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)
MCT Graphics via Getty Images
Fawn Johnson
Add to Briefcase
See more stories about...
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.

What We're Following See More »
PAC WILL TARGET INCUMBENTS
Sanders Acolytes Taking the Movement Local
28 minutes ago
WHY WE CARE

"While Democrats nationwide have put the focus on President Trump, the Sanders wing of the party has engaged in an intramural fight to remake the party in a more populist, liberal mold." From Washington state to California to Florida, Sanders loyalists are making good on their promise to remake the party from the ground up. And just last week, a "group of former Sanders campaign aides launched a super PAC with the explicit goal of mounting primary challenges to Democratic incumbents."

Source:
THANKS TO MILITARY ROLE
McMaster Requires Congressional Approval
41 minutes ago
THE DETAILS

Congress will need to vote on Donald Trump's pick of Lt. General H.R. McMaster to be his next national security adviser, but not for the reason you think. The position of NSA doesn't require Senate approval, but since McMaster currently holds a three-star military position, Congress will need to vote to allow him to keep his position instead of forcing him to drop one star and become a Major General, which could potentially affect his pension.

Source:
THE QUESTION
How Many Signatures Has the Petition for Trump’s Tax Returns Received?
4 hours ago
THE ANSWER

More than 1 million, setting a record. More than 100,000 signatures triggers an official White House response.

Source:
SENT LETTERS TO A DOZEN ORGANIZATIONS
Senate Intel Looks to Preserve Records of Russian Interference
4 hours ago
THE LATEST

"The Senate Intelligence Committee is seeking to ensure that records related to Russia’s alleged intervention in the 2016 U.S. elections are preserved as it begins investigating that country’s ties to the Trump team. The panel sent more than a dozen letters to 'organizations, agencies and officials' on Friday, asking them to preserve materials related to the congressional investigation, according to a Senate aide, who was not authorized to comment publicly. The Senate Intelligence Committee is spearheading the most comprehensive probe on Capitol Hill of Russia’s alleged activities in the elections."

Source:
MORE COOPERATION WITH LOCAL AUTHORITIES
Deportation, Detention Rules Released
4 hours ago
THE DETAILS

Memos issued by the Department of Homeland Security on Tuesday night "implemented sweeping changes to the way immigration policy is enforced, making clear that millions of people living illegally in the U.S. are now subject to deportation and pushing authorities to fast-track the removal of many of them. ... The policy calls for enlisting local authorities to enforce immigration law, jailing more people while they wait for their hearings and trying to send border crossers back to Mexico to await proceedings, even if they aren’t Mexican."

Source:
×
×

Welcome to National Journal!

You are currently accessing National Journal from IP access. Please login to access this feature. If you have any questions, please contact your Dedicated Advisor.

Login