Democratic presidential candidate Hillary Clinton would spend $350 billion over 10 years to reduce student debt and rein in the cost of college; her chief rival, Vermont Senator Bernie Sanders, would make all public colleges and universities tuition-free. President Barack Obama has called on Congress to make community colleges free, a proposal Republicans have rejected, along with efforts by Massachusetts Senator Elizabeth Warren, a Democrat to let about 25 million holders of student loans refinance their debt at a lower interest rate. Perhaps the biggest change in the field came without Congressional action: the Obama administration has sharply expanded programs in which ex-students make payments calculated as a percentage of income. Republican presidential candidate Senator Marco Rubio has also called for expanding income-based repayment programs. The income-based programs have a cost too: At least $39 billion over the next decade.
When the U.S. federal student-loan program began in 1965, its goal was to give students reliable access to funds that would help them get through college by deferring some of its cost until they had an income. Most loans were paid off in a few years, while the benefit of the degree lasted a lifetime. As the cost of college raced ahead of inflation, the federal loan program morphed into something larger and different. Commercial banks also ramped up their higher-interest lending for those whose needs exceeded the caps on federal loans. The biggest growth in the program came in the past decade, as student debt rose an average of 14 percent a year, to $966 billion in 2012 from $364 billion in 2004, according to New York Fed data. After July 2010, the government cut out banks as middlemen in the federal loan business. Much of the savings was used to increase college grants, but some went to reduce the budget deficit. Today, the majority of loans, almost $1.2 trillion, are federally backed. That figure has doubled since 2007 and expected to double again in a decade, according to the Congressional Budget Office.
Is the problem the loans or the cost of college the loans help students cover? A common criticism of proposals like Warren’s is that they don’t address the root problem of above-inflation tuition hikes. Making it cheaper to borrow, that argument goes, only makes it easier for schools to raise fees. Obama tried to address college affordability by proposing a ratings system for colleges that could potentially be tied to eligibility for federal aid, an idea that was dropped in the face of almost universal opposition from colleges. Both Republicans and Democrats have called for giving students information about how much they’ve borrowed each year instead of when they begin or leave a program. When students at Indiana University were told how much they would owe after graduation, undergraduate borrowing dropped by $31 million in one year. Scarcely debated in the U.S. is the path many other developed nations have chosen, of higher taxes to make public universities free or cheap. It’s an approach that harks back to the U.S. system of state universities. It’s also under pressure almost everywhere in an era of austerity.
The Reference Shelf
- Studies by the New York Fed and Pew Research looking at the effect of student loans on the economic well being of young adults.
- A June 2014 report by the White House on student debt.
- Resource pages from the U.S. Education Department and Consumer Financial Protection Board.
- An Organization for Economic Cooperation and Development survey of support for higher education.
- A Bloomberg News series on “Indentured Students” was awarded the 2012 George Polk award for national reporting.
- The Atlantic ran a set of charts in 2013 on “The Myth of the Student Loan Crisis.”