Tuesday, February 16, 2021

Effective Reform for the Finances of College Students

College funding and student debt have emerged as critical topics in political and, now, policy arenas of the U.S.


There are few, if any, investments that have a greater impact on our nation, our economy, and our fellow citizens than providing an affordable pathway to higher education for students of all socioeconomic backgrounds.


Stump speeches and soundbites calling for “free college” are easy to understand and driven by the best of intentions, but they replace one set of inequities with another. Leveling the playing field for all meritorious students requires adjusting the details, not moving the goal line for all players.


While many developed countries have nationally subsidized higher-education systems, they are available to a much smaller percentage of their populations. Whereas, the U.S. benefits from the world’s most diverse higher-education offerings.


Contrary to popular belief, internal financial aid programs make many private institutions more affordable than public ones. For example, after aid, on average, students at Susquehanna pay $5,700 less per year than they would at our state flagship university, but for many that is not enough.


With the possible exception of the GI Bill, the Pell Grant program has been the most transformative federal investment in education in our nation’s history. These grants are available to students who are financially in the lowest 20% of the population to help them attend public or private universities. Were we to double the award, the possibility of completing a degree would be within reach.


Furthermore, if we added an award equal to the current Pell allotment to the next economic quintile of the U.S. population, attainment of a college degree would be within reach of all academically qualified Americans. This tactical approach—within an already proven system—provides a sustainable model that is scaled to students’ demonstrated needs.


Another tactical approach is needed to address what has been called the student-debt crisis. There is a crisis, but the elements that are lifted up in the banter of pundits distract the public and our leaders from the specific problems that need to be fixed.


Americans hold a cumulative student-loan debt of over $1.5 trillion, but it isn’t that simple. Over 40% of all student loans and half of federal student loans go to graduate students. In each of the last 10 years, American undergraduate students have borrowed less than the year before—equating to a decade-total decline of over 20%. During that same period, graduate-school borrowing has increased 7%.


Over one-third of all student debt is held by only 7% of borrowers, and the supermajority of them have completed a graduate degree. These are graduates well positioned to pay back the investment of their lenders.


On the flip side, over one-third of all borrowers hold just 5% of the total student debt, but that group is most likely to default. This is, in part, because many of them took out loans to begin degrees, but did not complete them, missing out on the earnings advantages a degree conveys. For that reason, a college graduate is far more likely to pay off a substantial student loan than someone with a small debt who did not complete a degree.


Moving all student loans to income-based repayment plans, including a quantifiable forgiveness program, is a smart solution. For the majority of education borrowers whose lifetime earnings are enhanced many times the amount they borrowed, the lender’s investment is rightfully repaid.


Perhaps more importantly, this approach protects low earners—most often those who did not complete their degrees—from being paralyzed by even small student loans, which can be forgiven after a fixed period if the borrower’s income did not meet the sustained threshold to generate repayment.


Expanding the Pell Grant system may not grab attention like “free college,” but feasibly it makes more sense. Pell and income-based repayment plans have proven their merits over decades. Expanding them is the most cost-effective and efficient approach to make a positive transformation of the economics of earning a college degree.


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