Our Editorial: A better vision for student loans
After eight years of former President Barack Obama getting increasingly entrenched in the student loan business, the Trump administration is taking a different approach. It’s one that could have a beneficial impact on students and taxpayers.
Students loans are staggering: The country faces $1.4 trillion in student loan debt affecting 44 million borrowers. While President Obama made college affordability a priority, in trying to ease the burden for some students he dumped the responsibility of federal aid and unpaid loans on everyone else.
As another academic year begins, the Trump administration’s proposed changes to federal student loan programs could save taxpayers $7.6 billion, a Brookings Institute report shows.
It would do this in several ways. The proposed U.S Education Department budget would cut a provision waving interest that the popular subsidized Stafford Loans accrue during college, saving taxpayers $2 billion, says Brookings report co-author Jason Delisle. The interest doesn’t amount to much per student, but adds up across enough students.
In addition, graduates would see an increase in their yearly income-based payment plan rates to 12.5 percent from 10 percent. College graduates would see their loans forgiven sooner, in 15 rather than 20 years, and graduate school grads would be forgiven later, in 30 rather than 20 years.
Graduate students have higher earning potential and less chance of defaulting. Extending their payment plans 10 years keeps them in the payment pool for an extra decade when their salaries can grow substantially, particularly for lawyers and doctors, lessening taxpayer obligation.
“Graduate school is where the big balances are,” Delisle says. “The biggest growth has been in graduate school debt, where there are no caps on the amount you can borrow and schools are rolling out outrageously expensive one to two-year master’s. Columbia University School of Journalism has a new $100,000 data journalism one-year program. That’s all made possible by these graduate school loans.”
Grad students do have some restrictions, says Michelle Luck, associate director of retention and outreach at Wayne State University. The federal Direct Program caps graduate loans at $25,500. But students also have access to the Plus Program, a secondary loan program where loans can’t exceed tuition for the academic year.
These changes could help, yet as long as there’s easy federal aid available, including loans, students probably won’t see tuition prices change, says Neal McCluskey, director of the Cato Institute’s Center for Educational Freedom.
“When we manipulate an interest rate, we’re not really getting at the root problem,” he says.
Federal loan programs don’t help students discern between good investments for them (programs that can reasonably be repaid), and bad investments (programs likely outside the realm of repayment). This leads to loan defaults.
Data from the Federal Reserve Bank of New York show default rates are highest among those with lowest loans, around $5,000, at 35 percent, suggesting defaults are concentrated among students who drop out.
Education Secretary Betsy DeVos is also looking to make some organizational changes. She has suggested consolidating the myriad loan servicers to one company. This would facilitate paying off loans on the students’ end and save taxpayers $130 million, according to department calculations.
“One of the big problems with federal student aid is that there are so many different programs with so many different rules,” McCluskey says. “It would certainly be a move in the right direction and something that could get bipartisan support to go to one grant program, one work study program, one loan program.”
These are good initial proposals to get the government less involved in student lending. And they offer the best shot at lowering exorbitant college costs.