Moving Toward Progressive Solutions for America’s Student Debt
As a country, we have reached a critical point within our system of higher education. In the past three decades, the cost of attaining a college degree has increased more than 1,000 percent. Two-thirds of students who earn four-year bachelor’s degrees are graduating with an average student loan debt of over $25,000, and a whole 10 percent of borrowers now owe more than $54,000 in loans.
As a result, student debt in America now totals more than $1 trillion, and there’s no clear ceiling in sight. This debt often burdens entire families for decades and can stunt the very economic mobility that higher education is designed to offer.
The next two years will be critical in the fight for access and success in higher education. Looming are annual Pell Grant shortfalls, rampant defunding of public education, privatization of financing, egregious abuses by the for-profit college and lending industries, the reauthorization of the Higher Education Act, increases in the cost of college and record student debt.
Higher education is more essential than ever. For our society, it provides for a skilled workforce that is crucial to rebuilding the American economy. For individuals, it provides a clear path to the middle class, a higher likelihood of gainful employment, and life-long financial and personal benefits.
It’s time for progressives to build an offensive strategy to fix our increasingly dysfunctional system of higher education. We must build public and political will for comprehensive policy solutions that reform our higher education system. We must engage all stakeholders—from students, families and their communities, to lenders, politicians, government agencies and institutions of higher education—in this critical fight.
It is time for bold policy solutions that help current, future, and former students. We suggest that policy officials and elected leaders explore some of these options:
Allow Borrowers to Refinance Their Student Loans
Though the federal government currently borrows money at an interest rate of approximately 1.6 percent, millions of student loan borrowers remain locked into interest rates several times higher. Students who just accepted federal loans for the 2012-2013 school year paid a higher rate, too.
We believe that policymakers should be asking why students are paying so much more than the government rate, especially when a lower interest rate might prevent struggling borrowers from defaulting on their debt. There are certainly costs associated with the administration of the loans, but the government could pass some of the savings of the current low interest rates on to students and other borrowers.
The federal government could mimic the proposed mortgage refinancing by creating a program to allow borrowers to refinance their student debt at a lower interest rate. This program could apply to all or part of existing FFEL (Federal Family Education Loan), Federal Direct Loans, and private student loans. This move would provide much-needed and immediate relief for borrowers and produce a significant stimulus to the economy. The Federal Reserve has previously purchased loan securities as part of its quantitative easing efforts and it, along with Congress, could explore additional steps that also provide direct relief to borrowers.
It’s important that policy makers begin exploring options for providing relief to the Americans already burdened with student debt. In the coming months, Campus Progress will release a detailed proposal outlining our recommendations on how such an effort could be implemented.
Make Necessary Changes to Bankruptcy Protections for Private Loans
Borrowers of private student loans typically don’t benefit from the same level of protection as those borrowing directly from the government, according to a joint report by the Department of Education and the Consumer Financial Protection Bureau. These protections can include options like the federal Income-Based Repayment plan.
Therefore, we should consider making necessary adjustments to ensure that student debt of all types does not balloon and become impossible to repay for those facing economic distress.
Compared to other private consumer loans, relatively few options exist for those with private student loan debt. If these individuals were businesses, various forms of bankruptcy would allow them to restructure their debt. Unfortunately, this is not a possibility for those with private student loans.
It’s crucial that we find better solutions that both protect against abuses of bankruptcy and ensure those unable to pay their loans have reasonable options available.
Require Schools to Certify Private Loans
Many students borrow far more money than necessary from private sources to pay for college. Often, these borrowers do so before exhausting loans that carry lower interest rates by the federal government. It seems that these students don’t have a complete understanding of the various loan options available to them.
This proposal, also outlined in legislation such as the Know Before You Owe Act, would require private lenders to certify with the borrower’s school that the student is borrowing an appropriate amount of money relative to college costs. It would also require schools to provide counseling for students to help determine whether they need a private lender and, if so, which private lender would be the wisest financial decision. This would also provide another opportunity for the school to ensure students understand the distinction between private and federal loans.
Make Income-Based Repayment the Default Option for Federal Student Loans
Federal loans are distributed based on a student’s need; they are not calculated based on the student’s ability to repay these loans. While this practice makes sense as a policy to help ensure college affordability, it can also create a situation in which students are expected to pay the same amount regardless of their post-graduation employment status and income.
Fortunately, the federal government offers an Income-Based Repayment (IBR) plan that links student loan payments to a set percentage—currently 15 percent—of the borrower’s discretionary income. However, too few borrowers are aware of the options available to them to help manage their student loan debt, including reducing their monthly payment through IBR. Additionally, too many borrowers have had difficulties navigating and completing the IBR application process once they have started it. The policy recommendation, as outlined in the Center for American Progress report “Making Our Middle Class Stronger,” is to make the income-based repayment system an “opt-out” rather than “opt-in” program and combine this change with meaningful counseling that would help students understand whether IBR is right for them.
Some borrowers will be able to pay a higher percentage of their income than 15 percent and would have the option to opt-out. However, placing all new graduates on an income-based plan ensures a seamless transition to affordability.
Require Colleges to Provide Standard Acceptance Information via College “Nutrition” Labels
For potential students, deciding which institution of higher learning to attend can be an overwhelming and confusing process. Some school’s tuition could result in “sticker shock” while others may look comparable in cost but be dramatically different in terms of quality. Students need more information and tools to help them make better decisions about which school to attend.
A standardized college scorecard, akin to the standard nutrition labels, would provide consistency across a student’s prospective institutions. Schools should be required to include a scorecard, like the one recently unveiled by the Department of Education, in all acceptance packets; it should also be posted on school websites and on enrollment forms. This would help ensure prospective students have the information they need to make the best decision possible for their educational and financial future.
Limit College Costs to 15 Percent for Middle-Class Families
To better ensure the affordability of higher education for all Americans, the federal government should provide incentives to colleges that limit the net price of a degree to 15 percent of a family’s income.
There are a variety of ways the federal government could incentivize schools and/or state legislatures to limit the net price or a degree, some of which are outlined in a recent Center for American Progress report.
Providing this incentive would allow more middle-class and lower-income families to enroll in these schools that offer affordable options. Additionally, from a marketing viewpoint, such a system would be easy for colleges and universities to explain and market to their potential pool of students. This would make colleges utilizing such a system even more desirable in the eyes of potential students.
One specific incentive would be providing zero-interest federal student loans to families with incomes below $150,000 at schools that agree to limit cost of enrollment to 15 percent of family income. This also doubles down on the benefit of the 15 percent limit by making higher education even more affordable for the student and her family.
Our higher education system, which has historically provided a pathway to the middle class for millions of students, is in danger of becoming unattainable for those most in need. With tuition costs soaring, student debt at record levels and decreased investment in higher education at the state and local level, it is time for all stakeholders to come together and address the challenges we face. We need bold solutions and an offensive strategy to reform our higher education system. These ideas are a start to this critical conversation.
Tobin is the deputy director for Campus Progress.
Anne Johnson is the executive director of Generation Progress.