Student Debt Reform

Student Debt Reform

Jeffrey Williams: Student Debt Reform

The Obama administration?s recent reform of the college student loan system is a mixed blessing.

One of the surprises of the recent Health Care and Education Reconciliation Act of 2010 (H.R. 4872) was that it grafted a section on student loans (originally entitled ?Student Aid and Fiscal Responsibility Act?) to its healthcare provisions. The most significant change it enacted regarding loans was specifying that they come directly from the federal government. Formerly, the federal government had paid subsidies to banks to originate loans; banks, without having to guarantee the loans, brought in a handsome fee at no risk to themselves. (I noted this glitch in my 2006 Dissent essay, ?Debt Education.?) A portion of the discontinued subsidy will be rechanneled toward Pell Grants rather than loans.

The shift to direct loans and the increase in grants are improvements. It had never been fair that banks collected such subsidies essentially for nothing (banks had no justification for their making this extra tariff except that it created jobs, complaining that the change would mean a loss of jobs for people in banking?therefore confessing that student loans are a welfare apparatus for those in banking). Even better is the shift in federal aid to grants rather than loans, since the latter are a gift with considerable strings attached.

While an improvement in broad outline, there are, however, some problems that mar the prospects of these reforms. First, while the Reconciliation Act displaces banks, it still assumes debt as the basis of the system and the prime form of aid that a majority of students will receive. With the current administration?s push for increasing attendance in higher education, debt will surely increase. The goal should be the diminishment if not the end of debt. The increase in Pell Grants is a move in the right direction, but only a small one.

Furthermore, the stipulated rates for loans are not low, particularly at a time when the federal prime rate is almost zero. They are generally around 5 percent, and currently nearly 8 percent for PLUS loans for parents. Compared to most home equity rates and even some charge card special offers, 8 percent is exorbitant. The rates should be tied to the federal prime; if banks can borrow at minimal rates from the federal treasury, why can?t citizens, especially for a public good like education?

Second, student debt, which has risen 30 percent above and beyond inflation over the past decade, will rise even more sharply in the next five years as tuition increases in response to cuts in state budgets, as we can see from the precipitous rise in fees in California. Though in some ways it is a public good to have wider access to student loans, it also provides a ready vehicle to shift the cost of public services from the public tax base to individual citizens. It masks the cut in public services: sign now, don?t pay until later!

Third, there?s a good possibility that the longstanding federal subsidy of interest?the one benefit of the current system to students?will end. With subsidized Stafford loans, the federal government pays the interest while a student is enrolled in college or graduate school (and for a short grace period after graduation). However, the 2010 report from the so-called Commission on Fiscal Responsibility and Reform, chaired by Erskine Bowles and Alan Simpson, proposed that the Stafford subsidy be eliminated in order to reduce the expense of the program. Thus interest would accrue from the moment one entered college and took the loan. This would have immediate effects, conferring higher costs on students as well as providing a disincentive for them to go to college. It would take away the one slim, real-dollar benefit that students now receive. Then we would truly enter the brave new world of free-market higher education.