Fresh Approaches to Student Debt

Over the past year, I’ve been helping to counsel an acquaintance—I’ll call her Debbie—who has been trying to escape from student-loan hell. Back in the late 1980s, Debbie borrowed money to go to a four-year college. After struggling with her grades and being put on academic probation, she switched to a community college. After a year, she was readmitted to her four-year school, borrowed even more money and ended up with $17,000 in federal student loans.

After graduation, Debbie held a series of low-paying jobs and never made regular payments on her loans. The Department of Education eventually turned over the unpaid debt to a collection agency, and Debbie’s wages were garnished. With her personal finances in disarray, she declared bankruptcy. But her loans continued to accrue interest and fees. When she disregarded a further payment notice from the Education Department, her tax refund was seized. By last August, she owed more than $24,000 in principal, interest and fees on her loans, which were in default.

Debbie’s story has a satisfying ending. With help from a generous family member, she made the nine monthly on-time payments required to get her loans out of default. She recently received a letter from the feds declaring her to be back in good standing. The collection agency is off her back, her wages are no longer being garnished, and she’ll get her tax refund. She can renegotiate the remaining loan balance to get better terms with a lower payment.

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Debbie’s experience illustrates how easy it is to borrow without considering the consequences. Debbie didn’t realize what she was getting into, didn’t take responsibility for repaying her loans or seeking help to handle them, and was eventually overwhelmed by the system, which has been criticized for overly aggressive collection tactics. I can’t help thinking that if someone had suggested to Debbie that she would be better off academically and financially by staying in community college to get a degree, she wouldn’t have found herself in such a fix.

That’s why it’s so important for students and parents to know what they’re getting into before they borrow. In her story The Right Way to Borrow for College, senior associate editor Sandra Block shows families how to borrow smart and set up a manageable repayment plan. In How Much Is Too Much?, reporter Kaitlin Pitsker gives families benchmarks to calculate how much debt they can afford.

Beyond borrowing. With $1.1 trillion in student loans outstanding, policymakers are scrambling to come up with ways to ease the burden. But it seems to me that we need out-of-the-box thinking that makes students less dependent on loans to start with. In 3 Out-of-the-Box Proposals to Fix the Student Loan Mess, senior editor Anne Kates Smith outlines several innovative proposals—such as letting private investors foot the bill in exchange for a slice of a graduate’s future earnings.

Meanwhile, students and families are taking matters into their own hands. An annual survey by education lender Sallie Mae found that in the 2013–14 academic year, enrollment in two-year public colleges was at its highest level since the survey began seven years ago. Overall, the typical family covered 22% of college costs with loans—the lowest level in five years—and paid 42% of costs out of savings and income from both parents and students, up from 38% the year before.

I encountered one of those industrious students last summer at a farmer’s market at the beach, where a young woman was selling homemade pound cakes. Her sign announced that she was paying for her college education "one pound at a time."