• July 24, 2014

The Solution to the Student-Loan ‘Crisis’? Depends on How You Define It

Student-loan debt is widely perceived to be a problem, even a crisis. Experts, advocates, and policy makers have been debating how to tackle it for years, and with the reauthorization of the Higher Education Act on the horizon, those conversations are likely to pick up steam.

At an event in Washington on Wednesday, the American Enterprise Institute plans to explore "policies to puncture the student-loan bubble." On Tuesday the Brookings Institution pointed out in a paper that the typical student-loan borrower is faring much better than the "crisis" narrative suggests. Policies aimed at helping all borrowers, the paper argued, are "likely to be unnecessary and wasteful."

The many recent proposals to help borrowers have ranged from giving prospective students better information on college costs to letting borrowers refinance their loans to putting more people into income-based repayment plans.

Each policy recommendation is presented as a solution. But the so-called solutions are based on different understandings of what, exactly, the problem is.

So what’s actually wrong with the student-loan landscape? Here are four ways of defining the student-loan problem, and possible solutions that might fit with each.

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Problem: Borrowers don’t know what they’re getting into.

Paying for college is the first major financial transaction many traditional-age students make. For all students, it’s one of the biggest and most important. But that doesn’t mean they go into it well informed.

If a lack of information is part of the problem, more of it should come at the beginning, says Sandy Baum, a research professor at George Washington University. "It doesn’t make sense to let students make bad decisions," she says, "and then rescue them afterwards."

Some students take on debt to attend colleges they’re unlikely to graduate from, or to earn degrees with little market value. Others who might benefit from college don’t go, to avoid debt.

Student advocates have long argued that colleges’ financial-aid awards are unclear and hard to compare, things the government has tried to improve with a standardized financial-aid "shopping sheet."

But even if students know how much they’re borrowing, they may not understand how much, with interest, they’ll end up having to repay. Federal student-loan borrowers have to go through entrance and exit counseling, but experts wonder if that is enough.

Potential solutions: Giving students, especially first-generation and low-income ones, more help in choosing a good-fit college; providing better financial-aid information further in advance; and expanding or improving student-loan counseling.

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Problem: Students are borrowing too much.

There’s no question that the proportion of students who graduate with loans and the average amount they borrow are rising. Seventy-one percent of students who graduated from four-year colleges in 2012 borrowed, with an average debt of almost $30,000.

As key sources of revenue for many colleges—particularly state support—have fallen short, institutions have relied more on tuition, shifting the burden of paying for higher education to students and their families, only a small fraction of whom can pay out of pocket.

"We know there are instances where students are borrowing too much," says Justin Draeger, president of the National Association of Student Financial Aid Administrators. His group has argued that colleges should have the authority to limit how much groups of students, say those in a certain program or enrolled part time, can borrow.

Whether student-debt loads are reasonable depends not only on the amount borrowed but also on how much money those borrowers go on to earn. That is a particular concern for students who borrow but don’t graduate, as they must repay the loans without the earnings premium that comes with a degree.

Potential solutions: Allowing colleges to limit the debt levels of particular groups of students; encouraging timely graduation; reducing the cost of college; and increasing public support for higher education.

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Problem: Borrowers can’t afford their loan payments.

Even if students borrow a normal amount, they may struggle to make their monthly payments.

That could be because landing a well-paying job takes many new graduates longer than the six-month grace period before they must start repaying most federal undergraduate loans. Some will never earn enough to comfortably pay off their debt.

Designing a policy solution is like diagnosing a health problem, says Susan M. Dynarski, a professor of public policy, education, and economics at the University of Michigan at Ann Arbor. "In the case of student borrowing, the symptoms are high default and high delinquency, but moderate debt for the vast majority of undergrads," she wrote in an email. "That pointed me toward a repayment problem."

To help borrowers who can’t afford their payments in the short term, Ms. Dynarski has proposed a modified income-based plan in which payments automatically rise and fall with income and are deducted from borrowers’ paychecks.

Potential solutions: Better preparing students for a challenging job market; making it easier to choose and enroll in an income-based repayment plan; reducing the interest students pay on their loans; and making it easier for distressed borrowers to discharge their loans in bankruptcy.

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Problem: Repayment options are confusing and cumbersome.

The federal government offers a whole menu of student-loan repayment plans. "It’s nice to give people options," says Robert M. Shireman, executive director of California Competes and a former U.S. deputy under secretary of education. "It always seems like a good idea."

But those choices are complex, and even well-informed borrowers have found the process of switching repayment plans full of hurdles.

Many groups have suggested streamlining the number of repayment plans, either to a single income-based plan or one income-based and one mortgage-style option.

Borrowers often learn of their repayment options as they approach graduation—before many of them know how much they’ll be earning or what other expenses they’ll face. That can make the trade-offs between a lower monthly payment and a longer repayment period hard to evaluate, Mr. Shireman says. One thing that might help: if loan servicers encouraged borrowers to switch into an income-based plan as soon as they became delinquent.

Potential solutions: Reducing the number of repayment plans available; automatically placing all borrowers or struggling borrowers into an income-based repayment plan; and taking automatic payments out of borrowers’ paychecks.

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To some observers, all proposed solutions are beside the point, and the fact that any students borrow to pay for college is itself the problem.

The current reality is the result of many decisions made over decades, says Jacob P.K. Gross, an assistant professor of higher education at the University of Louisville. "What we can’t probably do," he says, "is rewind the clock."

Moving away from student loans as a means of paying for college would require a tremendous improvement in families’ financial situations, much more taxpayer support for higher education, or both. Meanwhile, says Mr. Gross, "there are students out there struggling right now, who need help right now." Policy makers can do a lot for them. But first they must decide which borrowers they’re trying to help, and why.

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