When Congress passed bills overhauling federal student aid in mid-July, the rhetoric flew high. House Speaker Nancy Pelosi called them “the single largest increase in college aid since the GI Bill.” But the GI Bill radically transformed college from an elite bastion to a middle-class aspiration, while these long-delayed reforms merely regain some lost ground. Certain provisions in these bills could fundamentally change the way society shares the burden of college costs, but upholding the vision of a true meritocracy will require broader reorganization of student loans and even changes in the way colleges are run.
The bills contain $17 billion to $18 billion in new aid. The need-based Pell grant will increase 25 percent over five years; interest rate reductions and loan forgiveness will make loans more affordable. These benefits are paid for by $19 billion in subsidy cuts to the student lending industry. (Differences in the Senate and House versions have yet to be reconciled; a Bush veto threat looks shaky considering the Senate’s 78-to-18 margin.)
As generous as they sound, these reforms won’t make college as affordable as it was even fifteen years ago. College costs have more than doubled in constant dollars since 1985. Nine-tenths of all high school students recognize the value of a college degree, yet 400,000 forgo enrollment each year because they can’t afford it. Only a third of young people will earn a postsecondary degree. In 2004 two-thirds of graduates had an average $20,000 in student loan debt. Private, unsubsidized student loans have been growing at the staggering rate of 27 percent annually.
Philosophically, the most important innovation is income-based repayment. Under these new rules, those earning below 150 percent of the poverty line–about $15,000 a year for a single person–are exempt. Anyone can limit payments to 15 percent of his or her marginal income above that line. So a single mom earning $27,000 a year and owing $20,000 would pay back $80 a month, compared with more than $200 on conventional repayment plans. Taxpayers would make up the difference. After twenty-five years, all balances would be forgiven.
Income-based repayment works like systems in Northern Europe, Britain and Australia. Right now, the US system is booby-trapped. Those with large student loans and low incomes–whether because of illness, unemployment or career twists–have little recourse. Because of changes loan industry lobbyists won in 1998 and 2005, a few missed payments can turn into the nightmare of default, where debt balloons to four or five times the original balance. Yet there is no bankruptcy protection for either federal or private loans. College students who finance their education with student loans are making an investment that benefits themselves and society. Income-based repayment provides social backup if the personal investment doesn’t pay off–or for those who become preschool teachers, social workers or enter other crucial low-wage professions.
The fattest reform target is the student lending industry, which faces recent scandals over sweeteners it offered college financial aid officers. About 77 percent of federal student loans are administered by lenders in the Federal Family Education Loan Program (FFELP), with federally guaranteed returns and guarantees against default, while the remaining 23 percent comes from the Treasury through the Direct Loan Program. Direct loans are much cheaper for taxpayers, even after these subsidy cuts.