Hear from John Hickenlooper, former Colorado Gov. and Democratic presidential candidate about his thoughts on student loans and debt, April 12, 2019.
Zachary Oren Smith, Iowa City Press-Citizen
The federal government should abide by the same disclosure standards as private lenders. In addition, responsible caps are needed.
The University of Tennessee made news recently with its announcement to offer four-year college tuition at no cost to qualifying low-income students. Like Tennessee, many states and the federal government are exploring wide-ranging options to make college more affordable.
As Congress prepares to reauthorize the Higher Education Act, ideas for reform are coming in from both sides of the political aisle, ranging from loan forgiveness or “free” college, after-the-fact loan servicing reforms, and the Trump administration’s ideas, including caps on federal loans and requiring colleges to have more skin in the game.
One thing that gets lost in the “who’s-up, who’s-down” coverage of this debate is why American student loan debt ballooned from about $600 billion to $1.5 trillion in just a decade.
The bottom line is that the federal government’s student loan program, which originates about 90 percent of all student loans, has driven this increase, essentially making the U.S. Department of Education our nation’s fifth largest bank. And while 98 percent of privately funded student loans are repaid successfully, borrowers of government funds are experiencing double-digit delinquency and default rates.
A problem of this magnitude starts at loan origination and is not solved by loan forgiveness or tweaks to back-end servicing.
So why the disparity between private and federal loans? Perhaps because the federal program provides nearly unlimited lending, is not customized for a borrower’s needs or ability to repay, and lacks the most basic of consumer protection practices like personalized disclosures outlining a loan’s annual percentage rate and monthly payments – all standard practices among private lenders.
Let’s call this crisis what it is: a federal student loan debt crisis.
Placing responsible limits on federal loans will allow students to achieve their higher-education goals without taking on insurmountable levels of debt. The removal of the previous cap on Parent PLUS loans and the subsequent creation of the Grad PLUS program has helped fuel increases in college tuition.
In a recent survey of 1,000 registered voters, conducted earlier this year by the Consumer Bankers Association, nearly 85 percent support placing responsible caps on federal loans that offer access to a quality education without setting up a debt trap post-graduation. Likewise, the administration proposed placing caps on the Parent and Grad PLUS programs.
Here are five ways to get those loans paid off, suggested by Forbes.
Katie Sullivan / Staff Video
Nearly unlimited federal lending programs have fueled this crisis and, while we welcome debate on the merits of caps and other debt solutions, one thing that needs no debate and should receive unanimous approval is requiring the federal government to abide by the same disclosure standards as private lenders.
Under the Truth in Lending Act, private lenders must provide a clear, plain-language disclosure on loan costs and terms before disbursement, and the information must be tailored to the individual borrower. With a complete picture of the proposed interest rate, loan fees, annual percentage rate, monthly payment amount and total cost over the life of the loan, borrowers are able to make informed and educated decisions about their financial futures.
This no-brainer, common-sense reform is supported by 90 percent of survey respondents.
In addition to clear loan disclosures, respondents widely supported the availability of loans that provide borrowers many options. Federal loans, while good for some borrowers, offer a one-size-fits-all approach. Private loans, on the other hand, offer fixed and variable interest rates, various lengths of time to repay and multiple repayment options – options supported by 87 percent of those surveyed.
Finally, private lenders consider a borrower’s ability to repay the loan. By ensuring borrowers take out only what they can afford, private student loans set students and their families up for success. Uncapped expansions in federal lending, on the other hand, have encouraged over-borrowing. The New York Federal Reserve has directly tied federal aid to increases in tuition costs.
At the end of the day, the federal government certainly has a role to play in helping Americans finance their higher-education goals. However, borrowers need to know all the facts and explore all their options. We have called on Education Secretary Betsy DeVos, as well as Consumer Financial Protection Bureau Director Kathy Kraninger, to adopt the same disclosures for federal loans as private loans. While not a silver bullet, better disclosures when combined with reasonable, responsible caps on federal student loans would go a long way in helping students and families achieve their higher-education goals without the burden of insurmountable debt.
Richard Hunt is president and CEO of the Consumer Bankers Association.
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