I have spent much of my working life studying and promoting student loans. As a good liberal Democrat, I spent years arguing for the expansion of the old Federal Family Education Loan Program (FFELP) which had its roots in Lyndon Johnson’s War on Poverty. My professional life included stints working for one of the nonprofit FFELP agencies and being a co-founder of an entirely private nonprofit, non-federal student loan guarantor. Currently, I consult to a for-profit student loan company.
I am surprised, therefore, to hear myself saying that it is time to start downsizing the federal student loan programs.
I am watching with interest to see how the new version of our federal student loan program, the Federal Direct Student Loan Program (FDLP) works out. I hope it is successful.
But I am increasingly worried that in the extensive and prolonged policy debates between the FFELP and the FDLP backers, we lost sight of bigger and more ominous issues around student loans. We concentrated on the delivery system—who should administer the program and where should the capital for loans come from. The Democratic congress and administration came out in favor of having the federal government assume completely the administrative and financing roles taking all student loans onto the Federal balance sheet. Republicans cried "socialism." Democrats pointed to hoped-for efficiencies and savings.
But all the noise over the delivery system masked the fact that debt burden for students was exploding and default rates were increasing.
Historically, this has always been a concern, but study after study going back to the early ‘90’s found that debt burden and default rates were not excessive and that the value of a college education was well worth the level of debt that most students were accumulating. Many of these studies were conducted by the Institute for higher Education Policy (IHEP) in Washington D.C., where I am currently a senior associate.
The most recent IHEP study, however, paints a very different picture. Through our federal loan programs, it suggests, we are creating large numbers of young people struggling with and failing to repay these loans. We have raised the limits on amounts that students can borrow and through our federal PLUS loan program, we are allowing parents and graduate students to borrow up to the full cost of education with no limits. As has been widely reported the level of student loan debt in the U.S. now exceeds credit card debt. Our students will soon be wallowing in more than a trillion dollars in student loan debt.
Meanwhile everyone knows what is happening to the cost of higher education.
Again, I never thought I would find myself saying this, but I think it is time to take steps to discourage borrowing for higher education. We should slowly over a period of time substantially reduce the government student loan programs. My reason for this is primarily to protect students from untenable debt burden. I realize there will be cases where students with reduced recourse to government loans would have to choose lower-cost alternatives—community colleges instead of expensive for profit schools or public colleges and universities over high cost private institutions, but I’m not sure this is a bad thing. We have to begin to address the issue of what the best financial fit is for students. We simply can’t afford to have a system in which the federal government encourages so much student debt.
I also think a reduction in federal student loans would help to address the issue of out-of-control college costs and the growing national debt.
There has long been concern that one reason colleges can increase their prices at such a rapid rate is that students and their parents can borrow at favorable terms from the federal loan programs. In the case of PLUS, the government offers a program which will lend at good rates with minimal credit requirements for the entire cost of education, no matter what the colleges charge. It’s a deal which the car companies or any other industry reliant on consumer credit financing would envy. A reduction in federal loan availability might just encourage higher education to think a bit more seriously about reducing the rate of increase in its costs or developing more cost-efficient ways to deliver high-quality education.
Finally, I don’t think we can ignore the cost to the government of this explosive growth in the amount of federal student loans on the federal balance sheet. Currently the federal number-crunchers tell us that these loan programs will not be all that costly. In fact, they say that because the cost of money to the government is much lower that the interest rates charged, the government actually makes money on student loans (one might wonder why this should be). But cost is dependent not just on the spread between cost of money and interest charged, but on among other things, future default rates. The government projects that future default rates will be moderate enough to ensure profit. But our experience with government cost estimates doesn’t give much comfort. Think the Big Dig or any of numerous Defense Department weapons systems.
Let’s save our students from crushing debt, help our colleges control costs, and save Uncle Sam a buck or two. It’s time to start reducing the size of the huge federal student loan system.
Thomas D. Parker is senior associate at the Washington, D.C.- based Institute for Higher Education Policy (IHEP), director of IHEP’s Global Center on Private Financing of Higher Education, and a consultant to the First Marblehead Corporation.