With the 2016 Presidential Election just days away, we’ve gotten to hear from both candidates about their plans to combat the growing problem of student loan debt. And despite the fact that we are not personally running for office, we wanted to throw our hat into the student debt ring and offer our official “Student Debt Election Platform” that we think would go a long way toward curing this problem once and for all.
This platform is a simple 7-point plan that attacks the problem from all angles and would clean out much of the rot currently embedded in the student loan system. The result would be a much simpler, more efficient, and beneficial environment for everyone, especially student borrowers!
So, with that in mind, let’s get started.
Expand Pre-Student Loan Counseling.
Let’s face it, most borrowers don’t understand what they’re getting into when they take out student loans. They haven’t considered how much they’re borrowing, or how long it will take to repay it, or the job market they’ll likely be entering, or whether their field of study will even lead to a job that would make repayment possible… the list goes on.
However, this problem could easily be fixed from the very beginning. While there are current mandatory counseling requirements to meet before you receive a federal student loan, the results leave much to be desired. The counseling is done online through FSA in individual 30-minute sessions with only the Entrance and Exit sessions shown as required. This leaves plenty of room for borrowers to simply play the session and then tune out completely.
While the current method may be simple, it is not proving to be effective. Expanding the mandatory counseling to better engage with borrowers and ensure that they fully understand both the benefits and responsibility of their new loans would go a long way toward reducing future problems.
Here are some points that expanded counseling could (and should) cover:
- Total loan amount, term, and interest rate details
- Average starting salary in their chosen field of study
- Percentage of students who graduate with a job offer (or gain employment within 3-6 months of graduation) in their chosen field
- Loan repayment schedule, timetable, and total repayment amount (including interest by the end of the term)
- Potential repayment and forgiveness options post-graduation
- Consequences of lack of repayment
Loan counseling should ensure that future borrowers have all the facts up front before making a decision. These facts might convince some student who would get the least benefit from a college degree to forgo it entirely. Either way, expanding mandatory counseling as a provision for student loans is an ideal first step to both educate new borrowers and reducing the student loan crisis in the future.
Ban For-Profit Colleges From Receiving Government Funds.
Our next step is to keep government funds away from for-profit colleges going forward. We believe for-profit colleges have every right to run their schools as they see fit and to profit accordingly. However, the receipt of government funds often allows them to benefit significantly at taxpayers’ expense.
Taxpayers should not be forced to subsidize these schools against their will and with no mutual benefit. Letting both private and public schools operate as they see fit (and adjust accordingly going forward) would be a much better option.
There have been increased efforts recently by the Department of Education to crack down on for-profit schools amid allegations of predatory lending, deceptive sales practices, and false statements regarding graduation rates and post-graduate salaries. The unfortunate reality is that many for-profit schools rely on low-income students with federal loans as their main source of income without delivering on many of their graduation promises.
Recent examples of this include ITT Tech and Corinthian, two of the largest for-profit schools in the US, who recently shut their doors permanently after being banned by the Department of Education from accepting students with federal loans.
Unfortunately, mixing federal funds and for-profit colleges creates negative consequences that are almost always shouldered by the borrowers and taxpayers. We think keeping the two separate going forward is an appropriate step.
Simplify the Income-Driven Repayment (IDR) Programs.
It’s no secret that IDR programs can be extremely helpful to student loan borrowers. They can offer both flexible repayment programs as well as forgiveness options. However, the complexity of many of these programs often makes them very tough to navigate. The unfortunate result is that many borrowers simply give up and stick with their standard repayment schedule, wasting thousands of dollars per year in the process.
A practical solution would be to have only one income-driven repayment program instead of several. This one program could comprise the best aspects of all current programs and be as inclusive as possible. With one simple and easy-to-understand option, it would be much easier to attract and enroll eligible borrowers.
Which leads directly to our next point…
Increase Awareness of IDR Programs.
Studies have shown that only a small percentage of eligible borrowers are even aware that these IDR programs exist. For Income-Based Repayment (IBR) programs alone, only 10% of those eligible are currently taking advantage of them. While the government has made some noble efforts to increase awareness, there is still a lot of room for improvement.
One recent development has been enlisting the help of potential employers to help spread the word. These employers can offer student loan assistance as a hiring perk, often in place of retirement accounts (which the new hires strongly prefer), and receive a tax incentive as a result. Working with both public and private sector employers to increase awareness and offer incentives for student loan assistance would be an excellent way to get more borrowers into these programs.
Even a 10% increase in enrollment in IDRs would translate into hundreds of millions of dollars a year in savings which could otherwise be put to good use by borrowers…
Improve Loan Servicing Issues.
Between poor customer service and unnecessary red tape by many student loan servicers, many borrowers have struggled to get their student loans under control through no fault of their own. Streamlining and simplifying the processes that loan servicers use to handle borrower issues would go a long way toward solving this.
One recent development has been Federal Student Aid, the government’s loan servicer for all federal student loans, creating a new online platform to assist borrowers with all aspects of managing their student loans.
According to the Department of Education, this new platform will have the following features:
- Allow borrowers to manage all aspects of their student loans through a single online portal (including making payments, applying for benefits, managing their account, etc.)
- Improve communication with borrowers on all aspects of their loans and available options
- Avoid borrower confusion by creating a uniform experience for all borrowers
- Improve oversight of individual vendors
- Increase cost efficiencies and loan allocation metrics that reward customer service partners for effective outcomes (such as managing payments and avoiding defaults)
- Include an integrated complaints processing system to ensure vendor accountability
- Collection and release of data to the public to increase transparency and vendor performance
All of these improvements are necessary and will make it much easier for borrowers to handle their student loans once in effect. Although not scheduled to be up-and-running until next year, we’re glad to see the much-needed progress actually being made.
Reform the Tax Laws On Student Loan Forgiveness.
One of the few drawbacks about student loan forgiveness is that under current tax laws, forgiven loan amounts are considered additional income and are therefore subject to taxation. This goes not only for IDR programs, but loans discharged because of death or disability as well.
This frequently results in a substantial (and often unexpected) tax bill at the end of the year for the borrower. Just when the borrower thought they’d met their obligations and were free and clear of their student loans, they are saddled with a huge tax burden as a result. When it comes to forgiving student loans, removing the “IRS asterisk” would be a great step.
Thankfully, there are already efforts underway to fix this problem. One piece of proposed legislation called the Student Loan Tax Relief Act would exempt student loans discharged for any reason from being taxed as income. While progress in this area has been glacial at best, we are seeing signs of improvement in the future.
Bankruptcy Reform For ALL Student Loans.
Getting student loans discharged through traditional bankruptcy proceedings is no easy feat. Being able to prove that repaying your student loan would cause an “undue hardship” is often so difficult that many borrowers don’t even bother. While there are Congressional efforts currently underway to help borrowers needing to discharge student loans, those efforts are receiving minimal support.
Creating a path for discharging student loans through bankruptcy is something that should be made available for certain borrowers. While this process should understandably involve strict criteria, it should not be as “off the table” as its current form suggests. Unfortunately, this may be one of the more difficult changes to make in the student loan arena.
In order to get the ever-increasing problem of student loan debt under control, there will need to be significant changes made to several different areas of the problem. We believe that our 7-point plan addresses each of these areas and offers both simple and effective solutions.
Unfortunately, our name will not be on the ballot for 2016…
We hope you enjoyed this article and we will definitely have more information for you after election day.