Credit & Debt
Student Debt Keeps Growing — What's the Government Doing About It?
College has become intimidatingly expensive. The average cost of a private education is now $30,921 per year, while public colleges cost an average of $9,400 for in-state students. And so about seven in 10 students graduate with debt. They owe an average of almost $29,000, an amount that has increased by more than 50 percent in the past decade. The total outstanding higher education debt in the Unites State has reached $1.3 trillion — enough to create a drag on the economy as indebted graduates delay buying homes and cars.
This has made the cost of higher education an important issue in the coming presidential election, and most candidates are addressing the issue in one way or another. But the most important policy changes will probably be in the Higher Education Act, a piece of legislation initially passed in 1965 — and renewed every 5 years or so since — that governs the entire student aid system, from loans and grants to work-study funds.
The last revision of the Higher Education Act, in 2008, reduced interest rates on loans, increased Pell Grant Awards, and created an arrangement to forgive unpaid loans for government employees after 10 years. That act expired in 2013, but it has been extended since as lawmakers debate how to change the system to meet costs that seem to keep rising faster than inflation. This upcoming revision, which lawmakers have debated for years, will be one of the most important ever.
One of the most intriguing proposals being considered is simplifying the income-based repayment system, which allows students to make payments based on a percentage of their earnings rather than the amount they borrowed. Under the current law, graduates can choose from five income-driven repayment plans, with a complicated variety of eligibility rules and features. Under these plans, students who took out loans in recent years benefit most, while those who borrowed money before 2010 don't get as much help.
The new Higher Education Act is expected to consolidate these options into a simpler one-size-fits-all plan that will allow all graduates to take advantage of the generous aspects of all five programs. The Obama Administration set a precedent for this in December, when it introduced the program Revised Pay As You Earn (REPAYE), which makes five million direct-loan borrowers eligible for better repayment terms.
"REPAYE helps students who are struggling to manage their student loan payment," says Lauren Asher, president of The Institute for College Access and Success, which is dedicated to policy research on college affordability. "It's a strong starting point for Congress to streamline all five plans into one improved plan."
Lawmakers across the political spectrum back the idea of streamlining the existing income-based repayment plans so they're available to more graduates, as do the education subcommittees of both the Senate and the House of Representatives. Hillary Clinton's presidential campaign platform includes a similar solution.
The Higher Education Act is also expected to include some form of "risk-sharing," a concept that will give colleges and universities a financial incentive to reduce both student debts and subsequent defaults. Senator Lamar Alexander, chairman of the Senate education committee, is leading that charge; he has said he is "seriously considering" adding a provision to the bill that would fine or cut federal funding for schools that have a certain number of student defaults. That would provide an incentive for schools to keep costs down, and perhaps increase the number of students who graduate, since dropouts are much more likely to default on their student debts than students who graduate.
"Colleges should rethink what they do so they can't just say, 'It's all on students if they drop out,'" says Andrew Kelly, director of the Center on Higher Education Reform at the American Enterprise Institute, a conservative think tank. "There are ways to manage these risks but colleges just haven't shown much interest in it because they don't have much incentive to." The idea is that universities will be motivated to invest in the success of their students, whether that means offering financial counseling, intervening to boost graduation rates, or limiting borrowing (that means implementing measures that, for instance,ensure students don't borrow beyond annual tuition or that eliminate subsidized loans altogether, which requires students to pay interest while in school). This could change the game for the for-profit colleges, whose students have spiked loan default levels, but it would affect all institutions of higher education.
If risk-sharing becomes part of the new Higher Education Act, some fear that schools could discriminate against students who seem likely to drop out or default. So lawmakers are also considering incentives to enroll more at-risk students. "It would be a tremendous lack of imagination, and frankly defeatism, to say that the only way for schools to improve is to change who they admit," Kelly says.
Other potential solutions include simplifying the application process for federal student aid, which would curb unnecessary borrowing, or making Pell Grants available year-round, so students can take summer courses in order to graduate faster, and with less debt. Another idea being discussed is offering states incentives to spend more on higher education, since almost all of them have slashed spending since the 2008 financial crisis. New legislation that would let students refinance their loans at lower interest rates is also being considered.
Any changes to the Higher Education Act could take a while to affect students and schools — it remains to be seen if Congress can take up the bill in an election year, so they might push it to 2017. Once it passes, however, the law could have a substantial effect on both how students pay for college and how they pay back their college debt.
To learn more about how college costs and student debt spiraled over the years, see the accompanying timeline.
Mai Nguyen is a freelance writer in Toronto who covers business and personal finance.