May America Live Long and PROSPER: Reining in Student Debt

The federal government is currently on the hook for over $1.35 trillion in higher education loans, over half of which has accumulated since 2009. A number of Capitol Hill lawmakers have come up with legislation to reduce public exposure in the event of a calamity: the Promoting Real Opportunity, Success and Prosperity through Education Reform Act, or PROSPER. The House Education and the Workforce Committee approved the bill in mid-December in a 23-17 party-line vote; the Senate now is taking up its own measure. The context underscores the unsoundness of the Obama-inspired higher education overhaul of 2010 that has played no small role in bringing about this situation.

Taking on debt to attend college or graduate school is a way of life. According to a quarterly Federal Reserve Board data base, fully 42.6 million U.S. adults by the close of 2017 owed an outstanding $1,366.9 trillion in federal student loan aid. That’s more than double the 2009 figure of $657 billion. A Fed survey issued last May revealed that over half of all adults under age 30 who attended college as of the fall of 2016 had borrowed. At the same time, falling behind is also a way of life. The May 2017 Fed report also found that 11 percent of all borrowers who had left college with a bachelor’s degree were delinquent on repayments, a figure that was around one-third for those who left with less education. Student loan debt now accounts for about 10 percent of all household debt, double the share of 2009.

Such trends are understandable in light of rising tuition and fees. Graduates of the Class of 2016 who took out loans carried an average debt of $37,172. But some of the problem lies with student financial ignorance and recklessness. A survey of about a year ago of 500 active college students sponsored by the Hoboken, N.J.-based student loan refinancing service LendEDU found that 49.8 percent of the respondents actually believed the government automatically will forgive their loans upon graduation. “It is worrisome that current students may be over-borrowing on the hope that their student debt will be forgiven in the future,” said LendEDU research analyst Mike Brown. And how’s this for brass? LendEDU found that about 30 percent of surveyed college students had planned to use some of their loan money for travel or lodging during Spring Break.

To some extent, the problem carries the words “made in Washington.” Back in 2010, Congress, pressured by President Obama, passed legislation to phase out federally-guaranteed bank lending for higher education in favor of direct lending. The Department of Education would be the “bank.” Cutting out the middlemen, supporters insisted, would promote efficiency and enable more people to attend college. The law also offered students loans on highly favorable terms, especially if they took public-sector jobs after graduation.

Things didn’t work out according to plan. With the government more eager to lend and students more eager to borrow, cost control became less of a priority. Colleges and universities, anticipating a windfall of federal payments, had an extra incentive to raise tuition, which in turn gave students an extra incentive to borrow more. The mutually reinforcing cycle is an example of “moral hazard,” the recklessness that so frequently results from excessive use of other people’s money. Moral hazard gone wild, in a nutshell, was the story behind the mortgage loan debacle of a decade ago. If we’re not careful, it could lead to a student loan debacle.

Republicans in the House and Senate, urged by President Trump, believe the PROSPER Act can avert such a future. The legislation is more than a clever acronym. The measure would revamp the Higher Education Act in several ways that include: elimination of the provision enabling current and future students to avoid repayment through the Public Service Loan Forgiveness program (which had been instituted in 2007); placement of an annual $28,500 cap on graduate and professional school borrowing; and a partial shift from direct lending toward vocational training.

Higher education officials are displeased. Peter McPherson, president of the Association of Public and Land Grant Universities, writes that the legislation would “sharply increase the costs of higher education for students, and make students and taxpayers more vulnerable to predatory actors and poor-performing institutions and programs.” Terry Hartle, senior vice president for the American Council on Education, calls PROSPER “bad for students and especially bad for graduate students.” As if we haven’t seen enough inefficiency already.

Industry people like McPherson and Hartle have an interest in maximizing enrollment. That’s why they frame financing issues on the assumption that higher education is an entitlement. But this view is misguided. College is not for everyone. There are many less expensive ways of acquiring a good education and career opportunities without enrolling in a four-year institution. The idea of higher education as a universal right is at the root of the growing volume of student loan debt and delinquencies. PROSPER might be the best way to apply the brakes.