Student loans need even more reforms

Last modified: Friday, September 07, 2012
Former president Bill Clinton used part of his speech at the Democratic National Convention to tout President Obama's executive order tying the student loan repayment plans of several million students to their ability to pay.

The plan caps monthly payments at 10 percent of the debtor's discretionary income, down from the 15 percent cap imposed by Congress last year. Students who are diligent about making payments for 20 years will have any remaining balance forgiven. Graduates who take jobs in government, teach or work for a nonprofit could see their debt wiped out after as little as a decade of payments.

The income-based plan, which had been kicked around in one form or another for years, is sorely needed. But it's only one of the big changes that should be made in the way students borrow for college and repay their loans.

Student debt now tops $1 trillion, exceeding credit card debt. Students, especially those who ran up big bills for an education but still couldn't land a decent job, are defaulting on loans. Some 850,000 already have. Meanwhile student loan balances continue to grow beyond the borrower's ability to ever repay.

Obama's education funding proposals differ starkly from those of his rival, Republican Mitt Romney. The president increased funding for the Pell grants awarded to needy students by 95 percent and wants to do more. Romney opposes an increase because it could lead colleges to increase tuition to grab more federal funds.

The Obama administration wants to decrease or even eliminate the role of private lenders in funding education. Romney would like to see even greater involvement by the private sector - even though many of the worst-off student debtors were victims of the private sector. Lured by the unrealistic promises of for-profit colleges, they funded their education with high-interest loans from profit lenders who were unconcerned with their borrowers' ability to repay, since they bundled the loans and sold them.

Several reforms are needed in that system. Federal loans should not be given to students who plan to attend a for-profit college that cannot demonstrate that a high percentage of its students graduate and find employment related to their field of study.

In 1976 Congress changed the law to make it hard to discharge a federal student loan by declaring bankruptcy. Subsequent changes over the years made doing so nearly impossible. In 2005, under the guise of keeping interest rates down and allowing more students to attend college, Congress granted the same protection to private lenders. That was a mistake that encouraged private lenders to take unreasonable risks. It's an unwarranted private-sector protection that Congress should remove.

While it's at it, Congress should make the reduction on Stafford loan interest rates permanent. It was temporarily reduced from its too-high 6.8 percent to 3.4 percent for two years and then, after a lot of posturing and horse-trading between Republicans and Democrats, the reduction was extended through this year. It's in the national interest to educate as many citizens as possible, and that means keeping federal education loan interest rates as low as they can be.

Basing monthly student loan payments on the debtor's ability to pay is no miracle cure. Debtors will pay less per month - often far less - but the terms of their loans may be extended by years. Lowering payments will, however, reduce the default rate at little or no cost to taxpayers. It will also grant young people the financial freedom to get on with their lives and perhaps pursue the further training that might lead to a good-paying job. That will be good for students, society and the economy.