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How to Fix the Student Loan Debt Crisis

Aug 4, 2010 Jennifer Williamson, Distance Columnist | 0 Comments

Two out of three graduating college seniors leaves school with some level of student debt. And there are few protections for student debtors—it’s notoriously difficult to declare bankruptcy on a student loan, and consumer protections are proving inadequate. Some studies suggest as many as one in three students has to default on a student loan.

So how can we fix this broken system? Several groups have had ideas. Here are a few.


The Project on Student Debt


According to the Project on Student Loan Debt, the solution to the student loan debt crisis comes in five parts: 

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  • Limiting the amount of loan payments to a small percentage of a graduate’s income.
  • Calibrating that percentage limitation based on the size of the borrower’s family.
  • Protecting borrowers in financial hardship from high interest rates.
  • Canceling outstanding student debts after borrowers have made regular payments for 20 years.
  • Increasing the number of people who have access to need-based Pell grant aid.

The Project on Student Debt particularly advocates for wider access to Pell grants, because this is the only type of federal aid that isn’t loan-based. Other federal aid usually includes subsidized loans that may offer lower interest rates than private student loans, but that are notoriously difficult to discharge in bankruptcy—leaving students with few options if their debt burdens that are simply too heavy to bear.

They also advocate for stronger consumer protections on private student loans. They ask for the government to treat federal student loans as they would any other type of loan, allowing the same bankruptcy options and improving data collection and transparency on all student loans.


Forgiving Student Loan Debt


In the beginning of 2009, two Facebook groups were started to gather support for a request to President Obama to cancel all student loan debt. The largest group, Cancel Student Loan Debt to Stimulate the Economy, was founded by New York City lawyer Robert Applebaum. The second, Stimulate the Economy: Forgive Student Loans, has over 40,000 signatures for its petition.

Robert Applebaum argues that forgiving student loan debt would have an immediate positive impact on the economy—freeing students to spend more, improving credit markets and housing markets.

There are arguments for and against the effect this would have on the economy as a whole—although there is no doubt it would improve the lives of millions of students nationwide.


Barack Obama’s Student Loan Overhaul


While he hasn’t decided to completely forgive all student loans, President Barack Obama has made significant loan reform—and he’s taken a cue from the Project on Student Debt’s wish list. Measures signed into law during his term include: 

  • An end to subsidies to special-interest private lending companies, freeing up money that can be spent on Pell Grants.
  • Doubled funding to Pell Grants, increasing the amounts of individual grant money and widening the number of students that qualify.
  • Legislation that caps graduates’ annual student loan payments at 10% of income.
  • The Income-Based Repayment Plan (IBR). If you qualify, you could be required to pay much less than 10% of your income toward your student loans—the government will subsidize your payments. And after 25 years of regular payments, your loan will be forgiven.

One problem with the Income-Based Repayment legislation as it stands now is that it requires all loan amounts forgiven to be taxed as income, which could potentially create financial problems for borrowers. The Obama Administration supports eliminating this requirement, but couldn’t get it passed into law. The Project on Student Debt supports its elimination as well.

There’s no easy fix for the student loan crisis. Student debt is rising almost as fast as tuition, and the economy hasn’t been providing strong job prospects for recent graduates. Still, the Obama Administration has shown that it cares about student loan debt—and hopefully, as the student loan crisis grows, political support for real change will grow as well.


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