Taking on the Student-Loan System

Is changing the way student debt is repaid the solution to a multibillion-dollar problem?

Can only be used with Fawn Johnson piece which originally ran in 5/17/2014 magazine    USA - 2013 300 dpi Rick Nease illustration of graduation mortarboards made out of U.S. currency; can be used with stories about student loans. (The Detroit Free Press/MCT)
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Fawn Johnson
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Fawn Johnson
May 15, 2014, 5 p.m.

As Con­gress be­gins to work on reau­thor­iz­ing the High­er Edu­ca­tion Act, it has be­come clear that one of the is­sues law­makers are likely to ad­dress is stu­dent loans. The ques­tion is, how far will they go?

Rep. Tom Petri, R-Wis., is hop­ing they’ll over­throw the sys­tem.

Petri has been push­ing le­gis­la­tion that would provide an al­tern­at­ive to the cur­rent ar­range­ment, un­der which fed­er­al stu­dent loans are gran­ted based on fin­an­cial need but re­paid at a fixed monthly rate, re­gard­less of a bor­row­er’s in­come. Un­der his bill, after bor­row­ers hit an in­come level suf­fi­cient to cov­er their ba­sic needs, 10 per­cent of their dis­cre­tion­ary in­come would auto­mat­ic­ally be de­duc­ted from their paychecks to pay back stu­dent loans. (The de­duc­tions would not be man­dat­ory; those who wanted to could still opt for a more tra­di­tion­al re­pay­ment plan.) In ad­di­tion, last month Petri and Sen. Marco Ru­bio, R-Fla., pro­posed sep­ar­ate le­gis­la­tion that would al­low stu­dents to forgo the loan sys­tem al­to­geth­er by prom­ising a per­cent­age of their fu­ture earn­ings to private in­vestors who agree to pay their tu­ition.

Both bills are an at­tempt to ad­dress the grow­ing con­sensus that the cur­rent sys­tem hasn’t been work­ing out so well for those who take the loans or those who make them: The de­fault rate hov­ers around 9 per­cent, and past-due bal­ances — de­lin­quen­cies plus de­faults — total $85 bil­lion, ac­cord­ing to the Fed­er­al Re­serve Bank of New York. What’s more, col­lec­tion agen­cies are pock­et­ing an ad­di­tion­al $1 bil­lion an­nu­ally in late-pay­ment fees from bor­row­ers, ac­cord­ing to Sen. Tom Har­kin, the chair­man of the Health, Edu­ca­tion, Labor, and Pen­sions Com­mit­tee.

Petri and Ru­bio aren’t alone in be­liev­ing that it makes sense to tie stu­dent-loan pay­ments to in­come; on the Demo­crat­ic side, Pres­id­ent Obama has set up a lim­ited “pay as you earn” pro­gram that al­lows some bor­row­ers who can demon­strate hard­ship to pay no more than 10 per­cent of their dis­cre­tion­ary in­come to­ward their debt, no mat­ter what they owe.

“It just fits the real-world cir­cum­stances bet­ter,” Petri says. “I don’t think there was any par­tic­u­lar reas­on why they didn’t do that at the be­gin­ning ex­cept that, ini­tially, the loans were much smal­ler, the cost of edu­ca­tion was much lower. It just wasn’t something worth fool­ing with if you were get­ting a $500 stu­dent loan.”

Now, however, the num­bers look a little bit dif­fer­ent: Al­most 39 mil­lion people in the United States owe money from stu­dent loans. The av­er­age bal­ance is $26,000, but the col­lect­ive bal­ance of that debt tops $1 tril­lion, and it grew by $114 bil­lion just last year. And the in­crease in the num­ber of bor­row­ers over the past 10 years has been steep — up from 23 mil­lion in 2005 — track­ing the over­all growth in col­lege en­roll­ment, which grew 32 per­cent between 2001 and 2011, ac­cord­ing to the Edu­ca­tion De­part­ment.

The sud­denly ser­i­ous stat­ist­ics have poli­cy­makers in­creas­ingly fo­cused on mak­ing debt re­pay­ment less bur­den­some — and lower­ing the chances that bor­row­ers fall be­hind. “Mak­ing col­lege more af­ford­able” and “help­ing bor­row­ers strug­gling with stu­dent debt” are Har­kin’s top pri­or­it­ies for the high­er-edu­ca­tion le­gis­la­tion he is start­ing to put to­geth­er, ac­cord­ing to an aide to the Iowa Demo­crat.

That high­er-edu­ca­tion bill will likely be fin­ished next year, and auto­mat­ic­ally de­duct­ing a per­cent­age of a bor­row­er’s in­come from his or her paycheck is by far the most am­bi­tious idea be­ing con­sidered for in­clu­sion in it, but the move could vir­tu­ally elim­in­ate stu­dent-loan de­faults. The United King­dom, which col­lects stu­dent-loan pay­ments through paycheck with­hold­ing, sees al­most no de­faults from bor­row­ers who re­main in the U.K. after col­lege. (The Brit­ish gov­ern­ment does have trouble col­lect­ing from stu­dent bor­row­ers who be­come em­ployed out­side its bor­ders, but the United States faces that situ­ation far less of­ten.)

Oth­er ideas range from re­quir­ing fin­an­cial coun­sel­ing for all new bor­row­ers to stream­lin­ing the cur­rent sys­tem. For ex­ample, if the fed­er­al gov­ern­ment could “sim­pli­fy the vari­ous ways — I think there are eight of them — to help bor­row­ers pay back their stu­dent loans,” the de­fault rate would go down, says Sen. Lamar Al­ex­an­der, R-Tenn., the rank­ing mem­ber on the HELP Com­mit­tee. Sen­ate Demo­crats are also plan­ning a floor vote in June on le­gis­la­tion, sponsored by Eliza­beth War­ren, D-Mass., that would al­low bor­row­ers to re­fin­ance their loans at the new, lower rates set by last year’s stu­dent-loan law.

War­ren’s bill isn’t likely to go far with Re­pub­lic­ans, since it pays for the lower rates by hik­ing taxes on mil­lion­aires. But it will help un­der­score a point that most seem able to agree upon: The cur­rent stu­dent-loan sys­tem is one only a col­lec­tion agency could love. 

This art­icle is part of The Next Amer­ica pro­ject.

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