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Why so many people are underwater on student loans

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Posted at 1:13 PM, Aug 20, 2021
and last updated 2021-08-20 16:13:52-04

We're getting a new picture of just how expensive college has become.

Tuition has increased 26% at public and private schools in the last decade, according to new research from Student Loan Hero. It found an even bigger increase for in-state tuition, which has gone up 36% on average across the country.

Southern states have seen the largest tuition increases this decade.

“It’s really something that's driven by school costs just being too high and wages just being too low for borrowers to be able to sufficiently pay down their loans,” said Whitney Barkley with the Center for Responsible Lending

Barkley is talking about the nearly two-thirds of student loan borrowers with one servicer who are underwater on their loan. That's even though they've been voluntarily making payments during the federal payment pause.

The Center for Responsible Lending and the National Consumer Law Center looked at servicer Navient because they have the most complete data on this, but they stress this isn't Navient's fault and this issue isn't unique to them.

Of the borrowers who are underwater, a third owe more than 125% of their original balance.

One of the things the Center for Responsible Lending says would help is ending interest capitalization. That is when borrowers to have to pay interest on interest.

“A lot of this is caused by borrowers going into new plans, by borrowers who are coming out of default having their interest capitalized,” said Barkley.

Another concern is the interest borrowers are paying with income-driven repayment plans.

The National Consumer Law Center says it's common for low-income borrowers to have their monthly payments not be enough to cover the interest in these plans.

Income-contingent repayment plans are one thing the U.S. Department of Education will be looking at rewriting regulations for in October.

It's still not clear whether there will be widespread student loan debt cancellation.

This week, more than 300 faith leaders sent a letter to the president and vice president, urging them to use their executive authority to cancel a substantial amount of student debt for all borrowers.