Policy Agenda to Address Rising Student Debt

Updated December 2009

Since launching the Project on Student Debt in 2005,we have made significant progress to reduce the risks and burdens of student debt. But there is much more work to be done. Our current priorities are to:

• Significantly increase the value of the Pell Grant and other need-based aid.

• Simplify the federal financial aid application (FAFSA) by using income information the government already has

• Provide incentives for colleges to enroll and graduate low-income students

• Treat private student loans like other consumer debt in bankruptcy

• Create a Consumer Financial Protection Agency to protect borrowers from unfair or deceptive practices and go after abuses as soon as they emerge

• Require lenders to certify key information with the borrower's school before disbursing funds

• Improve reporting and data collection about private loans

• Eliminate income tax liability on loan balances forgiven through Income-Based Repayment

• Provide periodic confirmation of eligibility for Public Service Loan Forgiveness

• Make it as easy as possible for borrowers to find out about and use these two important programs

   

Increase access to need-based aid

Grants based on financial need help reduce the amount that low- and moderate-income students have to borrow and encourage them to attend and finish college. Unfortunately, the federal Pell Grant and other forms of need-based aid have not kept pace with rising costs, which is why more Pell recipients (who usually have family incomes under $50,000) borrow, and have higher average debt than college graduates as a whole. Financial aid policy should ensure that students from modest backgrounds can get a college education without crushing debt or excessive outside work. That means more federal grant aid, a financial aid process that is a gateway rather than an obstacle, and stronger incentives for states and colleges to make a quality education affordable for low- and moderate-income students.

Significantly increase the value of the Pell Grant and other need-based grant aid.

A strong economy requires a well-educated populace. Every year hundreds of thousands of academically qualified young people from low- and moderate-income families miss out on a college education. Millions more adults fail to advance their skills and knowledge through postsecondary training. Grants are the most effective way to promote college enrollment and completion by disadvantaged students. We strongly support the Student Aid and Fiscal Responsibility Act currently pending in Congress, which provides for real annual increases in Pell Grants. We also successfully advocated for including a major Pell Grant increase in the 2009 American Recovery and Reinvestment Act.

Simplify the federalfinancial aid application (FAFSA) by using income information the government already has.

In 2004 alone, 1.5 million U.S. college students who were likely eligible for a Pell Grant did not complete the FAFSA. The application would be much simpler if  the most complex and error-prone income questions could be answered with information the government already has. The Department of Education plans to let some students pre-populate the FAFSA with their own IRS data starting in January 2010. We hope that all students will have access to it soon.

Provide incentives for enrolling and graduating lower-income students.

College-qualified students from low-income families are much less likely to enroll in higher education and graduate than their higher income peers. We support creating financial incentives for colleges and states to enroll and graduate more low-income students.

Strengthen consumer protections for private student loan borrowers

Private student loans are much more expensive and risky than federal student loans. Interest rates on these loans are often two or three times as high as those on federal student loans, and the rates are variable like those of credit cards. Lower income students often end up with the worst rates and terms, and private loans do not have the important borrower protections and repayment options that come with federal loans. Congress, lenders, and colleges all need to make changes so that consumers know their options, understand the risks of private loans, and have all the information they need to make wise borrowing decisions. See all of the Project's publications and resources related to private loans.

Treat private student loans like other consumer debt in bankruptcy.

Private student loans are nearly impossible to discharge in bankruptcy. This means that repayment demands can essentially extend forever, leaving even the most destitute borrowers with no way out. The Project testified at the first Congressional hearing on this topic in September 2009, and leaders in Congress are working on a bill to address the problem.

Create a Consumer Financial Protection Agency to protect borrowers from unfair or deceptive practices and go after abuses as soon as they emerge.

The Obama Administration has proposed creating an independent agency with the sole job of protecting American consumers from fraud, abusive terms, deceptive practices and hidden fees, and ensuring people get the clear information they need on loans and other financial products.  This responsibility is currently spread across multiple agencies with competing priorities, resulting in consumer protections getting inadequate attention and action.  We support the creation of a strong, independent Consumer Financial Protection Agency with authority over all private student loans.

Require lenders to certify key information with the borrower's school before disbursing funds.

Many students borrow private loans without applying for federal aid and don't understand the difference until it is too late.  Even those with federal loans frequently could have borrowed more in safer federal loans and avoided taking out a private loan. Requiring lenders to confirm with the school that a prospective borrower is eligible for a loan gives administrators an opportunity to counsel students about safer options and help them make smart borrowing decisions.

Improve reporting and data collection about private loans.

All federal student loans are currently reported to a federal database, the National Student Loan Data System (NSLDS), allowing policy makers, schools and researchers to accurately track debt trends, and consumers to find all their loans in one place. In order to fully understand and address rising student debt, information about private loan borrowing should also be collected through this system.

Ensure easy access to Income-Based Repayment and Public Service Loan Forgiveness

In September 2007, Congress created two important new student loan repayment programs to make federal loans more manageable for people with high debt burdens. Income-Based Repayment (IBR) caps loan payments at a reasonable percentage of income, limits interest buildup, and forgives any remaining debt after 25 years of repayment. Public Service Loan Forgiveness forgives debt remaining after 10 years of IBR or certain other payments for nonprofit and government employees. These programs provide real help for borrowers with otherwise unmanageable debt. However, to make these programs work well, we are pressing to address some issues that have surfaced in the implementation of the law. For more information about IBR and Public Service Loan Forgiveness, visit www.IBRinfo.org.

Eliminate income tax liability on loan balances forgiven through Income-Based Repayment.

Current law requires that loan amounts forgiven after 25 years of income-based payments be taxed as income, creating a potentially crippling tax liability that most qualifying borrowers will be unable to afford. H.R. 2492 would fix this problem and ensure true loan forgiveness, as Congress intended. The bill has the support of the Obama Administration and more than 30 cosponsors as of October 2009. Send a letter to your senators and representatives urging them to support H.R. 2492.

Provide early confirmation of eligibility for Public Service Loan Forgiveness.

The Department of Education should establish a system that allows borrowers to confirm and track eligibility so that they have a clear incentive to enter and continue in public service, and a sense of security while doing such important work.

Make it as easy as possible for borrowers to find out about and use these two important programs.

Months after the launch of IBR in July 2009, some major lenders - including the Department of Education - do not have thorough information about the program on their web site. Some lenders do not provide the application online, and there has been very little proactive outreach to borrowers about Income-Based Repayment and Public Service Loan Forgiveness. We will continue working to improve this situation.