Virginia's Student Debt Crisis: What Is It, How We Got Here, and What’s Next?

The return on investment (ROI) for graduates of Virginia’s higher education institutions is among the highest in the nation. Virginia’s public higher education system produces $21 in greater gross state product (GSP) and returns $1.92 to the state’s treasury for each dollar spent. In addition to these economic contributions at the state level, higher education prepares young people to be contributing citizens, resilient workers, and effective leaders in all fields. Though higher education provides a great value to the individuals, communities, and the Commonwealth as a whole, not everyone has the same opportunity to participate for various reasons, with financial concerns being at the top of the list. To make college more accessible, students and their families have relied on loans to help finance their educations leading to what is now being described as the “student debt crisis”.

What Is It?

Student debt is currently one of the major focal points in the larger conversation about the cost of higher education. Scholars, researchers, journalists, politicians, activists, and others who work closely on the topic may disagree about the primary causes of the crisis and who or what is most at fault. However, it is widely accepted that decreased public funding for higher education, rising tuition costs, and bad actors within the lending and education sectors have all contributed to the current state of student debt.

At $1.5 trillion, student loan debt is now the second-largest source of consumer debt behind home mortgages, surpassing credit card debt in the United States. The average bachelor’s degree graduate at one of Virginia’s four-year public institutions will walk away with approximately $30,000 in student loans. As startling as these number are, they do not tell the whole story of student loans or the student debt crisis.

Student Debt and the Economy

Forty-million Americans have outstanding student loan debt. In a 2017 Virginia21 survey of nearly 500 Virginia college students and recent graduates, forty-eight percent of young professionals surveyed reported having between $20,000-60,000+ in educational debt and ninety-three percent indicated that their debt made it harder to pay bills and/or kept them from buying a home. Student loan debt not only affects borrower’s ability to participate in the economy as consumers but as entrepreneurs. High debt-to-income ratios can make it more difficult for millennial borrowers to receive approval for mortgages and other types of bank loans. A recent nationwide survey of 9,523 private student loan borrowers found that over twenty percent of respondents had put off starting a business because of their monthly student loan payments, and another eight percent reported being declined for a business loan.[i]

How We Got Here?

The Cost of Funding and Going to College

The issue of student debt in Virginia (and nationwide) is complex and there are several factors that have contributed to students’ reliance on loans to help pay for college. The rising cost of public higher education in Virginia can largely be attributed to the state’s steadying disinvestment and the shifting of responsibility for education-related costs at public institutions to students and their families. The State Council of Higher Education for Virginia (SCHEV) estimates that if the state share were aligned with the General Assembly’s 2004 cost-share policy goal for the 2018-2019 academic year, tuition would be as much as $3,000 lower than current levels, or about 40% less.[ii]

Moreover, the increasing costs of education prices out certain students, making borrowing inevitable. In addition, rising tuition, fees, and other expenses often make it that much more difficult for students to finish, particularly first-generation students and those from low-income families. These groups are also at a higher risk for default, primarily because of their lower rates of college completion. Failing to obtain a degree can make repayment particularly difficult for such borrowers because the average increase in earning potential from postsecondary education essentially disappears for students who do not complete their degrees. SCHEV reports that Virginians with a bachelor’s degree will make $2.3 million in their lifetime. Compare this to individuals with only a high school diploma who will make $1.3 million.[iii]

Bad Actors

As stated above, postsecondary degree attainment can have a huge impact on an individual’s life trajectory. However, not every institution within the education marketplace has students’ best interests at heart. For instance, the rate of loan default among for-profit students is almost four times that of public two-year students (47% versus 13%).[iv] Default trends over time are extremely concerning among for-profit colleges. In a recent longitudinal study by the Brookings Institution on loan defaults, 23 out of 100 students who ever attended a for-profit defaulted within 12 years, compared to just nine students who never attended a for-profit. However, the most significant problem is not high levels of debt per student.[v] Defaults are actually lower among those who borrow more, since this typically indicates higher levels of degree attainment (i.e. individuals who attend medical school). This is true in the entire borrower population but particularly troubling for for-profit students. Dropout and for-profit students have high rates of default even on relatively small debts.[vi]

Even if a student receives a credential from a for profit institution, they may find it unhelpful in seeking employment in their chosen field. To address this issue, the Obama administration created the Borrower Defense to Repayment program in 2014. Under this program, borrowers may be eligible for forgiveness of the federal student loans used to attend a school if that school misled them or engaged in other misconduct in violation of certain laws. The borrowers’ defense program was a result of discoveries that some for-profit colleges made false claims and promises of an education that would yield gainful employment to attract students. Many of those certifications weren’t recognized by prospective employers, leaving graduates burdened with student loans they couldn’t repay. The fate of the Borrower Defense Repayment program is in flux as the Trump Administration Department of Education seeks to roll back the regulations on for-profit institutions and protections for students.[vii] It is critically important to hold bad actors accountable as a means to both assist current borrowers and also prevent future students from falling prey to questionable practices.

What’s Next?

Virginia’s Office of the Qualified Loan Ombudsman

This summer Governor Northam signed HB1138 and SB394 which established the Office of the Qualified Loan Ombudsman. This office will reside within SCHEV to review and resolve complaints from education loan borrowers and assisting borrowers with understanding their rights and responsibilities. The Ombudsman will also create a loan education course. Creating a state-based entity that offers student loan counseling, debt management, and financial literacy is vital to addressing the crisis.  While assisting individuals who are currently struggling with debt is a crucial step, it is essential to provide high school students and individuals interested in seeking postsecondary education with knowledge of student aid, delinquency and default prevention before they enter the system.

Strategies for Students and Borrowers

Federal student loans have made college accessible for many students and there are strategies borrowers can adopt while in school that can help limit their debt and manage their student loans and other financial obligations. In addition to federal aid, Virginia has several financial aid programs. To be eligible for both federal and state aid, students must complete the Free Application for Federal Student Aid (FAFSA). It is important to submit the FAFSA on-time to allow students to be considered for grants and work-study opportunities, which could lower the price of attendance. Completing the FAFSA is also necessary if students intend to take out federal student loans. To manage federal loans, students should only borrow what is needed. Students are offered the federal government’s maximum loan amounts but are not required to take the maximum amount and may accept only what they need.

For more information on the the financial aid options available for Virginia students, visit SCHEV’s website.

Sources:

[i]  Young Invincibles. Borrowers in Distress: A Survey on the Impact of Private Student Loan Debt. (May 2013).  http://younginvincibles.org/wp-content/uploads/2013/05/Borrower-in-Distress-5.8.13.pdf.

[ii] State Council of Higher Education for Virginia. 2018-19 Tuition & Fee Report. (August 2018). http://schev.edu/docs/default-source/Reports-and-Studies/2018-reports/2018-19t-freportfinal.pdf[iii] State Council of Higher Education for Virginia. First Look: Post-Completion Wages of Graduates.http://research.schev.edu//apps/info/Articles.First-Look-Post-Completion-Wages-of-Graduates.ashx

[iv] Brookings Institution. The looming student loan default crisis is worse than we thought. (January 2018)https://www.brookings.edu/wp-content/uploads/2018/01/scott-clayton-report.pdf [vi] Ibid.[vii] Ibid.

[viii] Bloomberg News. Betsy DeVos Loses Student Loan Lawsuit Brought by 19 States. (September 2018) https://www.bloomberg.com/news/articles/2018-09-12/devos-loses-states-suit-over-borrower-defense-rule-delay