Student loan debt has more than doubled in the last decade and 92 percent of that debt is held by the federal government. Loan forgiveness or free college have been the topic du jour from many presidential candidates. And, while they might make for good campaign rhetoric, these proposals are unlikely to become law.
Luckily, Sens. Tim Scott (R-S.C.) and Joe Manchin (D-W.Va.) introduced legislation, the Student Loan Disclosure Modernization Act, to help student loan borrowers – and has the added benefit of actually being able to become law.
Their bipartisan bill would require federal student loans, which currently account for about 90 percent of student loans originated each year, to carry clear and concise plain-language disclosures on the true cost of the loan.
For many students and families, a college education will be one of the most important – and expensive – investments they make. Knowing the true cost of this investment will help them make better long-term decisions and set them up for success after graduation instead of a debt trap set by opaque federal disclosures.
The current so-called Plain Language Disclosure on federal loans is six pages of legal jargon in fine print and shows only generic loan costs and repayment terms. The Scott-Manchin legislation streamlines the disclosure to concisely outline the costs and terms of the federal student loan specific to the individual borrower. Private student lenders already offer their customers a clear, “Know-Before-You-Owe” disclosure form ensuring borrowers fully understand monthly repayments, interest rates and the full cost of a loan prior to origination.
A clear understanding of loan obligations combined with responsible underwriting is why bank-offered student loans have a 98 percent repayment rate compared to a double-digit delinquency and default rate on federal loans.
A recent CBA poll of 1,000 registered voters echoed the importance of borrower disclosures as 90 percent of those surveyed felt borrowers should receive disclosures detailing costs and terms before taking out an education loan. More than 90 percent felt such disclosures should always provide specific monthly payment amounts.
The New York Federal Reserve Bank has said every dollar in federal student aid, either through grants or federal student loans, leads to a 25-63 cent increase in college tuition because the government lends up to the cost of attendance, a figure set by the college. When colleges and universities know the money is available, there is little incentive to restrain tuition.
Disclosing the full repayment cost of federal loans through the plain-language disclosures Scott and Manchin are advocating for will shine a brighter light on the correlation between runaway lending and skyrocketing tuition. Hopefully, this awareness will be a first step in stabilizing tuition.
The next step should be placing responsible caps on federal loans. These caps must be set at an appropriate level to guarantee access while preventing over-borrowing. We certainly believe the federal government has a role to play in helping students with the most need, but it is clear federal borrowers are being trapped in a broken system.
[To learn more about CBA’s recommendations, visit www.ConsumerBankers.com/EducationFunding.]
Continuing to push the same post-graduation “fixes,” like debt forgiveness or income-based repayment plans, will not address the reason why so many students are struggling under the weight of federal student debt. If the same level of attention is given to crafting long-term solutions, like the bill Sens. Scott and Manchin introduced, then future students could have better options than today’s graduates and college tuition costs could finally stabilize.
The bipartisan Scott-Manchin legislation will give borrowers the information necessary to make informed decisions about financing higher education and Congress should consider passing this legislation a mandatory assignment before the start of the next school year.
Nick Simpson is Vice President of Public Affairs at Consumer Bankers Association.