Canceling student loan debt is just the start

There is much we don’t yet know about President Biden’s anticipated plan for student loan forgiveness. One thing is certain though: while this will benefit millions of borrowers, it will not fix our broken student loan system. We need to help people who are struggling with student debt, but providing limited forgiveness today will not help all current or future borrowers. 

To avoid forcing today’s and future students into the same debt morass, we must modernize the federal student loan program. Congress, state legislatures, federal agencies, loan servicers, and colleges and universities have all contributed to the current mess, and all must now contribute to cleaning it up.

Congress Must Act

A big part of the problem is that student loans cost more than they should. Congress sets student loan interest rates in law, and the current levels are far higher than what it costs the Treasury to borrow. The goal of federal student loans is to provide access to education, and they should be priced as affordably as possible.

Borrowers should be in a system that minimizes costs, protects them from harm, is simple to understand, and easy to operate. When students enter repayment, they face as many as seven repayment plans and up to 13 cancellation and forgiveness options. Congress should reduce the confusing number of repayment plans and provide borrowers with a default income-driven repayment plan that tailors payments to earnings, ensuring that borrowers don’t pay more than they can reasonably afford.

The interest that accrues on loans should be capped, so we don’t see any more borrowers faithfully making payments, yet falling farther and farther behind. Congress must make existing forgiveness programs, like Public Service Loan Forgiveness, easier to access and work better. Finally, for those borrowers who are truly not able to repay their loans, Congress must restore the ability to discharge student loan debt through bankruptcy.

Loan Servicers Must be More Effective

The labyrinthine student loan operation is run by an understaffed Department of Education, which contracts the job of servicing these loans to for-profit businesses selected primarily because they are cheap, not because they do the job well and effectively.  

The Department of Education needs to enhance its administrative and technical capacity with a priority on customer service at the same time—and cut off poorly performing servicers.

State Legislatures Need to Step Up

More than 70 percent of the nation’s approximately 20 million college students attend public, state-run institutions of higher education. But over the past several decades, many state legislatures have largely walked away from their responsibility to provide adequate funding for their states’ public universities.

State disinvestment is a major driver of rising tuition prices at public colleges and universities—and a big reason why many students have been forced to borrow more to pay for college.

Colleges and Universities Must Do Their Part

Institutions own a share of this problem and must address it, providing students and families with transparency and predictability as they make decisions.

First and foremost, college leaders should look at every program they offer and ask if they are preparing students for success. If not, those programs must be overhauled or ended.

Colleges and universities must examine ways to explain their pricing to current and prospective students, using transparent and easily understood financial aid award letters. The National Association of Student Financial Aid Administrators has already proposed a model to follow, and implementing it doesn’t require anything other than campus leadership.

Another model to consider: institutions that are freezing tuition for several years at a time and offering price guarantees. This may not be right for every campus, but every institution would be well served by exploring ideas like this.

Other tools, such as Congress granting schools the ability to limit how much students can borrow and requiring borrowers to receive counseling about the debt they are taking on, would help limit the risk to students. Doing this right will be tricky, but providing colleges and universities with the flexibility to tailor the amounts students can borrow based on likely outcomes would help ensure students don’t borrow too much. And in order to speed the time to a degree and lower costs, schools must ensure that students don’t face needless barriers when they seek to transfer credit earned elsewhere.

There is no magic bullet. Congress, the Department of Education and loan servicers, state legislatures, and institutions must roll up their sleeves now and together find ways to make the student loan program more borrower friendly while protecting the taxpayers, and to put that into effect as quickly as possible. 

Ted Mitchell is president of the American Council on Education (ACE).