Credit: Carson Kahoe

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Come May, graduating college seniors nationwide will walk out their campus gates, diplomas in hand. All will have degrees, some will have employment plans and a great majority will graduate with student debt.

An overwhelming 64 percent of students at private, nonprofit, four-yearuniversities nationwide took out student loans at some point throughout their college career, according to College Board’s 2015 Trends in Higher Education report. Students who borrow at these types of postsecondary educational institutions face the challenge of paying off an average debt of $30,200 upon graduation. In fact, the $1.2 trillion in outstanding student loan debt across the U.S. has already surpassed total credit card debt. When considering levels of consumer debt, it's second only to mortgages.

Luckily, the majority of Penn students file out of commencement without significant worries about their student debt. But despite a "No Loan" policy, 32 percent of Penn’s 2015 graduates took out a student loan to finance their education, according to Student Registration and Financial Services reports. Those that did graduated with an average debt of $18,900 in federal and nonfederal student loans. Penn, in fact, has asked researchers from the Graduate School of Education to explore why students still incur debt under the policy.

Today, 47 percent of Penn students receive some sort of financial aid at an average of $43,800 in grants and work-study programs. According to SRFS Director of Communication Karen Hamilton, Penn’s aggressive financial aid policy and its comprehensive review of a family’s ability to pay are at the core of student debt reduction at Penn.

“It is the university’s commitment that a student’s aid consists of something that enables students to have more choices upon graduation,” Hamilton said. “So you can see that the trend has been that as more aid has been provided with grants, students have, year by year, consistently been able to take out less loans.”

One of the main reasons Penn students end up borrowing less is due to the university’s “all-grant” policy implemented in 2009. Under the policy, Penn provides students with a financial aid award that includes grants and a work-study job, but no loans. Any loans taken out by students are considered separate from the financial aid package. Since the policy’s implementation the volume of accumulated federal and nonfederal student debt at Penn has steadily decreased from $30,065,803 in 2009 to $21,781,846 in 2014, according to SRFS reports.

Student debt crisis nationwide

Penn, along with an estimated 50 selective four-year academic institutions, is able to afford an "all-grant" or "loan-free" policy financial aid program; however, most students at one of the other 4,725 degree-granting institutions in the United States do not enjoy the same luxury and end up falling into the clutches of student debt more representative of the national numbers.

Several factors are at the root of the problem. One of them is the soaring costs and decreasing affordability of higher education in general. Adjusted for inflation, the average tuition for a private, nonprofit, four-year institution was $10,080 in 1975, $19,117 in 1995, and $32,405 in 2015, according to College Board reports. The figures exclude room and board, along with any other student fees and personal expenses.

While tuition costs have sky-rocketed, state funding of public institutions has dwindled and financial aid hasn’t been able to keep up. Pell Grants — federal aid given to students from low-income families  — had the ability to cover up to 94 percent of a student’s tuition at public four-year universities in 2000, but only 61 percent of tuition costs in 2015, according to College Board.

Combine these factors, along with stagnant wages and the increasing necessity of a college degree to be competitive in the American marketplace, and students are left with few options but to borrow money to finance their education.

Why Penn students take out loans

While these figures help explain why two-thirds of students nationwide take out student loans, it doesn’t completely answer why one-third of Penn students end up taking out loans despite the university’s “all-grant” policy.

After filing tax forms, a portion of Penn students from middle-class families are denied financial aid if their family’s income exceeds a certain threshold. Often, students fall in this financial gap where their family’s income is too high for financial aid, yet not enough to cover the full costs of tuition.

Many students facing this dilemma take it upon themselves to borrow money in order to ease their parents’ financial contribution.

Such was the case of 2015 College graduate Alex Droznin-Izrael, who graduated Penn with $25,000 in student debt. Droznin-Izrael — a Boston native and son to Russian immigrant parents — described his family’s socio-economic situation as “comfortable, middle-class,” yet noted that Penn’s high-sticker price was too costly for his retired parents to pay in full.

“When I applied, my family was denied the financial aid package completely. I ended up taking the maximum amount of student loans I could,” Droznin-Izrael said.

To cover the rest of Penn's tuition, his parents took out a second mortgage on their house, which they expect to finish repaying in five years.

Recent research at Penn suggests that many other students share Droznin-Izrael's predicament. In 2015, Graduate School of Education Ph.D candidates Kata Orosz and Roman Ruiz carried out a study at the request of SRFS to understand why students at Penn take out loans.

The qualitative study was carried out by interviewing 29 randomly selected Penn undergraduate students who received financial aid packages from Penn, yet had taken out student loans.

“We worked on a research study to basically understand the loan-borrowing behaviors of Penn undergraduate students,” Ruiz said. “So, within the context of a 'no-loan' financial aid policy, the research question was, ‘What are the experiences and behaviors of undergraduate students who borrow or don’t borrow within the context of a 'no-loan' financial aid policy?’”

Orosz and Ruiz found that Penn students took out loans to “cover the parental contribution; to avoid having to work during the academic year; to participate in study abroad; to pay for summer housing when taking summer courses; to supplement the decrease in financial aid after the fourth year; and to overcome a liquidity constraint when encountering an unanticipated expense.”

Prominently, the study found that many high-need students willingly took out loans to pay the parental contribution of their financial aid packages themselves to avoid burdening their families financially.

College sophomore Rita Wegner applied to Penn knowing she would bear the costs of financing her education. Although Penn grants her a yearly financial aid package, the expected parental contribution is too costly for her family to pay.

“I was always told by my parents that I was paying for my schooling,” Wegner said. “I always knew that even if my parents would pay upfront costs, I would be taking loans and paying them back for it.”

She has already taken out $14,000 in student loans and expects to take on an additional $13,000 in debt by the time she graduates. In Wegner’s case, costs associated with her parents’ health makes her family’s financial situation even more unpredictable.

“Every year [my family] writes a letter to Penn explaining my unique financial situation. My dad has a lot of health issues that aren’t really reflected in the FAFSA [federal forms], so we write about all these health issues that he has,” Wegner said. “Penn helps us out with maybe $1,000 or $2,000 extra for my expected family contribution.”

Paying off student debt

While both Droznin-Izrael and Wegner described the federal loans application process as simple, paying them off is another matter entirely.

For the students interviewed, employment after graduation determines how effectively they are able to pay back loans. Droznin-Izrael, for example, started paying off his student loans three months ago after getting a job in the pharmaceutical industry in Philadelphia. The Penn graduate pays anywhere from $150 to $200 in loans a month and expects to do so until he is 32-years-old, as he plans to defer payments if he goes to graduate school next year.

Although Droznin-Izrael is confident he will pay off his loans comfortably, the fear of defaulting due to unexpected circumstances has crossed his mind.

“I think that one of the issues about having something that you have to pay to the government every month is that if you don’t have that money that month, it is terrifying. With the Department of Education, if you don’t pay, you default,” Droznin-Izrael said. “The idea of defaulting is so far away from anything I would expect from myself. If it happened it would be terrifying.”

Defaulting on loans, however, is rare among Penn graduates. SRFS reports obtained by The Daily Pennsylvanian show that only 1.1 percent of Penn students defaulted on their loans in 2012, which sharply contrasts with the 11.8 percent national average. 

The disparity in default rates can be explained by the effect graduation rates have on paying off loans. According to the 2015 College Board report, 24 percent of student borrowers who did not graduate defaulted on their student loans within two years of entering repayment.

The overlooked contributors to these high default rates are often private for-profit colleges that accept any paying applicant and promise a top-notch degree in manufacturing, health care and other technical fields. More than half of students at these colleges don’t graduate, leaving many indebted and leading many others to default on their loans, according to a September Brookings Institution study.

Laura Perna, founding executive director of the Alliance for Higher Education and Democracy at Penn, said a student’s inability to graduate diminishes their chances of successfully paying off debt.

“Loans are risky, and they’re especially risky for people who don’t finish their degrees,” Perna said. “If you finish your degree program and you get a job and you have the money to repay, you’re fine. If one of those things doesn’t happen, you can take on excessive amounts of debt.”

This type of debt accumulation has affected thousands of students nationwide and, in turn, has given the crisis a political spotlight.

In December, the Obama Administration took action by making changes to the federal student loan repayment program, called Revised Pay as You Earn, which caps borrowers’ monthly bills to 10 percent of their income and forgives the debt after 20 years of payment. The terms were only available to students with low income relative to their debt and only to those who borrowed after 2007. Obama’s new adjustments opens up the program to all borrowers, regardless of income and when they borrowed.

On the campaign trail, Republican and Democratic candidates alike are voicing their solutions to potential voters. Independent Sen. Bernie Sanders of Vermont advocated for free tuition at four-year public colleges, while former Secretary of State Hillary Clinton proposes increased public spending on higher education. On the Republican side, Sen. Marco Rubio (R-Florida) and others want to establish an income-based repayment plan for student loans.

Penn, the exception

With a 96 percent undergraduate graduation rate, Penn graduates virtually all of its students, dramatically increasing their chances of employment and income after graduation to pay off loans.

Ultimately, Penn’s prestige and educational excellence differentiates its degree from most others nationwide, which increases a graduate’s earning potential and availability to pay off debt.

“I’m confident that Penn as an institution will give me more options than any other option in the United States could,” Wegner, who studies environmental and political sciences at Penn, said.

“The job prospects, the networking, the connections you receive here as compared to a state school or less-known schools give me a more optimistic viewpoint when looking at these loans. I hope it will be worth it.”