inner workings of Brown’s financial-aid process, has almost no understanding of how the whole operation works. “I think they plug me into some super computer,” she explains. The university financial aid system is opaque. Brown’s “Financial Aid Calculator” asks for “both the student's as well as parents' latest tax returns and information regarding savings, investments and other assets.” After students plug in these values, out pops an “estimate” (their words) of a financial aid package. Very little of the internal logic is set forward.

This opacity has serious consequences. The apparent accessibility of Mali’o’s financial support masks the reality that awaits students upon graduation. Yet the solution is not obvious. On one hand, administrators have the responsibility to inform teenage students of the harsh realities of debt acquisition. On the other hand, doing so would run the risk of alienating a student population that they work hard to integrate into the social fabric of the university.

Beneath the surface however, is a system that works against both Mali’o’s financial interests and those of her family. For students that do not receive very much financial support from their families, the algorithm employed by the university, in Mali’o’s words, “makes me want to make my parents poor.” By reducing her financial aid for every extra dollar her parents receive in income, the university actually creates a disincentive for Mali’o’s parents to take a promotion.

The same goes for Mali’o’s personal capital. Her financial aid package is also contingent on the contents of her savings account, meaning that for every extra job she takes to earn more money—presumably to accrue funds to help her pay back the debt she will face upon graduation—there is a commensurate decrease in financial aid. This is the paradox of Mali’o’s position: she is steeped in debt that she will need to repay, but unable to work towards repaying it, her earnings siphoned off by a shrinking financial aid package.

The med student
As an undergraduate, Jessica Kremen B’05 also put her faith in the University supercomputer, and bit her lip as she acquired debt throughout her four years at Brown. She is currently a student at Mount Sinai Medical School in New York City, where she is finishing her medical education. “Now, the thing I am looking forward to is my repayment plan,” she says. “That’s where the fun begins.”

“Of course I cheered when I watched Obama on the television,” Jessica says. “No, his new policies won’t provide much support in terms of repaying my debt, but any relief is welcome.” Jessica highlights the positive side of the Obama program: he brought attention to the growing issue of student debt and started the government down a road of progress toward a reevaluation of student loans. Yet the Obama program should be considered in its political context as well. The announcement of the new program comes in the midst of the Occupy movement that has been projecting grievances about student debt over the loudspeaker. Melody Barnes, director of the Domestic Policy Council, reports that over 30,000 people signed a petition on the White House website calling for change in the federal program of student aid. And with an election approaching, it makes sense that Obama is eager to appease the generation that fueled his success in 2008.

Despite her optimism, Jessica is quick to note that the Obama program seems to miss the most salient problem of federal student loan policy in the United States. “The conventional wisdom is that we are all going to be physicians; we are all going to be employed.” But in the current economy, this conventional wisdom has come under attack. Many students struggle to find employment while continuing to make debt repayments.

With such anxiety weighing on their shoulders, students are often compelled to seek career paths that will offer a way out of debt. “People want to be able to move on from their debt to begin building their lives: a car, a house, a family,” she says. As a result, many medical students are drawn toward “specialty fields” that pay well—plastic surgery, for example— instead of toward “primary care, which is lacking.” For Jessica, the tragedy of the American educational system lies in this inverted system of incentives. “It’s a sad thing. These loans are supposed to help you to choose your career; instead, they determine it for you.”

The lawyer
The week before Aaron Abramowtiz passed the Bar examination in 2010—before he even knew whether or not he would be licensed to practice law—he made his first repayment for his student debt. Over the course of three years at law school, Aaron had accrued $200,000 in the red. Had he failed, Aaron would have had to wait another six months just for another opportunity to take the exam—all the while continuing to make debt repayments.

But for Aaron, the uncertainty that accompanied his early career was merely the beginning his repayment woes. He originally took out loans from a non-profit that only deals with student loans, but in the financial crisis of 2008, his lender filed for bankruptcy, leaving his loans in limbo. They were then packaged and sold to a different lender, a student loan clearinghouse that had been stable enough not to go under in the subprime mortgage crisis. At the time, Aaron was trying to consolidate his nine loans into a single package that he could pay over a period of 30 years instead of 15, paying $1700 a month rather than $2700. When he received his consolidation statement, however, only seven of his nine loans showed up. “I guess somewhere in the process of application, two of my loans had been repurchased by a different lender.” So he spent another few weeks trying to apply for a consolidation program with his new loans under the different lender. “All in all, a process that is supposed to take 40 days took me over six and a half months.”

The rollercoaster of Aaron’s consolidation process highlights the chaotic structure of the student loan system, in which students maintain almost no control over the fate of their repayment package once it’s written. This is the difference between the student and the graduate: once Aaron dropped the guiding hand of university financial aid, he was forced to confront the dark reality: the owners of his debt were betting against him, not for him. “I am still looking at a lifetime of debt,” he says. “These student loans follow you until you die.” And it’s true: even in bankruptcy, private loans for education are non-dischargeable. “Whether they are federal or private, they are going to get their money.”

When it comes to Obama’s program, Aaron is equally cynical. “Whenever there is student loan reform, it always comes down to a politician standing behind a program, saying ‘I gave back $500 million to students!’” For people like Aaron, mired in hundreds of thousands of dollars in debt, these new policies not only fail to address their private loans, but also fail to make real progress in the area of federal loans. “The new program touches roughly a fifth of what I have to pay back.” Aaron’s plan is not one of the Income Based Repayments (IBR) that Obama’s plan addresses. “But even if I was on an IBR, Obama’s announcement merely would have changed what my maximum repayment would be for a month.” In other words, his total debt—the specter that follows until death—remains intact, dragged instead over a longer period of time.

Like Jessica, Aaron has also witnessed the funneling effect of student debt. In law school, he watched as many of his peers turned away from careers in social justice and toward those in banking or other more lucrative pursuits. “Anyone going into social justice either comes from money or is willing to subsist as a poor working class lawyer,” he says. As a result, social justice becomes the area of the elite. He acknowledges that there are certain programs in the public sector that offer full debt forgiveness after ten years of service, “but still, there is so little money in those jobs, and as much as I am pro-social justice, I would have to be making $40,000 a year in taxable income just to pay off my student loans.”

The collapse
Earlier this month, the Federal Reserve reported that by the year 2015, students in America will have incurred over $1 trillion in outstanding private debt, exceeding the amount of credit card debt in the nation. With most of the Republican presidential field threatening to cut education out of the federal budget, the student debt crisis could become a permanent crater for this generation, much like entitlements have become for baby-boomers. The results could be crippling: an undereducated majority forgoing expensive schooling, a depleted public sector, and a system of education increasingly reserved for the rich. The current college-age generation of students will be forced to shoulder the burden of debt and wait until they collapse under its weight.

DAVID ADLER B'14 believes in more than a Band-Aid.