The Broken Record of Student Debt

I recently read an article by Mitchell Weiss of credit.com in USA Today titled “Student Loan Debt: America’s Next Big Crisis.” Weiss points out that the percentage of delinquent student loans rose from 11.1 percent to 11.5 percent between the first two quarters in 2015. On the surface, that doesn’t sound like much. But given that there are $1.19 billion in student loans, that amounts for approximately $137 million in delinquent loans in the second quarter of 2015. Weiss also notes that past due student loan debts account for one third of all “seriously past-due debt payments” in the United States.

That’s huge.

I’ve written about the financial strain put on recent retirees due to either their own student loan debt or their children’s or even grandchildren’s debt. The impact on taxpayers, social security, and other government support programs is immense and will loom even larger. Just recently I wrote about Lumina Foundation’s new report on affordability, and previously I have spoken out against Bernie Sanders and others who have their new plans for making college free. My conclusion has remained the same: they’re talking about the wrong end of the equation by ignoring the costs of higher education (read the August 19, 2015 Swail Letter).

Mitchell Weiss suggests that all loans be restructured to make payments more manageable. This is helpful but does not get at the growing issue of the expensive of higher education.

I am not a proponent of free tuition programs. I believe in affordability, but everyone should take some of the burden of the cost of a higher education. To do so, we have a responsibility to first reduce the cost of higher education, and second, determine better, more responsible ways for students and families to pay their responsible piece of the cost.

Ultimately, once we can agree on a fair level of payment on behalf of students, which is what Lumina is trying to get around, we have to look more seriously at income-contingent loans (ICLs). Used for years in other countries, and even offered as a vehicle for the US Department of Education, it never took root here for a variety of reasons. Financial experts and economists don’t like them because they are akin to a credit card company calling you to extend your payments. This makes the monthly more affordable but it also increases your interest payments, leading to tens of thousands of dollars in extra debt for high debtors. The same thing goes for auto dealers pushing people to 84 month loans now. Only a few decades ago the maximum auto loan term was for 36 months. Now the typical is 72 and is pushing longer. The same is happening in the mortgage industry where the typical mortgage term is 30 years. But only a decade or so ago is was a 25-year term.Mortgagecalculator.org now shows 40- and 50-year mortgages.

To make the ICL more fair than the examples above, there typically is a sunset on total debt. The current US ICL has a loan sunset of 25 years, such that if the borrower has been unable to pay off the total during that period, the loan is forgiven in full. This is the primary difference between a car or mortgage company program and a government-subsidized program: the former never stops compounding interest, while the student ICL forgives at some point.

Hillary Clinton’s New College Compact proposal would significantly reduce student debt for those attending public institutions by eliminating the need for loans. To do this, she would provide approximately $175 million in grants to states that, in effect, make up for the reduced fees from loan-based tuition fees. There is, however, a catch for state institutions: they have to show they can contain costs and increase higher education funding over time. Thus, states cannot bait and switch with federal money. To receive it, they’ll have to continue to make progress on their funding and system performance.

The second part of the Clinton proposal is to reduce interest rates and cut the ICL term from 25 to 20 years, further expanding affordability to students who have already incurred student debt and those that still will at private institutions.

The reality is we have to do something about student debt, and to do that appropriately we have to think more about cost drivers in higher education as well as the looming question of the linkage between higher education and the workforce and the relative cost of teaching and learning beyond high school.