Should access to student loans be limited?

Controlling the student debt crisis
Posted at 11:26 AM, Sep 02, 2016

Student debt has passed the $1.2 trillion point, saddling both graduates and dropouts with seemingly insurmountable debt. Programs have been proposed to forgive some college debt, or even to make college free. If controls were placed on the access to student loans instead, would that help students and parents make wiser decisions?

Consider that federal student loan debt is one of the few kinds of debt that does not require any form of assessment on the ability to repay the loan. Anyone who has tried to get a student loan on the private market can see the difference in standards — and therefore, in interest rates.

There is an inherent assumption that college graduates will make a decent enough salary to pay back their student loans in almost all cases. If that assumption ever was true, it certainly isn't anymore.

Limiting student loans seems like a reasonable idea until you start considering how to establish the criteria. Using traditional underwriting methods would skew the process toward wealthier families and deprive high-performing students from poorer families of the chance to climb out of poverty through higher education. Yet research has shown that the majority of defaulted student loans come from poorer students, those who were ill prepared for college, and those who were not enrolled in schools that tend to lead to decent-earning jobs that enable repayment.

If a major part of the issue is lack of preparation for college, why not base the criteria on tests and grades, similarly to the college admissions process? That would address the preparations issue, but it could also keep out students who could thrive in college but need extra help to overcome a poorer primary and secondary educational experience. Junior colleges and transfer programs could provide that path, but with financial limitations across all colleges, these students would likely be shut out.

A hybrid approach involves using grants to assist less-accomplished students during an initial trial period (perhaps one year) and making loans available in future years for those who prove that they can handle the academic demands. Arguably, this is the fairest approach, but drawing the guidelines and thresholds for grants and loans could be tricky business. A 2.0 GPA at a prestigious university is not the same as a 2.0 GPA at the average junior college. Grade inflation by pressured universities could be raised to another level.

Could specific schools be part of the problem? Evidence suggests that some for-profit institutions account for a disproportionate number of defaults and are partly to blame for the rapid increase in borrowing. A study by the Brookings Institution found that over two-thirds of the defaults from students who left school in 2011 came from non-traditional students attending for-profit schools or community colleges. A sizeable number were older students going back to school to attempt to improve their position in life, with poor results.

Actions have been proposed to hold schools accountable for the employment rate of their graduates, or otherwise regulate for-profit and less traditional educational outlets, but most do not limit access to debt.

Given that the student loan delinquency rate has far outstripped the credit card and mortgage default rates, it seems critical to take action to direct students into better choices with their educational purchases and steer them toward lower debt proportional to job expectations. Perhaps at the same time, we can consider how to cap spiraling college costs. Restrictions on both ends may be the only way to stem the tide of college loan defaults.

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