Last week, the Senate came up with a partial solution to the student debt crisis. Under their proposal, which would tie student loan interest to the Treasury bill rate, rates will slowly edge up to a maximum of 7 percent for undergrad loans, 9 percent for grad loans, and 9.7 percent for loans to parents. There will be no special provisions for subsidized Stafford loans to help middle class and lower-income students.
It's a new proposal for a very old problem: For years, politicians and pundits have grimly predicted the explosion of the student loan bubble. The economics are simple: as educations become more expensive and jobs pay less money, college students have become more deeply mired in debt. Unable to pay back their loans, these fresh-faced (and, later, not-so-fresh-faced) grads cannot buy homes, get new cars, or otherwise stimulate the economy. As the vicious cycle continues, the economy gets further dragged down, jobs become harder to get, debt becomes harder to service, and grads have even less money to spend.
The problem got worse on July 1, when interest rates on subsidized Stafford loans jumped from 3.4 to 6.8 percent, making it much harder for needy students to pay for their education. Rates on unsubsidized Stafford and PLUS loans held steady at 6.8 and 7.9 percent, respectively. The Senate's solution would eventually make loan rates rise even higher, putting students deeper in debt and making it even harder for low-income students to get college degrees.
Innovation at the State Level
At the heart of the student loan battle lies a basic contradiction. While most policymakers agree that education is vital to ensure America's place on the world stage, politicians on both sides of the aisle -- including President Obama -- have focused on proposals that will increase the student loan interest rate, saddling students with an ever-growing burden. Put another way, America's government realizes that a well-educated populace is in the national self-interest, but isn't willing to pay for it.
On the state level, things are a little more optimistic. In California, FixUC, a student-run group, has drawn a lot of attention with its innovative solution to the student debt problem. Rather than forcing students to borrow money to pay for their education, the FixUC proposal is that they agree to pay 5 percent of their post-graduation salary for 20 years. In practice, this would function much like the Pay As You Earn program, but FixUC proposes a revolutionary shift in the way that universities regard their students. Rather than forcing grads to go it alone own against a shifting job market, the plan would encourage colleges and universities to take an active part in ensuring the employability of their alumni.
FixUC may seem like pie-in-the-sky, but at least one state is seriously considering a similar plan. On July 1, the Oregon state legislature unanimously passed a bill that would create a "Pay It Forward" pilot program. In broad terms, Pay It Forward would allow Oregon high school graduates to attend a state university for free; in return, they would have to pay 3 percent of their postgraduation wages for the next 20 years. In the beginning, the program would be funded with state bonds; later, revenues from graduates would keep it going.
It remains to be seen if Pay It Forward will work, or even if it's feasible. If Oregon does manage to implement the program, however, it would be a game-changer. Not only would it offer a promising solution that could be implemented in other states, but it would also likely be a boon to Oregon's economy. As numerousstudieshave shown, state investment in higher education is incredibly profitable in the long run, both in reduced costs for social services and in increased tax revenue. If Oregon becomes a mecca for college students, it seems likely that the state's benefits would extend far into the future.
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The classic method for avoiding the job market, graduate school has the added benefit of -- under the right circumstances -- making you look even more attractive to employers and recruiters. On the other hand, a poorly-chosen degree can also leave you with even more debt and no improvement in your job prospects.
If you qualify for a fellowship, assistantship, or scholarship that will cover your tuition costs and give you a stipend, going for an advanced degree becomes a no-brainer. While grad stipends are far from princely, with careful planning, you may be able to get out of grad school with no increase in debt, a degree that will likely improve your employability, and a shot at job-hunting in a friendlier environment. That being said, it especially helps if your degree is in a high-paying field. Georgetown University's Center on Education and the Workforce offers some useful information on choosing the advanced degrees with the best returns on investment.
There's an old saying: If you have to pay for grad school, you probably shouldn't be there. In other words, if you can't get an assistantship or fellowship, you might want to reconsider your postgraduate education. For that matter, if you're carrying a lot of private student loan debt, you might want to hold off even for a program with a stipend: Those loans, unlike the government-backed variety, won't be deferred while you're in grad school, so if you take one of those not-so-generous stipends, keeping up with your payments will likely be difficult.
Another classic method for postponing the day you have to get a "real" job, the Peace Corps gives young people the opportunity to travel the world, see exciting things, and make new friends. And, when you get back, you'll have the added benefit of foreign language skills and a great line on your résumé.
If you're interested in seeing the world, aren't averse to living surrounded by extreme poverty, and aren't carrying much private loan debt, the Peace Corps can be a great choice. During your time in the corps, your federal student loans -- and some private loans -- will be deferred, and your Perkins loans may even be partially forgiven. And, when you get back home, you'll have a readjustment allowance to help you get back into the swing of things.
The Peace Corps doesn't pay much, which can make your financial life difficult if you're carrying a lot of private loan debt. For that matter, the Corps has recently had problems with ensuring the safety of its volunteers, which could be a serious problem, depending on where you're posted. Beyond that, if you aren't sure you'll be able to adapt to living in rougher circumstances, surrounded by extreme poverty, you may want to think twice about signing up.
If you're looking for a way to enter into the teaching profession, or if you just want to try out being in front of a classroom for a few years, consider Teach for America. The program places college graduates into low-income classrooms across the country, offering them a salary, loan forbearance, money for education, and -- when they leave -- up to $6,000 in loans and grants to help them get reintegrated into society.
If you're interested in teaching, are enthused about the idea of working with low-income students, and don't have a lot of outstanding private loans, Teach for America can be a great bet. It looks good on a résumé, and is an excellent way to get started in teaching.
This is going to start to sound repetitious, but it keeps applying: if you're carrying a lot of private loan debt, Teach for America may not be for you. Even if you can get a deferment on your loan, you'll still be accumulating interest, which will leave you further in the red. Beyond that, if you are uncomfortable living and working in lower-income areas, this program is definitely not for you.
Interested in joining the Peace Corps, but don't want to get vaccinated for yellow fever? If so, AmeriCorps might be the choice for you. Working in education, public safety, environmental protection and health care, it places volunteers with dozens of different programs. Depending on your placement, AmeriCorps service could land you in a classroom or the field, building houses or working with FEMA. Benefits also vary greatly, depending on the program, but can include a living allowance, childcare stipends, an education benefit, and some health care.
AmeriCorps members may qualify for up to $5,550 in education assistance, which can be used to pay off existing loans or to fund further schooling. Additionally, the childcare allowance can make it more attractive to people with children. And, as an added benefit, your volunteer work could help you pick up some marketable skills.
AmeriCorps' education assistance is not as impressive as the benefits offered by other programs, which may make it less attractive if you're carrying a heavy student loan burden. Also, because the work placements vary so widely, there's a good chance that your skills may not be all that marketable.