It’s hard to avoid reading about the U.S. college student loan system (the programs that are collectively organized under the Federal Student Aid or FSA system) in the press recently. Some Democrats in Congress have asked President Biden to unilaterally cancel student loans, up to $50,000 per individual.
President Biden has responded that he only has the authority to cancel loans up to $10,000 per individual and that Congress should fix this by changing the law. On the other side of this solution to the student loan crisis are individuals who fully repaid their student loans who question why the cancellation is necessary, and if it happens, why they should be penalized for repaying their loans.
Many borrowers with the largest loan balances are alumni of graduate programs like law school and medical school. The Wall Street Journal published a series of articles this summer about the graduates of elite programs who earn less than their cumulative loan balances. I wrote a few blog articles responding to the news as well as the data.
For the purpose of this article, I will avoid discussing student loan cancellations (Full disclosure: my wife and I borrowed to attend undergrad and grad school and repaid our loans). Instead, I would like to propose overhauling the entire student loan system. Since an overhaul of the system is unlikely given our divided Congress, I recommend several steps, any one of which would be an improvement over the existing system.
Step 1: I recommend cancelling the Parent PLUS loan program. Colleges that use these loans to cover the cost of their tuition, room, and board, in addition to federal student aid programs, are overcharging their students. Parents should walk away from any school that proposes a Parent PLUS loan as part of the financial aid package for a student to attend.
Step 2: Increase the maximum annual Pell grant amount from its current $6,495 to $10,000. Pell grants take care of our neediest students. They’re not enough money to cover tuition, fees, books, and other costs of living.
Congress has deliberately emphasized the loan programs over Pell grants for many years now. It’s time to make a 180-degree pivot. This recommendation could be a substitute for the currently mothballed free community college program, since a $10,000 per year Pell Grant would cover most community college costs.
Step 3: Fund some of the Pell grant increase by eliminating college work-study programs. These programs subsidize colleges and not students. Many students can find jobs off campus that pay much more than the College Work Study program.
Step 4: Eliminate the Perkins loan programs and fund some more of the Pell grant increase. Perkins loans have been on life support for years and are not equally distributed to all colleges. Why should some schools receive these programs and others not?
Step 5: Cap the annual subsidized student loan amount for undergraduates at the average in-state tuition, fees, and books amount for all 50 states. According to U.S. News and World Report, in-state tuition, fees, and books averaged $10,388 for the 2021-2022 school year.
Why use the U.S. average and not a different number? I don’t believe U.S. taxpayers should subsidize states that have chosen to underfund their public institutions.
As a graduate of three private universities, some of my fellow alums might ask why I am recommending a system that does not cover the much higher tuition and fees of private colleges and universities ($38,185 average sticker price in 2021-2022 according to U.S. News).
I thought about that. My proposal would establish an incentive for private colleges that admit and graduate Pell-eligible students. The incentive would provide a second subsidized federal loan for students needing to borrow more than the average in-state tuition, fee, and book rate.
Institutions would be eligible to offer this loan if:
- 25% of their undergraduates were eligible for Pell grants.
- Pell-eligible students graduated at a rate no less than 90% of the non-Pell eligible graduation rate.
The amount of the second subsidized loan would be capped. The cap would be based on the previous year’s average tuition grant provided by the institution. This strategy would ideally keep a student’s financial aid award package balanced between loans and grants. Reduce grants one year, and next year’s maximum federal subsidized loan is reduced.
Are there other ideas for reforming the student loan system that are as good or better than mine? Probably. My intent was to propose a system that would still provide funds for college but not allow loans to dominate the system.
Sadly, most entrenched federal benefit programs change incrementally, if they change at all. I hope that’s not the case, given that the current student loan system has encumbered 42.9 million Americans with $1.57 trillion in debt.
