Policy Agenda to Address Rising Student Debt

With the Higher Education Act up for reauthorization in Congress, our policy agenda should serve as a guide for what concerned policymakers can do to strengthen federal financial aid policies and reduce the risks and burdens of student debt.

Here are our four top priorities for Congress:

1. Ensure that borrowers with federal loans have fair and manageable payments;
2. Rein in private student loans;
3. Restore integrity to financial aid counseling; and
4. Increase access to need-based aid.

1. Ensure that borrowers with federal loans have fair and manageable payments.

As student debt hits record levels, millions of borrowers are facing unaffordable payments and decades of debt because of inadequate borrower protections. For federal student loans to help expand rather than restrict educational and economic opportunity, borrowers need to know that payments will be fair and that they will not last forever. Otherwise, more and more college graduates will be unable to afford to work as teachers and social workers, raise families, buy homes, save for retirement, or start small businesses. The goal of realistic repayment options, as outlined in our Plan for Fair Loan Payments, is supported by students, higher education leaders, loan industry representatives, civil rights groups, Republicans and Democrats in Congress, and organizations of parents, college counselors, and others concerned about the long-term implications of our higher education system’s growing reliance on student loans.

Policy Solutions: (a) Limit loan payments to a reasonable percentage of a borrower’s income (no more than 15 percent of earnings above 150% of the poverty level for their family size). (b) Protect borrowers from high interest charges in hardship situations. (c) Cancel remaining debt when borrowers have made regular payments for 20 years (without creating a tax liability for the borrower). (d) Provide easy access to fair payments for borrowers with both direct and guaranteed federal loans.

2. Rein in private student loans.

Ten years ago, private loans comprised only about five percent of the total dollar amount of education loans. Today they represent an estimated 20 percent of the money that undergraduate, graduate and professional students and their families borrow to pay for school. Borrowers who accept these loans subject themselves to interest rates and fees that can be as variable and onerous as those on credit cards, while missing out on limited borrower protections that come with federal student loans. Furthermore, private student loans are as difficult to discharge in bankruptcy as federal student loans. Borrowers can also be confused by aid packages that include private loans branded with the college’s name (such as an Acme College Gate Loan), which leads students and parents to assume that they are special and safer than loans from other sources. We have developed a policy agenda on private student loans that addresses these issues.

Policy Solutions: (a) Amend current federal bankruptcy law so that private student loans have to meet the same criteria as other forms of consumer debt to be exempted from discharge. (b) Require colleges and loan companies to clearly differentiate between private loans and federal loans, including cost differences, and ban the use of college names and/or insignias as part of a private loan brand. (c) Make all private loans subject to the disclosure requirements in the federal Truth in Lending Act, require that borrowers receive an accurate quote before they are asked to sign a promissory note, and set a minimum cooling-off period before the loan becomes final. (d) Protect borrowers who are victims of conflicts of interest or fraud by extending the Federal Trade Commission Holder Rule to cover students at all types of institutions and all types of student loans and loan holders.

3. Restore integrity to financial aid counseling.

Recent investigations have exposed disturbing conflicts of interest between student loan companies and some universities or their employees, undermining both the real and perceived integrity of the financial aid process as a whole. College officials have received gifts, trips, stock options and other benefits from lenders, while some colleges have agreed to recommend certain lenders if those lenders share the proceeds. In other cases, lenders provide staffing or call centers for a campus, posing as college representatives while answering students’ questions about financial aid, including loans. Students and families should be able to count on their college financial aid office to provide impartial advice about loans and lenders. Our comparison of the leading policy proposals describes several approaches to the following solutions.

Policy Solutions: (a)Prohibit colleges and financial aid administrators from having any financial stake in the loan products they recommend, and from taking gifts, trips and other items of value from lenders. (b) Require colleges to disclose the criteria they use in recommending lenders, and make it easy for students to borrow from any legitimate lender.

4. 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 $40,000) have student loans and higher average debt than college graduates as a whole. In addition, the federal financial aid process makes it hard for students making critical decisions about whether and where to go to college to find out how much grant aid they could be eligible for, and the aid application itself (the FAFSA) is so complex that it is an obstacle to getting available federal, state, institutional and private grant aid. The American Council on Education estimates that in 2004 alone, 1.5 million U.S. college students who were likely eligible for a Pell grant did not complete the FAFSA.

Without adequate and accessible aid, qualified students are less likely to go to college right after high school, attend a four-year school, take classes full-time, or have enough time away from wage-earning work to focus on their studies. These factors all affect the odds of completing a degree. Federal financial aid policy should ensure that students from modest backgrounds can get a college education without crushing debt or excessive outside work. That means both more and more accessible federal grant aid, a financial aid process that is more of a gateway than an obstacle, and stronger incentives for states and colleges to make education more affordable for low- and moderate-income students.

Policy Solutions: (a) Significantly increase the value of the Pell Grant. (b) Provide incentives to states (such as a College Opportunity Incentive Fund) to enroll and graduate more students from low- and moderate-income families. (c) Give aid applicants the option of having FAFSA questions that require IRS data answered automatically (as proposed in our report, Going to the Source), which would eliminate the need to answer more than 30 of the most complex, intimidating and error-prone questions on the form. (d) Open the federal aid application process in the fall, when students start applying to college, instead making them wait until January.