Yesterday’s hearing of the Senate Health, Education, Labor and Pensions (HELP) Committee on student loans seemed to clearly answer the question of who is to blame for our $1.2 trillion and climbing student debt debacle. The only problem is, it was inaccurate. That makes the conversation unproductive regarding making federal aid policy effective.
If you believed the hearing, private lenders, loan servicers (TIVAS), and greedy state guaranty agencies (GAs) are to blame. During the hearing Sen. Patty Murray (D-Wash.) prided her role in passing recent cuts to GA-collected fees, as “providing relief to struggling borrowers.”
Just as with the subprime mortgage crisis, everyone involved played a role in driving our student debt burden. States have decreased funding for public universities (for example, Colorado is expected to stop all funding by 2022), schools have increased tuition to fill the difference, borrowers have little incentive to make smart borrowing decisions, for-profit institutions have a less than stellar track record, and funding has been readily available regardless of credit backgrounds to enable equal access and opportunity. Of course, there is also the epidemic lack of financial literacy of student borrowers. Lenders, school counselors, parents, or the borrowers themselves could all be to blame.
Moreover, the underlying dominance of four-year college model is also partly to blame. The fact is not all four-year degrees are created equally, and not all jobs require a four-year degree. Yet the lack of other viable options for workforce success could explain why everyone is encouraged to pursue a four-year degree. It could partly explain the astonishing rise in graduate school over the last decade, as poor employment prospects force college graduates to find ways to stand out, and the rising student debt that comes along with it.
Certainly some private loan servicers are not completely innocent, and may not always put student interests above their own short-term goals. But the harsh tone taken by Sen. Elizabeth Warren (D-Mass.) yesterday does not address the larger issues at play. Her comment, “Sallie Mae has repeatedly broken the rules and violated its contracts with the government, and yet Sallie Mae continues to make millions on its federal contracts,” even prompted the Department of Education to come to Sallie Mae’s defense.
Indeed, not all private-sector participants among the accused are approaching borrowers with mal-intent. Take for example state guaranty agencies (GA), the legacy administrators of the Federal Family Education Loan Program (FFELP) for a given state. Left out of the hearing discussion seemed to be the important fact that GAs are non-profit companies designated by the Department of Education. Their fees are used for an important cause – for extensive financial literacy training programs set up across state networks. The more their fees are cut, the fewer financial literacy services they will be able to provide.
The demonization of private loan servicers might lead one to think that federalizing student loan servicing would solve the problem. However, isolating TIVAS is counter-productive. Not only are student loan servicers not the greedy profiteers they are made out to be, but there is no reason to believe the government would be more cost-effective at loan administration. Further, there is no evidence that expanding the federal role in student loan administration would do much to relieve the existing student debt burden.
Instead, Congress should work with TIVAS and GAs as partners as they work to reform the federal student aid program. Just as the issues surrounding the student debt burden are systemic, so too must be the solution. Pointing fingers at a select few accomplishes little, even if it does sound good during election season.
If there is any take-away from yesterday’s hearing, it is that student loans have become the latest issue in need of greater awareness and education concerning all of the aspects. There are over 80 million young Americans under age 20 that are counting on policymakers to get the federal aid system right for when they invest in college. Luckily, since the reauthorization of federal student aid programs is almost certain to get postponed for yet another year, it is not too late.
Carew is the director of the Young American Prosperity Project at the Progressive Policy Institute, a center-left think tank..