What Will the Presidential Candidates do About the Student Loan Crisis?

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Students protest the rising costs of student loans for higher education on Hollywood Boulevard on September 22, 2012 (Photo by David McNew/Getty Images)

By now, most people are at least generally aware of the depressing state of the cost of higher education in the U.S. and the burdens it’s placing on students and their families.

To illustrate the alarming speed at which this problem is growing, the Department of Education (DOE) estimated that the price-tag for a four-year public university rose 15 percent in only two years — between 2008 and 2010. The cost of private colleges increased by about 10 percent in the same time period. And, with outstanding student loan debt topping over $1 trillion and nearly 20 percent of American families owing student loan debt (a record), the student loan dilemma has been likened to the housing crisis that was a driving factor in the recession.

With these figures and trends, it is screamingly clear that the student loan crisis is becoming a problem that is growing larger and larger with each new crop of undergraduates beginning their college years.  Also, it’s not a problem that only affects students and their families; rather, the crisis is having an impact on a broad swath of the electorate. Not surprisingly, investment in higher education (read: making college more affordable and accessible) contributes to economic growth.

Those who have been following the presidential election are probably familiar with various snippets from the campaign trail and the first two presidential debates. To many, however, the statements from the presidential candidates might seem like political platitudes. So, what do the presidential candidates and their vice-presidential counterparts intend to DO, if anything, about the student loan crisis?  Americans of all stripes and political affiliation deserve an honest answer to that question, free of political zingers and positions that change with the wind.  Through research, I have discovered that there are multiple notable distinctions between the presidential candidates in regards to how they would address this ever-growing problem.  Below are some of the major student loan reform issues and where the candidates seem to stand on each one.

1.  The Role of the Private Sector

First, perhaps not surprisingly, the candidates differ on an ideological level in regards to what role they believe the private sector should play in the student loan industry. Obama has been more speculative than Romney in regards to private lenders, and that concern is reflected in Obama’s legislation. In March 2010, Obama signed the Student Aid and Fiscal Responsibility Act (SAFRA) into law, with a provision that removed the Family Federal Education Loan (FFEL) program.  That program had provided federal subsidies for private student loans that private banks issued to students. Obama touts this reform as saving millions of dollars (including, for example, lending fees that no longer need to be paid) for the government because the government no longer needs to channel funds through the “middlemen” — the banks.  As a result of these savings, Obama argues that the government has been able to reallocate those funds to increase aid to students.

Romney, by contrast, seeks to increase the role of the private industry in higher education.  This is a theme that pervades much of his platform for student loan reform.  While Romney believes that increasing the presence of private lending institutions (some of which would be subsidized by the federal government like what occurred under the FFEL program) in the student loan market is a good idea because it would provide more options for students, many people have critiqued that idea for a range of reasons. For example, as mentioned above, it has been argued that the FFEL program was inefficient and unnecessarily costly because the government had to fund the middlemen.  Obama removed the middlemen, but Romney wants to reintroduce them.

In addition, private loans can be more burdensome on students because interest rates are often higher than government loans and because government loans usually have more repayment options. Moreover, the Consumer Financial Protection Bureau’s recent report suggests that graduates attempting to repay private loans are facing difficulties similar to those that mortgage borrowers faced during the apex of the housing crisis.

2.  Interest Rates

Obama has made a concerted effort to keep interest rates low on federal student loans. First, one of the effects of eliminating the FFEL program is that the loans that the government issues directly to students now typically have lower interest rates than the loans that private banks issued under the FFEL program. Second, this summer Obama pushed Congress to pass legislation aimed at preventing the interest rate on government-funded Stafford loans from doubling from 3.4 percent to 6.8 percent for approximately 7.5 million students. The President was successful in his campaign to extend the lower interest rate as Congress passed the measure despite objections from some congressional Republicans.

Romney also supported the low interest rate extension on Stafford loans, but he has indicated that he supports only a temporary extension and is against long-term government involvement in this issue.

3.  Income Based Repayment Program

Another part of Obama’s student loan reform legislation is the Income Based Repayment Program. Under that program, graduates can repay their loans based on a cap of 10 percent of their discretionary income, which is money left over after living expenses and taxes. Also, the government will forgive any debt remaining after 20 years under this program.

In contrast to Obama, Romney is against this program because he believes the program does not directly address the issues that cause ballooning debt.  Instead, Romney has again proposed increased “‘private-sector involvement to ensure students are clearly informed about their obligations when they apply for federal student loans, and that they receive support that goes beyond a call from a collections agent to help keep them on track to repayment.’”

While there do appear to be some issues with the Income Based Repayment Program, such as low student-awareness that this particular repayment plan is even an option, the Obama administration has been trying harder in recent months to raise awareness and rectify other problems associated with the program.

4.  Pell Grants & Federal Spending on Student Aid

The federal Pell grant program provides college funding to low-income students; unlike loans, however, students do not need to repay grants. Romney and Obama have conveyed dissimilar visions in regards to the future of the Pell grant program, with Obama in favor of expanding the program, and with Romney in support of cutting funding for the grants as well as making it more difficult to qualify for a Pell grant. During the second presidential debate, however, Romney appeared to change his position on this issue. Because Pell grants are reserved for needy students, serious cuts to the program could have a detrimental effect on the access of low-income students to higher education.

Part of Romney’s perceived (initial) plan to “refocus” the Pell program was based on the theory that increasing student aid contributes to the rising tuition problem. This theory makes sense in that if “you subsidize something, it increases demand and prices go up.”  Research has shown that there could be such a connection; but it is unclear as to what type of aid causes such tuition hikes, which schools raise tuition, and the degree to which the increased aid truly contributes to increased tuitions. Furthermore, in response to Obama’s call to universities to restrict rising tuition or else risk losing federal money for student aid, multiple college presidents expressed their view that the math necessary to lower tuition is not as simple as Obama has implied.

5.  Education Tax Credit

Obama has embraced extending the American Opportunity Tax Credit — worth up to $10,000 for four years of higher education for families and individuals.  Many American families have relied on this tax credit in funding their children’s college education.  Romney’s tax plan, however, indicates that he would let this tax credit expire.

6.  For-profit Colleges

Finally, which man is elected this fall will have an impact on the role that for-profit colleges play in the higher education world. In an attempt to address some indicators that for-profit colleges had been engaging in deceptive student-recruiting practices, the Obama administration implemented the “gainful employment rule.” Under that rule, applicable schools are required to make certain disclosures to potential students, meet a specified graduation rate, and adhere to student debt and employment standards — otherwise, the schools risk losing federal funds for student aid. Recently, however, a federal judge, struck down the rule. But the Obama administration has pledged to rework the law.

Romney’s view on for-profit colleges differs starkly from Obama’s. Romney would like to increase the presence of for-profit colleges to expand options for students, and he opposes increased regulations on schools. Romney’s education aide has stated that a Romney administration would immediately eliminate the gainful employment rule — thus, Romney would likely remove Obama’s potential new version of that rule.

While the candidates have made multiple policy proposals for how to solve the student loan crisis, the effectiveness of many of the policies is still up for debate.  And, ultimately, we cannot rely solely on politicians to fix the problem. We are already seeing innovative ideas at the university-level to decrease student debt. For example, the University of Texas at Austin is instituting a pilot program next fall whereby the University will forgive a significant portion of 200 incoming students’ loans who graduate within four years. While the buck does not stop at the university-level either, the University of Texas experimental program is at least a good start in attempting to make higher education more accessible to all.

About Nisha Ajmani

Nisha Ajmani is a recent law school graduate from the University of Oregon, and she graduated from Bowdoin College with a B.A. in Religion with a Psychology minor. She’s particularly interested in Constitutional Law, Criminal Law, and Consumer Protection issues, and in her spare time, she loves to bake (as she’s a self-professed sugar junkie), swim, and hang with her tuxedo cat, Izzy.
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