A political debate is raging when it comes to student loans. In 2010, then President Barack Obama signed legislation into law that ended a 45-year-old program offering federal subsidies to private lenders dealing federally-guaranteed student loans. The move left the U.S. Department of Education as the sole provider of federal student loans. Private lenders and banks continued to offer loans to students, but the old system was dead and left with a heavy emphasis on federal responsibility.
How Has the Federal Takeover Impacted the Student Loan Industry Today?
Since the federal takeover, student loan debt has skyrocketed, growing faster than inflation. Total student loan debt is around $1.5 trillion—more than the national credit card debt. The average student graduates with nearly $28,000 in loans. It’s generally seen as a problem. Graduates are seemingly hampered by student debt.
The flip side is that federal loans come with a number of perks and benefits that can help make repayment easier in general or in times of hardship. For instance, if something happens to you such as a death or dismemberment, your loans are cancelled. Borrowers have access to income-driven repayment (IDR) plans that allow you to cap payments at a percentage of income.
Since the federal student loan takeover, the private student loan market was drastically reduced. For many lenders, offering student loans was no longer financially profitable; for others, staying in the game meant raising their rates and fees. Today, they are not as beneficial as federal loans and are often associated with higher costs. Private loans comprise less than 10 percent of the total student loan market, amounting to about 1.5 million borrowers every year.
What’s in Store for Student Loans in the Future?
Naturally, politicians use student loans to their advantage, using the exponential growth in both debt and higher education costs to further their agenda.
Some, like Bernie Sanders, have said that college should be free to all, and many point towards the rising cost of college as the root origin of the problem. For sure, the rising cost of college is a factor in growing student loan debt, yet many point to the supply of federal aid as the reason behind rising college costs.
It makes for a compelling argument, leading to a partisan battleground over higher education.
To that end, the PROSPER Act, sponsored by 21 GOP lawmakers, is currently in the House of Representatives as a major reform according to Congress.gov. If it passes into law, the PROSPER Act would represent the largest reform in higher education since 2010.
When it comes to loans, under the PROSPER Act, there is a reduction in eligible aggregate loan limits for college students, and there is a notable reduction in the number of federal repayment plans (just the 10-year standard and a single IDR plan would remain).
Presumably, these changes may help the private student loan market grow. A lower federal loan limit could theoretically lead to greater demand for private loans to cover tuition. It also should be mentioned that fewer repayment plans could incentivize growth in student loan refinancing overall. It should be mentioned that the PROSPER Act actually increases access to Pell Grants (improving free access to college), but for demographics who would have relied solely on student loans in the first place, this may not be significantly impactful.
Either way, the PROSPER changes may reduce the overall role of the federal government in student loans.
Understanding the Political Argument on Student Loans
The debate on the federal takeover of student loans is a fairly complex one. One side argues for the federal government to handle all student loans; the other wants to privatize the industry and get the government out of it.
There are advantages to a complete federal takeover. As mentioned, federal loans have more benefits due to features like deferment, income-driven repayment, and even forgiveness in certain situations. Since loan approvals are not contingent upon creditworthiness, more borrowers can access federal loans as well. The downside, however, is that the American taxpayer foots the bill. With every default, that bill becomes more difficult to pay. Another enormous sticking point is the impact federal subsidies have on rising tuition; many claim federal intervention is the reason college tuition has skyrocket.
Privatizing the student loan industry has its own advantages. Ideally, free market principles could help drive down the overall price of borrowing through competition. Taxpayers do not share the risk in higher education because the cost of defaults or delinquencies fall upon the borrower. The often-touted disadvantage is that private loans are based upon the borrower’s credit history. As a result, many borrowers with less than stellar credit could find themselves unable to get education funding. This is an enormous point; many politicians staunchly defend the position that access to higher education is an essential right.
The debate over how to handle the student loan crisis isn’t going to be solved anytime soon. While reforms are pending, some question whether the reforms will actually help or simply make college less attainable for low-income or minority borrowers. What both sides can agree on, however, is that the current system can’t go on forever without some kind of reform.