In February 2016, the Government Accountability Office released a report
that suggests that the Obama administration’s policies have exacerbated
student debt. Student loans account for nearly one-quarter of annual federal
borrowing and it is estimated that only 37% of federal student loan borrowers
are actually paying down their loans. In this regard, the federal student
loan program has begun to mimic the pay-day lending industry. In April,
the Wall Street Journal reported that approximately 43% of the 22 million
Americans federal student loan borrowers were not making loan payments
as of January 1. It also reported that 3.6 million Americans were in default
on $56 billion in student debt. These trends suggest that the federal
government may have to write down as much as $500 billion as a result
of future defaults and loan forgiveness programs.
Currently, there are more than twenty Income-Driven Repayment Programs
available to borrowers with federal student loans. These programs function
in a similar fashion, allowing borrowers struggling with their finances
to defer their payments. However, when payments are not made, the loan
balance continue to grow. This is the case for over 20 million borrowers
who are currently participating in such programs. The federal government
will also have to deal with another student debt challenge as a result
of the Public Service Loan Forgiveness Program. Passed in 2007, this program
allows borrowers who work for nonprofit organizations or government agencies
to have their loans forgiven after 10 years. According to the Congressional
Budget Office, this law is expected to cost about $5 billion annually.
Congress has several options when dealing with the federal student loan
program and its potential losses. One option is to demand that the Congressional
Budget Office appropriately score the Income-Driven Repayment options.
The federal government should use nonperforming loan standards similar
to those used by banks. Additionally, it should be mandated that that
Education Department reserve funds in anticipation of significant foreseeable
write-offs. For example, if 20% of the current student loans end up being
written off, the department will be responsible for writing off more than
$20 billion annually.
Another option is for the Direct Lending Program to start leveraging its
power to price loans differently based on the success of students. Additionally,
the model by which colleges and universities receive programs should undergo
necessary changes. Currently, colleges and universities receive Title
IV funds at the beginning of the semester. These schools must return these
funds if students drop out before completing 60% of a course. A proposed
change to this program would give schools a portion of loan proceeds at
the beginning of the semester instead of the full amount. Schools would
only receive additional funds if the students enrolled are able to graduate
and pay down their student loans.
Overall, changes to the federal student loan programs are likely to be
the only solution when it comes to the problems incurred by nonpayment.