Innovative Solutions to the College Debt Problem
The current generation of students is finishing college with more debt than any other generation. More elderly Americans are entering retirement with outstanding student loans. These trends are accelerating.
Excessive student debt reduces the ability of borrowers to save, prepare for retirement, and purchase a house. Increased student debt burdens are adversely impacting family formation, quality of life, and opportunity in our society.
Proposals offered by the Trump Administration would worsen this situation. Recent administrative actions have already weakened consumer protections for many student borrowers.
Solutions offered by Secretary Clinton in her 2016 campaign were highly unrealistic, expensive, and burdensome to state governments and universities.
The paper offers 12 practical policy proposals designed to reduce student debt burdens. The proposals utilize 4 policy levers – (I) additional targeted financial assistance, (2) debt relief, (3) improvements in information about college outcomes and costs, and (4) policies to improve on-time graduation rates.
Several of the proposed policies offered here are notably different from current programs and policies under active consideration.
The primary proposal for expanding financial assistance presented here involves expanded aid to first-year students. Most previous proposals spread all additional assistance over the entire undergraduate population. The targeting of financial assistance toward first-year students will reduce interest costs on both subsidized and unsubsidized loans and will reduce loans to people who fail to obtain a degree and who are likely to experience repayment problems.
The proposals for assisting overextended borrowers presented here involve modifications to basic student loan contracts and changes in bankruptcy law. By contrast, most of the current policy discussion revolves around modifications to Income Contingent Loan programs. Some of the proposed bankruptcy reforms presented in the memo, including a proposal to give priority to student loans over other consumer loans in Chapter 13 bankruptcy, assist both student debtors and taxpayers.
One proposal presented here attempts to partially insulate future students from automatic increases in costs stemming from higher market interest rates. By contrast, recent discussions in Congress focused on immediate reductions in student loan interest rates for students in the current low-interest rate environment.
The work recognizes improvements in college assistance and debt relief programs will not resolve student debt problems incurred by students who enroll in a subpar academic program or fail to graduate in a timely manner. Several proposals seek to improve consumer information on school quality and improve on-time graduation rates.
One proposal calls for the adoption of policies that will increase pass rates on AP exams, especially in underperforming high schools. A second proposal requires that colleges with students using guaranteed student loans provide some credit to students receive a 4 or a 5 on an AP exam.
The growth of student debt is resulting in an increase in wealth inequality because high student debt reduces the ability of many students to save for other goals, including retirement savings and house ownership. Moreover, tax preferences for 401(k) contributions and mortgage payments persuade many people to delay repayment of student loans. Failure to adopt policies that would lower student debt burdens may eventually result in reconsideration of current tax incentives and current financial strategies.
The student debt proposals presented here attempt to target assistance towards people who might not otherwise attend college or are highly likely to default without some help. I hope this analysis demonstrates economic efficiency need not be the enemy of progressive policy.
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