Bipartisan opportunity to right size federal student lending

Senate Health, Education, Labor and Pensions Committee Chairman Lamar Alexander (R-Tenn.) and Ranking Member Patty Murray (D-Wash.) are at it again.

In 2015, these leaders achieved a bipartisan update to the nation’s elementary and secondary education programs and they are teaming up once again to tackle one of the nation’s biggest challenges: reforming our costly higher education system.

With showdowns on federal spending and immigration front and center, it is easy to overlook these real examples of bipartisanship occurring on Capitol Hill.

College tuition is at an all-time high and federal student loan debt is soaring. Year after year, college costs rise well above the rate of inflation. The College Board, an organization that tracks college pricing, has found average annual tuition and fees now total $9,970 at public four-year institutions and $34,740 at private non-profit four-year intuitions. As a result, students and their families are saddling themselves with debt to achieve their higher education dreams. On average, federal borrowers owe more than $30,000.

Now is the time for a bipartisan solution to drive down costs and provide options for students and their families. One way to do that is by right-sizing federal student lending.

The Department of Education enables soaring tuition costs by originating nearly $100 billion in loans annually, making it America’s fifth largest bank. In fact, the federal government dominates the $1.5 trillion student loan market as it holds more than 92 percent of all loans.

Ensuring access to higher education is an important and worthy mission. Unfortunately, the federal loan program does not consider a student’s or parent’s ability to repay their debt. Not only is it damaging to a consumer’s budget to lend more than one can reasonably afford, but this federal over-lending is fueling the high cost of college.

When colleges have unfettered access to students with federal funds up to the cost of attendance through the PLUS loan programs, there is little incentive to control costs. In fact, there is a direct correlation between federal lending and the cost of college. Every dollar increase in federal loans adds between $0.25 and $0.63 to the price of tuition, according to the Federal Reserve Bank of New York.

For some students, a large loan balance may be manageable given their job prospects, but for many others it can be a drag on their futures. This could mean putting off buying a home, having a family, or even retiring. Borrowers should make responsible tradeoffs for such an important investment, but it’s time the government stops fueling the tuition bubble and saddling students with unnecessary debt they cannot repay.

According to recent Department of Education data, 22 percent of federal borrowers – or 4.6 million Americans – in repayment have defaulted on their federal student loans.

Previous responses to these staggering figures has been to increase enrollment in income based repayment, but the debt burdens continued to grow. By the end of 2016, enrollment in income based repayment plans grew to 5.6 million enrollees, accounting for 40 percent of loan volume. Many borrowers use this program to “pay” nothing and still be current on their income based repayment plan. What that means is the percentage of borrowers whose debt has grown while in repayment has increased from 8 percent in 2008 to 12 percent in 2016. The New York Fed also found many of the loans in these repayment plans were actually originated in wealthier areas, meaning the initiative is not helping the very people it was created for. It’s time for a new approach. 

Congress has an opportunity to prevent future student loan debt problems before they start by rethinking the Department of Education’s status as the fifth largest bank. Restraining unlimited federal lending and opening the marketplace to responsible private lenders who evaluate program success and measure an ability to repay would provide options for students and their families and help drive down the cost of college. This approach would allow students with means to access the private market as they should and ensure government subsidized loans are available for those most in need – benefiting taxpayers and students alike.

Alexander and Murray should seize on the opportunity to challenge the status quo and take bold steps to right size federal student lending and ensure higher education is affordable for generations to come. 

Richard Hunt is President and CEO of Consumer Bankers Association.