Congress and the Trump administration are considering reforms to federal student loan programs to reduce the mounting burden of student debt.
Forty-three million Americans owe more than $1.4 trillion to the federal government in education debt as of March 31, 2019, states the U.S. Department of Education, which administers the loan programs.
Payments on 6.2 percent of the total amount of outstanding federal loans are delinquent or in collection, not including cancelled loans or deferred repayments.
The reason for the huge student loan debt is that government involvement in financing higher education has caused college tuition to skyrocket, says Philip Porter, an economics professor at the University of South Florida and a policy advisor to The Heartland Institute, which publishes Budget & Tax News.
“It is not surprising that the two sectors experiencing the highest price increases over the last 50 years are health care and higher education,” Porter said.
Spending in these two areas is largely paid for by employers or taxpayers rather than patients or students themselves, says Porter.
“In these sectors, individuals make spending choices that in large part others pay for,” Porter said. “Of course, we pay taxes and insurance premiums, but the marginal cost one faces at the point of purchase is only a fraction of the total.
“Wherever we can spend others’ money for our benefit, expect runaway [price] inflation,” Porter said.
‘Hidden Tax’ on Grads
Congress is considering reauthorization of the Higher Education Act of 1965, the law that governs the loan programs. The act expired in 2008, but loans have continued under other laws.
U.S. Sens. Mike Braun (R-IN), Kyrsten Sinema (D-AZ), Rick Scott (R-FL), and Chris Coons (D-DE) introduced a standalone measure, the Student Loan Tax Elimination Act of 2019, on June 4.
The bill would eliminate “origination fees” paid by borrowers. These charges are a holdover from when private lenders made federally guaranteed loans, before the DOE started making direct loans to students. These charges add 1 to 4 percent to the cost of borrowing funds from the federal government, states a press release from Braun.
“Student loan origination fees are nothing more than a hidden tax that burdens students,” Braun said in the release.
Targeting PLUS Loans
The amount an undergraduate student can borrow from the federal government is capped, but there is no limit on the debt for graduate and professional school tuition and expenses. The Trump administration supports limiting so-called PLUS loans for post-undergrad study and to the parents of undergrads, states the White House’s “Proposals to Reform the Higher Education Act,” released March 18.
PLUS loans allow an individual to borrow hundreds of thousands of dollars for professional or graduate school expenses and are a prominent cause of repayment problems, says Jenna Robinson, president of the James G. Martin Center for Academic Renewal.
“Trump’s proposal is well-targeted,” said Robinson. “His focus on PLUS loan recipients will help prevent borrowers from taking out more loans than they can afford. Most federal student loans are capped at a reasonable amount. PLUS loans shouldn’t be an exception to prudent lending rules.”
‘Lowered Their Tuition’
Putting caps on the amount an individual can borrow would reduce prices, says Robinson.
“Trump’s proposal is likely to produce the effect he wants: lower tuition in some schools and programs,” Robinson said.
There are no income limits on who qualifies for PLUS loans. Past restrictions based on creditworthiness helped slow the rise of education prices, says Robinson.
“We know from past experience that limiting PLUS loans puts downward pressure on tuition,” Robinson said. “When scholars studied the effect of credit limits on PLUS loans, which effectively shrank the program, they observed that schools that had traditionally attracted PLUS loan recipients lowered their tuition.”
Encouraging Excess Debt
Excessive student loan availability leads to tuition increases, says Jane S. Shaw, chair of the Martin Center’s Board of Directors.
“A substantial body of evidence indicates that federal loans contribute to an increase in tuition,” Shaw said. “The Martin Center reviewed 25 studies of the impact of federal loans on tuition; 14 of them found that an increase in loans pushes up tuition.”
The loans encourage students to take on more debt than they can pay, Shaw says.
“[The Trump administration’s] proposal is a good first step in reducing the hardship that can occur when students, especially graduate students, are unrealistic about the value of their education and borrow too much,” Shaw said. “Until now, the federal government has allowed graduate students to borrow as much as an educational program costs, even though they may never earn an income high enough to pay off the loan.”
Income-Based Repayment Trap
The White House policy statement also proposes to cap payments for some loans at 12.5 percent of the former student’s income. Income-based repayment schedules can create a debt trap for students, says Shaw.
“Existing programs that allow students to reduce their payments to 10 percent of their salaries offer only temporary relief, as the principal continues to climb,” Shaw said.
The White House proposal would also offer loan forgiveness for undergraduate loans after 15 years of payments. Shaw says that’s unwise.
“Loan-forgiveness programs both create harmful incentives and also burden the taxpayer,” said Shaw.
‘Sugar Daddy’ Creates Temptation
Requiring students and parents to shoulder more of the cost would moderate higher-education prices, says Porter.
“That students and parents pay roughly half the cost of higher education helps slow cost increases, but easy access to student loans weakens inflation’s brake,” said Porter. “Making students and parents pay more for education now is like new brake pads: Speeding inflation is more easily brought under control.
“It’s time for the federal government to stop being the ‘sugar daddy’ that causes more harm than good by making money so freely available,” said Shaw.
Sarah Quinlan ([email protected]) writes from New York City, New York.
Sen. Mike Braun (R-IN): https://www.braun.senate.gov/