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The Student Loan Problem: The KISS Solution

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President Obama is right: A wider range of college graduates (and even
non-graduates) need a more effective way to pay down their student debt. Otherwise, the data show they will be hurting both themselves and the economy because low credit scores can inhibit employability and the capacity and willingness to borrow for homes and cars. In short, our economy will suffer if student borrowers do not find a reprieve from their vast student indebtedness.

President Obama is right: Loan Servicers (paid by the federal government) need to be rewarded for being better advocates for and advisors to student borrowers, and they need to share more information about the options for avoiding default and repaying debt. In short, the Servicers must reorient their focus toward better protecting the consumer rather than just acting as a government collection agency.

President Obama is right: We need wider dissemination of information
concerning repayment options, including income-based repayment (IBR), and we need to approach outreach on many fronts, including non-governmental participation in this outreach effort. We know from assessing the data that more students could benefit from IBR but have not signed up for this benefit, partly because they were unaware of the opportunity and partly because it is unavailable once one is in default.

Senator Warren is right: Student borrowers should be able to refinance their government and private loans at lower interest rates than presently exist on student loans. If one can refinance one's car loan or home mortgage, surely we should make it possible for students to lower their interest rate to more closely match the market. That said, this effort has recently stalled in the Senate.

Senator Warren is right: We need to fund the suggested refinancing by finding new sources of revenue. She suggests the tax code is the right place to look and I agree; our tax laws have always been a way of forging policy, shifting burdens from one party to another. While I may differ as to which tax policy should be altered (I have changing and adapting the charitable contribution rules), it is time to place an increased tax on those most capable of paying.

But....that proverbial but.

The student loan business has gotten vastly too complex. The federal government loan and repayment options are hard to explain and understand; even experts struggle to determine which among the myriad of repayment options are best for which students. Then, there are state lending options. Add to that the more traditional private lending options through banks or state sponsored entities. And more recently, there are new market entrants with sophisticated products pitched to benefit students, sometimes in the form of Human Capital Contracts (rather than debt obligations).

My recommendation is that we do what we have started to do with the FAFSA: simplify. Too many options actually inhibit wise decision-making. So, what we need instead are better quality financial products on the front end (think lower interest rates and expanded access to Parent Plus loans) and fewer options for student repayment on the back end. And, we need to link the front end and back end conversations so students better understand not just how much they are borrowing but how their debt can be repaid in a timely, affordable manner. It also would be wise to improve both retention and graduation rates to prevent the worst situation of all: debt without diploma.

Keeping it simple and straightforward (KISS), while harder than it appears on the surface, offers the best opportunity to enable first generation, Pell eligible students to see that higher education is both affordable and valuable. Our collective wellbeing requires nothing less.

States With Highest Average Student Debt - TICAS - Class Of 2012
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