Sunday, September 23, 2012

Consolidate Student Loan Legislation and Adopt Comprehensive Reform

Over the course of the last decade, considerable more students taking on debt to pay for college. This doesn't come as a surprise to many as tuition at some schools can set families back more than $50,000 every year the student attends the university. 

Also this isn't a surprise because so many people have loans.

In order to combat this rising tide of debt, a slew of legislators have thrown in their two cents and are now backing legislation designed to save the future of many young adults that are certain to be hindered, if not completely destroyed, by debt and default. 

And fire and brimstone.
While it is great that the nation is finally looking to tackle the student loan debt and default problem; however, current legislation is as piecemeal as student finances and needs to be drastically redesigned and expanded to make any real difference.

Student Loan Reform: More Important than Any Election

Student loans have eclipsed both credit card debt and auto loans as the biggest burden on American consumers as 70% of former students are graduating with debt. In the 2010-2011 school year, 10.3 million families borrowed from federal programs alone.  

To put that into perspective, New York City has 3 million families living in it.

There is almost $1 trillion owed on millions of different loans. This is much harder to make tangible as $1 trillion is an incomprehensible amount of money.

Use of private lenders has become more widespread as well. More than $150 million of this debt is owed on private loans. Which is great...

For nobody.
Students are also leaving school with more debt; the average is $25,250 a head. The top 10% owe upwards of $50,000 and the top two percent owe more than $100,000. This growth in debt has run parallel to a dramatic increase in student loan default. Currently more than $76 billion worth of loans have fallen into default at that number is likely to grow at unemployment sites stubbornly at 9%.

Current Legislation:  Really Needs a Good Grade on the Final

Good thing the system is being reformed, right?

Though a little late to the game, advocates of reform have been making progress on staunching the growth of this problem. President Obama signed a student loan extension as part of the Transportation Bill back in June of 2012 that prevented an interest rate hike on subsidized Stafford loans, something 9.3 million students signed up for in the 2010-2011 school year. However, the freeze is only for the 2012-2013 academic year. Unfortunately, this Bill also excludes graduate students.

At best, it was a very short term appeasement.
Granted, keeping the interest rates at 3.4% instead of allowing rates to rise to 6.8% is going to save a lot of people many thousands of dollars, but the problem is far more complex than interest rates on Stafford loans.

However, that doesn’t mean legislations needs to be. Comprehensive reform is possible, and it can be done in one bill.

The 3 Qualities of a Comprehensive Bill

1.  Comprehensive Interest Rate Regulation

Stafford loans are available to every student with demonstrable financial need; however, half all who are eligible for these loans do not exhaust this option before signing up with a private lender. The Bill signed back in June has no bearing on the $150 million dollars in student loans that most students are taking out.

Hint: someone actually looking to reform the system would reform the entire system and this means increasing control and oversight of private lenders or giving all students loans.

2.  Full and Comprehensive Disclosure of Fees and Future Monthly Payments

This seems like a fairly straightforward concept, and something that would already be done, but the disclosure requirements on student loans are frustratingly relaxed and information can be very hard to come by.

There are currently two Bills being tossed around the Senate:
Understanding the True Cost of College (Franken – D Minn)
This bill would require disclosure from lender about the more favorable terms of Federal Loans, interest rates, unexpected payments (like capitalized interest) and expected monthly payments
Know Before You Owe (Dick Durbin D-Iowa):
This bill requires schools to counsel students before they take out a private loan and inform them if they have untapped Federal resources

Meaningful legislation would need to combine the concepts of these things because really helping students requires this all of this information anyway.

3.  Clear, Defined Forgiveness Policies

Student loan forgiveness is a mythical beast and something and most students, no matter how “undue” their “hardship” is and despite certitude that they will not overcome it, will never be forgiven of their debts.  Only about 1,000 students attempt this annually as this nebulous language has reigned supreme since regulations were changed in 1976 and today is incredibly stringent and only 37% of students are released from the terms of their loans.

Actually helpful reform would clearly define the terms on which the contract could be terminated.

Letting an 18 year old borrow many thousands of dollars is, objectively, a terrible idea. But because of skyrocketing tuition and students' need to attend private institutions, it is an inevitable reality for millions who were gifted enough to get into college but not lucky enough to have the means to pay for it.

Writing a better bill is the least you can do for them.