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Democrats Miss Again on Student Debt Fix

ANALYSIS BY WALTER RUSSELL MEAD & STAFF - The American Interest

In an effort to cope with the student loan crisis, Senate Democrats have unveiled a plan to reduce the rate of student defaults by forcing colleges and universities to be more aware of the loan repayment performance of their graduates. Inside Higher Ed lays out the details:

Currently, institutions are kicked out of the federal loan program if their two-year default rates are 25 percent or higher for three years or exceed 40 percent in any single year. The most recent national two-year cohort default rate across all sectors of higher education was 10.0 – the highest since 1995. The department is transitioning to a three-year default rate for the upcoming year.

Under the new proposal, a college whose student loan default rate reaches 15 percent or higher in a single year would have to begin to pay a penalty of 5 percent of the value of the outstanding defaulted debt. As an institution’s default rate increased, it would have to pay increasingly larger penalties, with a maximum repayment of 20 percent of defaulted debt for colleges whose default rates exceed 30 percent.

The money collected from institutions would be directed toward borrower relief and the Pell Grant Program.

Overall, this plan suggests a certain amount of political cowardice on the part of the Democrats. Easy access to federal loans have played a central role in pushing tuition upwards. Yet rather than cut back on the counterproductive yet popular programs directly, this proposal keeps them intact while forcing the unpalatable work of telling students ‘no’ onto the schools:

“They will have to have skin in the game,” [Senator Jack Reed of Rhode Island] said. “They will have to make financial judgments based on how well-informed and how reliable their graduates are in terms of paying back their student loans.”

‘Financial judgments’ are the key words here. The good Senators probably think the universities will automatically lower tuition to allow the same number of students in, but it seems just as likely that universities will also try to admit fewer risky students into their programs. That’s certainly a mechanism for limiting demand for unaffordable student loans. But it’s a marginal fix, and it ultimately won’t do enough to solve what truly ails the higher ed system: too much free money inflating tuitions.

It will, however, get the federal government even more involved in regulating the entire sector—something that’s really not necessary or desirable, when a simple roll-back of student loan largesse would solve the problem much more efficiently and elegantly. There’s just no political will to push the efficient solution through.

Published on December 23, 2013 1:08 pm

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