As covered by other diaries, on Monday the House will be introducing legislation to take private lenders out of the student loan equation.
This is a good first step, and it's one that needs to be taken for the financial health of this country. This past spring, I gave an eight-minute presentation on how the financial aid system in this country needs to change. My suggestions are just that (and are by no means comprehensive), but I post the text of my remarks in hopes of beginning a conversation here about what needs to be done to fix the financial aid system.
Below the cut, the entirety of my remarks.
The Educated Poor: Ending the Cycle of Student Debt and Reforming America’s Financial Aid System
I begin today with a question: If you could go back in time a year to warn the world of the coming financial crisis and minimize the collapse, would you?
This year, over 60 percent of students graduating from college will have some form of student debt. The average student currently enters the workforce with $20,000 in educational debt, although figures for those attending graduate school can easily top $100,000. Last year, 6.9 percent of student loans went into default, up nearly 25 percent from the previous year. Given the current recession, this number is predicted to rise.
In America, we consider education to be the great equalizer. Yet our current laws regarding financial aid create an imbalance resulting in a generation of young adults that can best be described as the educated poor. As one man put it, “Sometimes I think going to school is the single worst mistake I've ever made.”
Creating a viable financial aid system does not require a PhD. The goal is simple: we need a financial aid program that enables those who could not otherwise afford an education the opportunity to gain that education without sacrificing their future financial stability. Society as a whole benefits from a well-educated population. But more than that, society benefits when that well-educated population is not trapped by high student loan payments that make owning a house, starting a family, and saving increasingly difficult, if not impossible.
Now, there are some current efforts to fix our financial aid system. However, they fail to address the crucial issues and instead shift the fault. They temporarily delay the crisis and nothing more.
I speak to you today about creating a stronger financial aid system. To help determine the best solutions, I followed two basic assumptions:
- Fairness. It is not enough to find the best solution only for those who require aid – we must also consider those who pay for their education out of pocket. The cost of attendance for both should be similar. Right now the balance heavily favors those who can pay in both admission to college and in cost of attendance, given that, for those with large amounts of debt, repayment can end up being almost double the loan’s original amount.
- This is not about socializing education or making it free. It is about finding an acceptable balance between making education a feasible option for every American while not forcing the wealthiest or the state to assume all costs.
Finally, this is by no means a comprehensive answer and does not address some of the minutiae the system requires. In no particular order, I will address some of the major problems and potential solutions facing our financial aid system.
Simplicity. Our current system is a mishmash of regulations and requirements that undermine and unduly complicate its purpose. Obtaining a degree should not require an education to get an education. There are several ways in which we can streamline the process. For example, we should end the fact-specific inquiries into people’s lives. Income restrictions fail to address the reality of the modern American family and the high cost of financing an education. Additionally, we must end the misguided attempt to shepherd those with debt into nonprofit service or public sector work. It benefits the economy to give people the option of public or private sector work. Also, we need to end the assumption that private sector work automatically means salaries sufficient to pay back student loans.
Interest rates. Currently, interest begins accruing the day students begin their education. For the majority of recent graduates, this means that when their loans are the highest and accruing the most interest, they are most unable to pay down the principle. To take an extremely simplified example, a recent graduate with $150,000 in debt and a 6 percent interest rate will have $9,000 in interest annually. The federal government currently recommends that students pay approximately 15 percent of their salary to student loans. In the case of this individual, then, they would need to make at least $80,000 to even begin to pay down the interest - and this is without touching the principle. Moreover, that interest does not go to the government or educational institutions but private corporations, which begs the question: why are we allowing private companies to profit off of education? Instead, while a student is in school, no interest should accrue. This should continue for the nine months following graduation. After that, the interest rate should slowly increase over time. For example, 1 percent for the 10 years after graduation, 2 percent for the 5 years following that, and so on. This will serve two purposes: it makes the actual principle easier to pay off, and it encourages people to pay off their debt more quickly.
Taxes. This ties in closely to the next point, which is taxes. On the one hand, current Internal Revenue law disadvantages those who either make too much money or pay down their debt above the allowed deductible amount. On the other hand, it encourages others to hold onto some amount of student debt in order to take a tax break. We need to take student debt out of the tax equation. By instead moving the “benefit” into lower interest rates and away from deductions and credits, everyone with student debt equally benefits without further complicating the tax code. It also removes the incentive to maintain student debt in order to gain a tax break. That said, we should keep a tax break in the form of a straight deduction for those who pay for their education out-of-pocket. This circles back around to that assumption of fairness: allowing a deduction for those who pay acknowledges their shouldering of a tremendous burden that benefits society as a whole. This also helps diminish the inequality created by offering student loan repayment below the rate of inflation.
"Good debt." Educational debt is frequently referred to as “good debt.” However, the complexity of the system makes it more and more difficult to stay within the confines of that “good debt.” Students can take out this “good debt” only up to the amount determined by the school, which is sometimes – especially in large urban areas – unrealistically low. As a result, more and more students are turning to private loans and credit cards to make ends meet. Recent reports indicate students are now graduating with an average of $4100 in credit card debt – a twofold increase in less than a decade. The current credit crisis has made credits cards a risky option with high APRs – up to 33 percent for some individuals – and harsher penalties for balances carried month to month. We need to give students more flexibility in their ability to take out educational debt. This is not about giving out a blank cheque but rather to allow students to be students, to focus on their education and not on how they will pay next month’s rent. Additionally, schools need to be more forthcoming in admitting the actual cost of attendance.
Accountability. This brings us to the final point: schools must be held accountable for their role in the growing debt crisis. Cost of attendance has more than doubled in the past twenty years, well above the rate of inflation. Financial aid information needs to be more accessible for students. Currently, there are no independent advocates to help students better understand their situation or the reality of their loans. Moreover, it is to the benefit of educational institutions to push for a reform to the financial aid system. Schools benefit from graduates with more disposable income and a lower investment in their education. Consider it another way: right now, private companies are potentially gaining up to $100,000 or more in interest from a $100,000 student loan. The total cost to that student for their education is $200,000. The educational institution sees nothing beyond that $100,000 in tuition, but may see a reduced giving rate since alumni are likely to consider that additional $100,000 in interest part of their educational expenses. This, in turn, affects the school’s endowment and ability to give scholarships, making it more likely that future students will have to rely on financial aid in order to attend. This again begs the question of why we are allowing private corporations to benefit at the expense of higher education in America.
These proposed solutions are by no means the only options for solving the looming financial aid crisis. Nor are they comprehensive. They ignore current students and recent graduates, who represent the biggest liability to the student loan industry. But before we consider short-term solutions, we need to fix the underlying structural problems. Failure to promptly address the problem pushes us closer to another financial collapse. If we have learned anything in the past year, it should be that waiting until the collapse occurs is not an acceptable option.
In conclusion, we should reward and not punish those who seek an education. Their desire benefits American society as a whole, yet our current policies make self-improvement and learning less and less realistic for those who lack the independent financial means to achieve those goals. We must end the mortgage we have taken out on America’s educated class and reform our financial aid system before it is too late.