We have all seen the worrisome headlines about student loans.  The New York Times Upshot (10/7/15) titled “Student Debt is Worse Than You Think” is just one that comes to my mind.  More recently there have been discussions about the role of student loans play in delaying millennials’ life decisions, from marrying to buying homes.

Hillary’s ‘New College Compact’ offers to Combat Key Student Loan Concerns...Does It?

Is it really such a problem?

In a presentation by the New York Federal Reserve Bank, it was reported that there was an 89 percent increase in the number of borrowers and a 77 percent increase in the average balance size between 2004 and 2014. This sounds ominous.

One imagines millions of undergraduates finishing school with large five-figure debt balances. In reality, only 2 percent have balances of more than $50,000. Forty-three percent borrowed less than $10,000. 72 percent less than $25,000.  Those borrowing larger sums for graduate school aren’t the problem either.

A closer look at the data

Adam Looney and Constantine Yannelis wrote a Brookings Paper (www.brookings.edu) for a conference this past fall. It digs into data recently made available by the Department of Education.

Take two or three minutes to watch the video summarizing the facts behind the crisis.

So the problem is NOT with 4-year colleges and their graduates. The default issue and rising borrowing can be attributed primarily to the for-profit institutions, and community colleges.

The students attending these institutions often don’t finish their programs. Their unemployment rate is much higher and income lower than their 4-yr degree counterparts.  By 2011, for-profit and community college borrowers represented 50% of student borrowing and 70% of the defaults.

What has been done to address the problem?

As early as the 1990s, Sam Nunn of Georgia started an investigation into the abusive practices at for-profit colleges.  Congress created a rule called the cohort default rate to manage/punish any institution falling above certain default thresholds.

About 1500 institutions were kicked out of the financial aid program.  Student borrowing has dropped 44 percent at for-profit schools since 2011.

Can Hillary’s New College Compact do more?

Let’s look at Hillary Clinton’s New College Compact. The plan aims to reduce students’ need for debt if they attend public institutions. It’s first element is FREE community college tuition.

The second key element of the plan aims to reduce borrowing for books and living expenses.

  • Pell Grants can be used for living expenses
  • Students will work 10 hours per week to defray these expenses
  • Parents who can afford to pay will pay

The final element focuses on student loans themselves.

  • Interest rates will be lowered
  • Previous loans can be refinanced
  • All borrowers will be eligible for income-based repayment

While much more focused on the debt reduction than Bernie Sanders’ Free Tuition plan, Hillary’s plan still relies on states stepping up to the plate and investing more in higher education.  They will need to make that investment in order to get federal grants to defray the additional costs of her plan.

But it is not clear how much the states will have to fund.  Fact is, states have been cutting back on higher education funding. So this will be a “huge” issue, to borrow a Trumpism.  These budget cuts are an issue that Hillary has hammered Bernie on in debates as recently as the Brooklyn rumble ahead of the New York primary.

Where will the federal funding come from?  To quote her website:

“Fully paid for: This plan will cost around $350 billion over 10 years—and will be fully paid for by limiting certain tax expenditures for high-income taxpayers.”

While the word “expenditures” must be a typo, the implication is that they meant to use the word “deductions.”   (I must note that I am disappointed that the wording on this has not changed since I first looked at it in October.) That would be in line with her stated desire to raise taxes on individuals with higher incomes.

That would also match the conservative criticisms of her plan, citing that charitable donations will drop if they can’t be deducted.  What those critics don’t realize is that there is already a very complicated set of rules in place limiting deductions based on income!!!