Have Degree: Will Work for Food

May 24th, 2010

by and

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A college diploma was once a permanent ticket to job security. But today’s graduates are seeing many more rejection letters than paychecks in what’s become the worst job market for new graduates in decades.

In March 2010, the unemployment rate for people 21-25 was 15.8%, while the unemployment rate for all college graduates was nearly three times its historic average.

Worse yet, many graduates face the double burden of unemployment and student debt. Two-thirds of today’s college graduates leave school with student debt and with an average debt burden of $23,000. As a result, student loan defaults are steadily creeping upward, from 4.5% in 2003 to 6.7% in 2007.

There’s little doubt that these young graduates, who have worked hard to earn their diplomas and fulfilled their families’ expectations, deserve some extra help until the job market improves. Congress can step in to help in three ways:

1. Increase the student loan interest deduction

Current law allows students to deduct up to $2,500 in student loan interest–a relatively paltry amount given the growing average debt burden carried by today’s graduates. Graduate and professional students carry even greater burdens–more than $47,000 on average for graduate students as a whole and $93,000 on average for law school graduates.

Raising the maximum deduction by just $1,000–to $3,500–could potentially save students thousands of dollars over the life of a loan. In addition, Congress should continue to keep this deduction available for individual taxpayers earning up to $75,000 (and $150,000 for joint filers). At the end of 2010, this deduction is currently scheduled to be available only for borrowers earning up to $55,000 a year ($75,000 for joint filers).

2. Allow interest-free unemployment deferments

Under the current federal student loan program, borrowers can apply for a “unemployment deferment” that allows them to postpone making loan payments if they are unemployed or face other financial hardship.

During the deferment period, students with so-called “subsidized” loans do not accrue additional interest, while students with private loans and “unsubsidized” loans do. The result is that these borrowers face higher payments once they are back on their feet because of the interest that was accumulated and is now added to the balance of their loans.

Congress should temporarily subsidize the interest on all student loans during an unemployment deferment, regardless of the type of loan. For a graduate with $25,000 in unsubsidized federal student loan debt, this program would save them more than $700 in interest over his or her deferment period–a significant amount to a graduate just launching a career.

3. Allow families to rebuild college savings accounts to pay off student debt

The financial crisis took a significant hit on college savings accounts, with the cumulative balance in 529 accounts dropping $27 billion from 2007 to 2009. For parents of soon-to-be college freshmen, there might not be enough time for their accounts to recover from their losses, forcing them to take out unexpected loans to cover the difference.

Currently, funds from 529 accounts can be used to pay for tuition and fees, books, supplies, and other equipment required to attend a college or university, but not to repay student loans. With the substantial losses they have seen, many parents are facing a use-it-or-lose-it scenario with their 529 accounts. They can realize their losses now and pay for some of the tuition bills for their children, but probably far less than what they could have covered in 2007. Or the parents can keep their money in the 529 account and hope that they regain some of their losses, but risk having to withdraw funds for non-qualified uses and pay a penalty.

Congress should help alleviate this problem by temporarily allowing parents to use funds from 529 savings accounts to repay student loans taken out by their children.

Today’s college graduates are tomorrow’s workers and leaders. Temporary help can restore them to sounder footing so they can fulfill their full potential. With these three simple steps, Congress could relieve some of the anxiety and stress that many recent graduates are currently facing.