Becky Gaul holds $96,000 of student loan debt. Her salary as a public school teacher for Nevada’s Clark County is about half that amount. Becky was raised in a household of little means in Ohio, but her single mother encouraged her to dream big. Becky qualified for scholarships, but when they weren’t enough to cover her tuition at the University of Akron, she turned to student loans.
Ten years later, Becky, now 32, is still struggling under the crippling weight of those loans. She manages to make payments with the help of her husband, who works in construction, but recent job cuts at his company have terrified the couple.
“It’s a huge burden,” she says. “I can see it on his face every single day.” If he loses his job and she fails to make payments, the government could begin garnishing Becky’s wages. She doesn’t think she’ll be able to keep a roof over her seven-month-old son’s head.
Early reports suggest that President Obama may take a moderate approach to this State of the Union. But for people like Becky, much rides on how forcefully he demands reforms to a broken, exploitative, student loan system.
More than 40 million Americans now hold student loan debt, amounting to a total of $1.2 trillion. Each year, that number swells. Last year’s average borrower finished college owing more than $26,000; this year, that number is projected to be higher.
Seven million Americans are currently in default on their loans. They are afforded few protections. While most debts, such as property foreclosures or credit card debts, can be canceled with a declaration of bankruptcy, doing the same for student loan debt is virtually impossible. Becky Gaul says that she would declare bankruptcy if she could, “to not have this debt hanging over my head… because right now, I can’t put money away for my son’s college or for my retirement.” Borrowers who default face penalty fees, suspended professional licenses, and the garnishing of wages and disability benefits, even without court orders. For people like Becky, there is no way out.
President Obama has positioned himself as a defender of vulnerable student borrowers. In 2010, he championed legislation that phased out the use of private lenders like Sallie Mae to administer federal loans. The White House projected that removing these middle-men would save $68 billion over the following 11 years. The understanding was that those savings would be passed to students and, in theory, the legislation was a step toward that goal.
But in practice, savings are reverting to the government, not borrowers like Becky. Federal loans are projected to generate about $185 billion for the government over the course of the next decade. Averaged annually, those earnings would rank the federal student loan program among the 20 most profitable companies in the world. “Instead of helping our students, the government is making a profit,” Sen. Elizabeth Warren has said. “It's obscene.”
President Obama gave loans prominent billing in his 2013 State of the Union. “Skyrocketing costs price too many young people out of a higher education, or saddle them with unsustainable debt,” he told Congress. Then and in an education speech last August, he promised a new system that rates colleges on “affordability and value” and ties federal aid to those ratings. The proposal is controversial among academics fearful of losing resources, but it could introduce desperately needed incentives for affordability. Neither ratings nor changes in federal aid have yet come to fruition.
President Obama has engaged on the issue since, but the results have been illusory. Last July, when Congress allowed the interest rate for undergraduate loans to double, the White House helped to champion an eleventh hour fix. A new bipartisan arrangement pegged the student loan interest rate to Treasury rates, ensuring students would only pay a slightly elevated rate. But the new interest rates are variable, tied to a growing economy that could drive interest rates far beyond the doubling feared last year, up to a cap of 9.5 to 10.5%. “My colleagues…say that it will lower interest rates on loans for this year, and that's all that matters,” Sen. Warren said. “That's…the same thing subprime mortgage lenders said when they sold teaser-rate mortgages.”
More recently, the White House convened college presidents to discuss access to education. But the meeting skirted the proposed college affordability ratings.
These steps are tantalizing hints at progress, but by and large, the promise of President Obama’s tough education rhetoric remains unfulfilled. No reduced interest rate or summit can solve the swelling education costs that create these loans. The cost of a college degree has risen by 1,120% since 1978 - dwarfing increases in the cost of food, healthcare, and housing. Fattened by what The New York Times has called an indiscriminate “student loan spigot”, colleges are increasing spending and passing costs to students. Without reform, the cycle of perverse incentives shows little promise of stopping: loans rise to meet costs and costs rise to meet demand inflated by access to loans.
This year, and this State of the Union, will be an opportunity to pull out of that downward spiral. The legislation governing student aid programs --the Higher Education Act --is up for reauthorization by Congress. The president can and should call on Congress to renew it with a full commitment to loan reform. And if Congress fails to act, the president should make good on his promise from last year’s State of the Union to use executive orders to surmount Congressional gridlock.
Becky Gaul will be watching from home. She doesn’t hold out much hope. “He can say all these amazing wonderful things,” she says, “but Congress is not going to act on this. It’s not a priority. Education isn’t a priority. We’re not a priority.”
This State of the Union should be an opportunity to prove Becky, and millions like her shouldering the weight of a failing loan system, wrong.