Student loan delinquencies and defaults are a plague that continue to baffle many. With more than 30 years of student loan experience, including serving as the CFO of a student loan company, I’m not surprised.
Today’s federal student loan programs were structured and tweaked by policymakers over many years to address a political concern — increasing access to education — not by bankers and economists solving an economic problem — helping families pay for college.
The resulting programs were purposely designed to make student borrowing easy — maybe too easy. Undergraduates file the Free Application for Federal Student Aid, sign a Master Promissory Note entitling them to multiple borrowings with one signature, do some perfunctory “counselling” and graduate with up to $31,000 of federal loans.
It does not matter what or where they study or their projected educational outcome. They have access to education but no protection from the potential economic harm of this simple process.
The majority of graduates do well. Their first-year earnings exceed the total amount they borrow — a measure generally considered to be reasonably indicative of prudent borrowing.
Those who do not graduate suffer. A recent Third Way study is staggering: Degree earners are 20 percentage points more likely to pay down student loan principal than non-completers.
Dig further into student loan debt statistics and you find that undergraduates who borrow leave college with about $30,000 of federal loans. The maximum they can borrow each year is capped between $5,500 and $7,500, indicating that graduates are borrowing all they can from Uncle Sam. This is relevant to understanding student loan defaults.
The White House Council of Economic Advisors reported that two-thirds of student loan defaulters had balances less than $10,000; 35 percent of defaults were less than $5,000. If completers exit college with $30,000 of debt, then the lion’s share of defaulters likely attended college for only a year or two, at most.
They accessed education but did not finish to reap the benefits. They’re stuck with a dream of college that became a nightmare.
In light of this, reports that student loan delinquencies remain stubbornly high while delinquencies in other asset classes have declined is not surprising. Delinquent credit card holders and other borrowers suffered when the economy was bad but recovered as the favorable economic tide raised their boats out of delinquency.
Not so for a delinquent student borrower with mounds of debt, no degree, few marketable skills and no job or one that doesn’t pay well. The booming economy will not wave a magic wand and convey the benefits of a completed degree or the skills needed to pay their loans.
The result is an emerging systemic delinquency problem non-existent in other asset classes. Student loan borrowers who did not complete college — and won’t — do not have a similar escape from delinquency.
Well-intentioned policy experts successfully designed a system that brought students into the education pipeline, at least initially. Now we see an unintended economic by-product of achieving the access goal: persistent delinquencies and defaults.
As this reality unfolded over the past several years, Washington’s response was politically viable but economically untenable: a hodgepodge of confusing repayment and loan forgiveness programs intended to reduce delinquencies at a cost that is difficult to accurately calculate.
The relief programs may have scored well for budget purposes and offered good sound bites, but they haven’t moved the needle on delinquencies.
To fix the student loan mess, both borrowers and policymakers need to change their behavior. Students can make better choices about which college to attend and how to minimize debt.
Student loans should be the last resort, not the first option, to pay for college. Before signing the first loan note, borrowers need to consider the monthly payment required to successfully pay off the loan.
Policymakers should recognize that there are two problems to be solved: current delinquencies and the system that produced them. For currently delinquent student loan borrowers, some sort of amnesty program may be necessary.
The government may need to write off some portion of interest that has been accruing during the delinquency, reset the principal amount and rewrite the repayment schedule based on the borrower’s ability to pay.
Fixing the system that created the current delinquency plague will not be easy, but it can be done. One painless action would be to eliminate the practice of including federal student loans in Financial Aid award letters. Students are confused when colleges package loans with true aid such as grants and scholarships that do not have to be repaid.
Some believe that reinstating means testing to determine eligibility for federal loans would ensure students who can’t afford loans get grants instead. To free up subsidies, well-off families may need to first access the private sector student loan market and use the government as a lender of last resort.
Others would like to link the amount that can be borrowed to college majors. There are many ideas — all with political supporters and opponents.
One thing is clear. The systemic economic problem of student loan delinquencies will not be solved by an improving economy. The solution requires political will starting with an immediate agreement that it’s time to stop the student loan delinquency merry-go-round.
John Hupalo is the founder and CEO of Invite Education, co-author of "Plan and Finance Your Family’s College Dream" (Peterson’s 2016), and host of the podcast "My College Corner" (iTunes, SoundCloud).