Who’s to Blame for the Rise in Student Loan Debt and Defaults?

“Soaring college prices are the most obvious factor behind rising student loan balances, but federal policy has exacerbated the problem by encouraging borrowing and easing repayment requirements,” according to the BPC report.  

“Ironically, the increasing generosity of federal loan programs has likely played a role in the escalation of college prices (tuition and other student charges) in recent years.”

The BPC report argues that the growing availability of loans along with more flexible repayment options have increased students’ willingness to borrow for college, which, in turn “has likely” made it easier for institutions to raise their prices.

“In this way, policies designed to promote college affordability could be having the perverse effect of also making college more expensive,” the report notes.

(Related on ThinkAdvisor: Student Aid May Be to Blame for Sky-High College Tuition: NY Fed)

It cites a 2015 report from the Federal Reserve Bank of New York finding that for each $1 increase in the maximum for subsidized student loans, the sticker price at colleges rose 60 cents and a Cornell Higher Education Research Institute report showing that public colleges increased in-state tuition rates based on the availability of federal Pell Grants, subsidized loans, and state need-based grant aid.

“A series of well-intentioned but flawed federal policies aimed at increasing the availability and attractiveness of student loans has, in part, encouraged systemic overreliance on debt to finance higher education in the United States,” the report notes.

The BPC offers the following policy options to address the problem of rising student debt but makes no specific recommendations:

• Change loan limits to reduce “overborrowing” and pressure colleges to reduce costs. For PLUS loans, used by graduate students and parents of undergraduates, that would mean instituting a borrowing cap. 

• Eliminate loans for remediation courses, which don’t receive college credit.                                                                                                                      
• Overhaul the debt counseling system, which is currently online, to a platform that is user friendly with information that students and their families can understand, or eliminate the online module and shift counseling to the state or local level, though that could be expensive to administer.

• Increase the accountability of colleges, which currently have little incentive to prevent or reduce overborrowing. For example, colleges could be charged a fee based on the portion of a borrower’s outstanding principal balance that hasn’t declined after a given number of years. Or institutions whose borrowers consistently can’t pay down their debt could lose access to federal loans and grants.                                                                                         
• Shift the direct student loan program back to the private sector, which managed the program before the federal government took it over in 2010.

• Overhaul the loan servicing system. Currently private contractors service direct student loans, but the Education Department is in the process of overhauling the system. The BPC report suggests that the new platform might have certain functions outsourced to subcontractors with expertise in that area and that servicers get rewarded for bringing delinquent accounts current.