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Government Stokes Student Debt Problem but Is Key to Solving It: Senators

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Beginning next month, hundreds of thousands of recent college graduates will begin paying their dues, literally. More specifically, they will start repaying their student loan debt as their six-month grace period following their May graduations ends. On Nov. 9, 125,000 students will begin repayments, followed by another 125,000 the following week, and so on; their average debt will be around $30,000, according to Sen. Elizabeth Warren, D-Mass.

“November is debt month” for college graduates, says Warren, who co-chaired a forum earlier this week with Senator Amy Klobuchar, D-Minn. The forum also included several other Democratic senators plus a trio of recent graduates who are deeply in debt. Its purpose: to “underscore the depth and scope of the [student debt] problem and the need for action,” said Klobuchar.

Collectively, more than 40 million students owe about $1.3 trillion in debt. They face decades of debt payments, and their numbers are expected to grow. Nearly 70% of students borrow to pay for college.

Government’s Role in the Student Loan Crisis

Among the key messages of the forum was the role that government plays, being part of the student debt problem as well as potentially part of the solution.

Consider this: Between 2007 and 2012, the federal government made about $66 billion in profit on student loans, according to Warren. “This is obscene,” said Warren. “The federal government should be helping students get an education, not be making a profit off of their backs.”

In addition, the federal government’s Perkins Loan Program, which provided low-interest loans to about 500,000 especially needy students per year, expired at the end of September because funding wasn’t renewed by Congress.

State governments, meanwhile, slashed funding for public educational institutions. A generation ago states covered $3 of every $4 spent, said Warren; today the ratio is $1 of $4, said Warren.

Another black mark on the government is the way it is “feeding the beast,” said Sen. Richard Durbin (D-Ill. He explained that even though students at for-profit colleges account for only 10% of all college students, they account for 20% of federal student aid and 40% of student loan defaults.

“Many of these schools are starting to fail,” said Durbin. And when they do, taxpayers will be footing the bill, he said. When the for-profit Corinthian College company went under, the Department of Education erased the federal debt of its students, creating a liability of as much as $3.5 billion for taxpayers, said Durbin. Those losses, in turn, will  affect the availability of student loans for other people, said Rohit Chopra, senior fellow at the Center for American Progress and former student loan ombudsman for the federal Consumer Financial Protection Bureau.

Even nonprofit colleges fail to provide accountability for the $140 billion that their students borrow from the federal government, said Sen. Chris Murphy, D-Conn.

How Government Can Help Solve the Student Loan Crisis

There have been several proposals to help address the student debt problem, including a proposal by President Barack Obama to provide free tuition for community college, which was introduced in the Senate by Tammy Baldwin, D-Wis., and in the House by Rep. Bobby Scott, D-Va.

Given the polarization in Washington, none of these proposals have advanced in Congress, but some potentially could find new life with a new Congress and a new president. Both Hillary Clinton and Bernie Sanders have touted plans for free tuition at public four-year colleges. On the Republican side, Donald Trump has criticized the federal government for profiting from student loan payments and Congress, and Sen. Marco Rubio has introduced a bill, with Sen. Mark Warner, D-Va., that would automatically adjust student loan debt payments based on income and prevent the compounding of interest during the loan repayment period. Expect more talk on the student loan crisis at Wednesday’s Republican presidential debate, according to news reports.

In the meantime here are some proposals that have been circulating around Washington and beyond: — Renew the Perkins Loan Program. “It’s one thing to fail to pass new legislation but another to let important loan program expire,” Baldwin said. The Republican-controlled House has already passed a bill extending the 56 year-old program for another year, and Baldwin has asked that the Senate follow suit.

Lower interest rates on student loans. At a time when a 30-year fixed mortgage is averaging 3.9%, subsidized and unsubsidized undergraduate student loans charge 4.29%, unsubsidized graduate loans charge 5.84%, and Direct PLUS parent loans and graduate loans charge 6.84%. A bill introduced by Warren—which failed in Congress earlier this year—would allow borrowers to refinance their student loans at 3.9%, the same as the 30-year fixed rate mortgage now.  

— Extend the Pell Grant Program. This program of need-based grants for low-income students should be indexed to the average state tuition cost and available year round, said Jen Mishory, executive director of the Young Invincibles, an advocacy group for millennials.

In the 1980s, Pell grants could cover over half of the cost a four-year degree at a public college or university. Now because of the sharp rise in tuition costs and fees at public colleges, Pell grants cover less than a third of those costs. Mishory explained that the $31,200 average debt load of a graduating student receiving a Pell grant would be cut by 44% if the maximum grant had risen in concert with the rising cost of public college.

Jess Sanchez, a single parent, first-generation college student and first-year teacher in California, told the forum he used his Pell grant for community college and first year of university but was cut off afterward. After completing his undergraduate and graduate studies, he’s left with $90,000 in debt and now half his income goes to to servicing that debt, leaving nothing for savings.

— Simplify the loan repayment process. Adopt loan disclosure practices similar to those required for home loans. “There is a huge problem navigating the student loan system, especially with private loans,” said Chopra. He called for better reporting and data, especially for private student loans. Sen. Jeanne Shaheen, D-N.H., who was also at the forum, has introduced a bill to create one portal for all student loans by adding private loan data to the National Student Loan Data System, which now covers federal loans only. Her Simplifying Access to Student Loan Information Act of 2015 remains in the Banking Committee.

The CFPB already has a hotline for graduates to file complaints about student loan servicing companies, but according to the students who participated in the seminar, more is needed.

Emily Best, a farm operations manager with $70,000 in student debt, said that even after her federal loans were consolidated, it was difficult to understand from her loan servicer, Nelnet, why some loans had a higher rate than others. She also received letters from another loan company about refinancing, which “looked good but may be a trap.”

All three graduates had plans for the money they could save if their student loans were reduced as a result of lower rates, loan forgiveness or both.

Sanchez would save for his son’s college education, Best would borrow in order to operate her own farm, and Wood would save in order to live a fuller, more mobile life instead of living like a college student, as she does now, looking for part-time work for the evenings or weekends to supplement her full-time salary from a nonprofit organization.