Federal student loan program doesn’t need more regulations, Baker Institute expert says

David Ruth
713-348-6327
david@rice.edu

Jeff Falk
713-348-6775
jfalk@rice.edu

Federal student loan program doesn’t need more regulations, Baker Institute expert says

HOUSTON – (Dec. 20, 2018) – More regulations would only make the existing federal student loan programs more complicated, according to an expert in the Center for Public Finance at Rice University’s Baker Institute for Public Policy.

Credit: 123RF.com/Rice University

Joyce Beebe, a fellow in public finance, said the federal government and Congress should focus on simplifying and consolidating existing programs. She outlined her insights in a new report, “The Current Student Loan Landscape and Recent Developments.”

At the end of 2017, 44 million Americans collectively owed $1.4 trillion on student loans, according to Beebe’s report.

“Although the statistics vary slightly across different data sources based on student loan providers, the vast majority are federal student loans,” she wrote. “Most of the $1.4 trillion balance was accumulated within the last decade; according to a study by the Office of Inspector General in the Department of Education, the student loan balance was $687 billion at the end of fiscal year 2009, which means the outstanding loan balance has essentially doubled since the financial crisis.”

Around the last quarter of 2009, student loans also surpassed auto loans and credit card debt as the second-largest household debt for American families, exceeded only by home mortgages, Beebe said. In the 2015-2016 academic year, 37 percent of undergraduate students used federal student loan programs to borrow an average of $19,000, a Congressional Budget Office study concluded. Graduate students amassed much more debt, the CBO reported, with 40 percent of grad students borrowing an average of $63,000 (including what they borrowed during their undergraduate years).

But a Federal Reserve Board study expanded beyond federal student loans to include other borrowing channels used to finance college expenses, including credit cards, home equity lines of credit, auto loans and borrowing from relatives. The study found that in 2017, more than half of young adults under 30 who attended college borrowed to finance their tuition, with average debt between $20,000 and $25,000.

There is no shortage of proposals to change the current federal student loan program.

“The Trump administration proposed an overhaul of the Income-Driven Repayment programs system in the FY 2019 budget,” Beebe wrote. “The administration’s plan calls for the consolidation of the various repayment plans into one that has different repayment terms (15 years for undergraduate students and 30 years for graduate students for loan forgiveness), while capping monthly payments at 12.5 percent of discretionary income. In addition, the Public Service Loan Forgiveness (PSLF) will be eliminated.”

Congress has also taken different approaches to improving the system. In 2016, several representatives introduced the Relief for Underwater Student Borrowers Act (H.R. 5617) and Student Loan Tax Debt Relief Act (H.R. 2429), which would essentially exclude discharged student loan debt from taxed income so that borrowers would not have to pay taxes on these forgiven loans, Beebe said. Neither of these proposals have gone anywhere on Capitol Hill.

On the other hand, the PROSPER Act (H.R. 4508, also known as the House Republican plan) proposed ending loan forgiveness and imposing a cap on total payments. This 542-page proposal called for a standard 10-year repayment plan and one income-based plan, discontinuing the PSLF program for new borrowers; it emphasized empowering families and students to make informed decisions about student loans. This plan was never voted on, but a portion of it became the Empowering Students Through Enhanced Financial Counseling Act (H.R. 1635), which passed the House in early September. That bill would require student loan recipients to receive counseling every year, as opposed to the current system requiring counseling only once when students take out their loans. It would also mandate counseling for Pell Grant recipients and parents borrowing money to finance their children’s education.

The Tax Cuts and Jobs Act (TCJA) of 2017 also made an important change to the tax law on canceled student loan balances, Beebe said. Prior to the TCJA, if a borrower died or became permanently disabled, the Department of Education would forgive the student loan but the family was required to report the forgiven amount as income. The TCJA changed the rules to allow discharged student loans to be excluded from taxable income under these circumstances. To prevent abuse, a doctor must certify disability, and approval is subject to a three-year monitoring period.

“We do not need more regulations to make the existing federal student loan programs more complicated, Beebe concluded. “Instead, the effort should focus on simplifying and consolidating existing programs. Overly generous programs such as the PSLF need to be tightened to avoid disproportionally benefiting higher income groups. Furthermore, students and their families are more likely to make good decisions if they are better informed about the costs and benefits of college education, including options for financial aid, employment prospects, risks, potential debts and repayment responsibilities.”

From the government’s perspective, because borrowers with certain characteristics may have higher risks of default, there may be a need for policies that focus on addressing obstacles these borrowers encounter or difficulties that prevent them from making informed decisions, Beebe said. “These policies will lead to positive outcomes in terms of increased government revenue, manageable amounts of loans and ideal levels of students’ education investment,” she wrote.

For more information or to schedule an interview with Beebe, contact Jeff Falk, associate director of national media relations at Rice, at jfalk@rice.edu or 713-348-6775.

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Related materials:

Report: https://www.bakerinstitute.org/media/files/files/f34ecd01/bi-report-121418-cpf-studentloans.pdf

Beebe biography: www.bakerinstitute.org/experts/joyce-beebe

Baker Institute Center for Public Finance: www.bakerinstitute.org/center-for-public-finance.

Founded in 1993, Rice University’s Baker Institute ranks among the top five university-affiliated think tanks in the world. As a premier nonpartisan think tank, the institute conducts research on domestic and foreign policy issues with the goal of bridging the gap between the theory and practice of public policy. The institute’s strong track record of achievement reflects the work of its endowed fellows, Rice University faculty scholars and staff, coupled with its outreach to the Rice student body through fellow-taught classes — including a public policy course — and student leadership and internship programs. Learn more about the institute at www.bakerinstitute.org or on the institute’s blog, http://blogs.chron.com/bakerblog.