How Student Loans Are Keeping You Out Of The Middle Class
When Vernardo and Claire Simmons-Valenzuela married, they imagined all the trappings of a middle-class life. Soon enough, they had kids. Claire finished a master's degree. They held jobs as an Army medic and a physician's assistant. They dreamed of next steps: owning a home, taking their first vacation in years. Vernardo would return to school for a bachelor’s in nursing. But when payments for the couple's $187,000 in combined student loan debt came due, most of it accrued during Claire’s graduate education, they put those dreams on hold.
"We make ends meet but basically have a mortgage payment in the student loans," which total $1,500 a month, Claire told Campus Progress. "It has made it impossible for us to save."
The Simmons-Valenzuelas make their loan payments on time. A strict budget keeps their spending under control. The loans that now burden Claire paid for an education that opened doors to higher-paying jobs and better opportunities. But the couple typifies a growing number of American families, nearly—yet not quite—overwhelmed by student debt, living on the brink.
"Young adults are in a period when they should be investing in their futures to build the kind of middle class stability that their parents’ generation enjoyed," Catherine Ruetschlin, a policy analyst at Demos, told Campus Progress. "Instead they are paying down tens of thousands of dollars in college debt, putting those critical investments in their future farther out of reach."
A new study from the Urban Institute shows just how long those investments can be delayed. Millennials have accumulated less wealth since entering the workforce than their parents did at the same age, even as the economy has grown and the average wealth of Americans has doubled.
The problems that have led to today’s middle-class crisis for borrowers aren't unknown. Cuts to public funding for higher education have gradually shifted the costs of a college education on to individual students. With scholarship and grant funding limited, students have turned to loans. Escalating tuition combined with stagnating middle-class incomes have made it harder for borrowers to meet their obligations.
Then there is the challenge Claire raised.
“I’m paying an interest rate of 8.5 percent on my loans," she said. "That’s well above the low rates I see in mortgages now.”
Today's average rate for a 15-year mortgage is 2.96 percent, according to Bankrate.com. Rates on federal PLUS loans, by contrast, are fixed at 7.9 percent. Private student loan rates frequently extend into the double-digits.
Those high interest rates force borrowers like Claire to hand over big profits to student lenders. On a 25-year repayment plan at her current rate, Claire will pay out an eventual $410,663 on her original $170,000 in debt
If mortgage payments prove too high for homeowners to handle, refinancing is always an option. That’s not so for student loans. As a recent Bloomberg article noted, students with federal loans can consolidate their loans with a new interest rate, but only one equal to “the weighted average of the loans being consolidated,” limiting the financial benefits of consolidation. Borrowers with private loans have fewer options. New entrants to the student loan market, like San Francisco-based SoFi, offer refinancing at attractive rates, but only work with a small fraction of U.S. colleges and universities.
Advocates have begun to push for student loan interest rate reform. In February, Campus Progress released a report on the issue and launched the It's Our Interest campaign. Earlier this month, the Progressive Policy Institute proposed creating a private sector fund that would restructure existing student loan debt and grant current borrowers lower rates in the process. The Consumer Financial Protection Bureau is accepting comments for potential refinancing ideas through April 8.
Refinancing is attractive to consumer advocates because small reductions in interest rates can result in huge savings for borrowers. On a 25-year repayment plan, a student with $30,500 of debt at a flat 6.8 percent interest rate (like current unsubsidized Stafford loans) would eventually pay out $63,500. If that student could refinance his or her loan at a 6.1 percent rate, the total debt burden would decrease to $59,500, saving around $4,000, and lowering monthly payments by about $20. If the loan could be refinanced at an even lower 4.1 percent interest rate, the savings would magnify: The total student loan burden would decrease to $49,000, saving around $18,000, and lowering monthly payments by about $50.
Those savings could make a real difference for today's borrowers.
"Think about having just 5 or 10 extra dollars a month to put into an emergency account," Caroline Ratcliffe, an author of the Urban Institute's wealth study, told Campus Progress. "What if your car breaks down and you need it to get to work and you don't have savings, so you have to go to a payday lender?"
That's a concern echoed by Claire.
"I am afraid of something happening to me," she said. "If I were unable to work, with these loans taking such a large part of our income...I don't know what we would do."