As outstanding student loan debt soars above the trillion-dollar mark, it’s little surprise that the subject of college tuition has become one of the key issues in this year’s presidential election. Despite such attention, proposed solutions have failed to truly address the root issue of the problem.
Although a wealth of evidence has proven that subsidizing higher education on the federal level actually increases the cost of tuition, proposed solutions, such as debt-free or tuition-free college, continue to gain traction. Such policies do not actually address the key issue of price increases and instead only transition more of the burden of higher education onto taxpayers. Traditionally, the subject of higher education has tended to focus on policies that would cause prices to balloon while extending ineffective incentives to students as well as schools. Under the Obama administration, the policy of income-based payments was expanded. This type of solution establishes a cap for loan repayments based on a percentage of the borrower’s income. This program, which began in 2007, originally capped such repayments at 15 percent of the borrower’s discretionary income. Under President Obama, that amount decreased to 10 percent. There were no measures put into place to ensure students did not borrow more money than they would be able to reasonably repay in the future. Furthermore, the length of time for loan forgiveness was shortened. Under the George W. Bush administration, loan forgiveness was set at 25 years. Today, loans are forgiven after the borrower makes payments for 20 years. If the graduate accepts employment in the public sector, loans can be forgiven in only 10 years. There have been suggestions that these terms should be reduced even further. While on the surface, it might sound generous to encourage students to borrow money in order to obtain a higher education with the general acceptance that these loans will be forgiven eventually, such a policy would only cause higher education costs to rise even more. The cause and effect are simple. When a student knows he or she will not have to pay back the vast majority of a loan, he or she will be encouraged to borrow more money regardless of whether it’s actually a good financial decision. At the same time, schools will be practically forced to rely more on federal subsidies while simultaneously increasing tuition costs. Those costs must be covered at some point, and it is the American taxpayers, a large percentage of which do not even hold college degrees, who will be stuck with the bill. As the cost of higher education continues to rise and an ever-increasing number of students take out loans to finance the cost of their education, it has become incumbent upon policymakers to address the root cause of what is actually driving the cost of college. Subsidies must be limited to reduce those costs, paving the way for private lending to be restored. The real problem is that the federal government, which originates and services student loans, has also taken the responsibility of determining the terms for loans based on the value of the education borrowers receive. Private lenders take a far different approach by establishing loan terms based on such factors as the likelihood of a borrower to repay the loan, school type, a student’s major, and the creditworthiness of a co-signor. Both forward-looking and backward-looking measures can be taken into consideration by private lenders when making a determination of whether to approve a student loan. For instance, a private lender might consider such traditional factors as credit score but could also consider whether a student would be able to reasonably repay a loan after graduation. Unfortunately, under current policies, financial aid offers are required by federal law to encourage students to exhaust borrowing options from the federal government before they explore private lending. This one policy has created a detrimental obstacle to a more common-sense approach to higher education financing. Eliminating that one rule is not enough, however. The real issue is that federal loans are inherently designed to be appealing and easy to obtain by offering partial debt forgiveness and low interest rates. For this reason, most students never even think about exploring private loans. As kind-hearted and generous as the subject of loan forgiveness may sound, the reality is that it is hardly plausible. Because of that, it has created a $1.3 trillion problem the American taxpayers now face. Rather than throwing more government subsidies at the problem, a more sensible solution is to reduce college costs in a competitive manner so that college students have the opportunity to finance the cost of their education more reasonably. This would require restructuring financial aid so that it is aimed at those students who truly need it while limiting federal subsidies, thus making it possible for private lending to be restored. Sources: 1. https://en.wikipedia.org/wiki/Student_debt 2. https://fred.stlouisfed.org/series/SLOAS 3. https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation
0 Comments
Leave a Reply. |
Details
ArchivesCategories |