With $30,000 in student loans, Cody Hounanian is still paying for his 2013 bachelor's degree – on top of $100,000 in loans his parents took out.
He makes his monthly payments, but the payments are only going toward his interest. The principal amount has not budged. Under his federal loan repayment program, he said, if he makes a bigger salary, a formula will adjust his payments higher. “In the meantime, my interest is accruing, and I'm not making much progress toward my principal,” he said.
Five years out of college, Hounanian is an expert on student loans. As program director for the nonprofit Student Debt Crisis, he is dedicated to fixing a $1.5 trillion growth industry made up of student loans. Student loan debt in the United States is now the nation's second-highest form of consumer debt, second only to mortgages, and the student debt continues to increase.
In a 2018 student debt report, Delaware college students rank third in the nation for student debt.
Predatory lending, particularly by the federal government, is behind the shocking trend, says Alan Collinge, founder of another nonprofit, Student Loan Justice. He has followed the burgeoning student debt crisis for 15 years.
“There is a lending system that is willing to lend ever-increasing amounts of money to students,” he said. “The reason the federal government is so willing to lend out all this money is because the federal government is making an astonishingly large amount of profit on this lending system.”
The way the system is set up now, he said, the federal government makes money even if a student defaults.
“From the federal government's perspective, they make money if the students pay their loans; they make money even if the students can't pay their loans,” he said. “The government has no fear; there is no risk. In that environment, they have every incentive to lend as much money as possible to the students rather than rein in the lending.”
The costs of defaulting Federal Perkins Loans are some of the worst, Collinge said. Although the original interest is low, he said, “When they go into default, colleges can tack on a 40 percent default charge, which goes directly into the college coffers.”
A $2,000 Perkins loan that goes into default would automatically become a $2,800 loan, and colleges love that, he said.
“It has become so ruthless because it's become so profitable,” he said. “Colleges love to throw loans into default.”
On top of that, he said, a defaulted loan precludes a student from obtaining any other financial aid. Students cannot get grants or scholarships until the loan is paid off, he said.
Hounanian said states are also cashing in on student loans. He said borrowers who enter a state-refinancing program forfeit any federal protections they may have had. “To some degree, states absorb some of the federal student loan borrowers, and offer worse terms than they already have,” he said.
“Some states have set up a profit-making center out of keeping borrowers in repayment, defaulting or not getting out of repayment quickly,” he said. “Some states are actors in this and not always on the right side.”
The big business of college
Collinge said colleges and universities today are being run like big business. College presidents and their administrations, he said, rake in millions of dollars in salaries and bonuses while the constant hum of pricey construction echoes across campuses nationwide.
The federal government – ready to hand out student federal loans to cover increasing college costs – is behind it much of it, he said. These loans leave students with a hefty bill.
In the Northeast, Collinge said, competition among colleges has made their tuitions the most expensive in the country.
“There becomes a perverted, prestige marketing phenomenon going on where maybe you're not Harvard or Cornell or Yale or Princeton, but maybe you are one of the upper-tiered private colleges, and by raising their prices they're building more prestige in the mind-set of prospective students,” he said.
Delaware's close proximity to the nation's elite Northeastern institutions has probably rubbed off on its college costs, resulting in the high number of debtors graduating from University of Delaware and Delaware State University, said Michael Brown, research analyst for LendEDU, the company that ranked student debt by state.
“You're a car ride away from NYC, Philadelphia and Washington, D.C. Competition is inherent in this part of the country. Schools can get away with raising tuition prices more and not giving away as many scholarships or grants because they know competition is high, and there is a lot of affluence. There are people in this area who can afford to pay these tuitions, so why not charge them more?” he said.
Hounanian said he agrees that the cost of attending college is out of control, but reductions in state funding for colleges have also played a role.
“When you look at state investment in some of these institutions, it hasn't returned to what it was before the Great Recession. We're still seeing a lot of impact from the financial crisis,” he said.
Before the 2008 financial crash, Collinge said, college costs were increasing at about double the rate of inflation, or about 6 percent per year. But since the recession, those costs jumped to 10 percent. And while some states stopped schools from increasing tuition rates, it did little to stop other increases. Additional fees and increased housing and food plans have all added to the total cost of college today.
“Colleges say they have frozen tuition, but it doesn't matter because they raised all other costs,” Collinge said. “At the end of the day the cost of attendance is the most important metric to look at.”
Delaware ranks third in U.S.
Collinge said he believes rampant student lending is behind escalating college costs.
“Instead of cracking the whips on schools to lower prices rather than raise them, the exact opposite is happening,” he said. “Every incentive is for the colleges to raise their prices and for the lending system to dole out more money than less, and that's really the core of the problem.”
Brown said the LendEDU report raises the question of whether colleges are giving out as much as they could in scholarships and grants. Median family income for students attending Delaware schools could also play a part in students graduating with high debt.
“Perhaps some of the family income is not as high to shoulder the cost of school, so they have to lean on student loans,” he said.
Released in August 2018, the LendEDU report compiled student loan data from all 50 states and ranked them based on information collected by Peterson's College Data.
At $34,144, Delaware students carry the third-largest amount of debt in the country behind Rhode Island in second with $35,371 and first-ranked Pennsylvania at $36,193.
Out of more than 1,000 four-year colleges that submitted student loan data, Delaware State University ranked 166 out of the top 250 highest-debt schools – both public and private – with an average $36,812 debt for its students. Among public colleges only, DSU ranks 30th nationwide out of 200; University of Delaware's $34,144 average ranks 59th.
Collinge said he believes the reported numbers are on the low side. He said Delaware student borrowers are probably closer to $40,000 a year.
The LendEDU report also ranked colleges graduating students with the least amount of debt. In many cases, Brown said, schools with low student debt have hefty endowments that can be used to help needy students. Princeton is among the lowest in the area; average student debt at Princeton is $9,000.
Editor’s note: See Part 2: The Cost of Higher Education in the Friday, Jan. 18 edition.
States with highest student debt
- Pennsylvania, $36,193
- Rhode Island, $35,371
- Delaware, $34,144
- New Hampshire, $33,462
- Alabama, $31,861
States with lowest student debt
- Utah, $18,425
- New Mexico, $21,805
- Nevada, $22,026
- California, $22,383
- Wyoming, $22,524
Source: LendEDU based on 2017 data