Earlier this week, President Obama announced he was taking unilateral action to restructure the process by which some individuals are expected to repay their student loans. The policy change is meant to respond to an increasingly ominous situation in the market for college financing. According to the New York Federal Reserve, outstanding student loan debt is expected to exceed credit card debt for the first time this year, and students are experiencing little hope for improvement as job prospects remain dim and tuition rates continue to climb.
Therefore, the president deserves praise for taking action, albeit of a limited nature, to assist those who must take out loans to afford college. Yet the financial barriers preventing students from attending and completing college are too large to be solved by any single executive order, meaning that further measures will be needed to ensure both that citizens have a route to economic security and that the U.S. economy has the supply of college graduates that it needs to perform to its fullest potential.
Unfortunately, some policymakers have been calling for reforms of precisely the wrong sort. Congressman Ron Paul, a Republican presidential candidate, said last weekend that he wishes to eliminate federal student loans entirely since he believes they have been the driving force behind tuition increases. This is very narrow analysis, however, since it neglects a number of more important factors influencing college expenses. Notably, faculty and staff health benefits and energy costs have become much greater financial burdens for universities. Since public institutions have also experienced a sharp decline in state appropriations, their only option has been to increase tuition to maintain the level of quality that students and policymakers have come to expect.
As this process has played out, the subsidized loans provided by the federal government have been crucial to keeping higher education within reach of the broad swath of lower- and middle-income Americans whose best avenue to economic stability is a college degree. Hence, the president's decision to relax repayment requirements on those loans is a well-targeted policy that will allow more students to pursue higher education and, in doing so, boost the nation's economic performance.
Most prominent among the changes enacted by the president is a recalibration of the income-based repayment plan, which limits the monthly payments of loan recipients. The new repayment process will reduce the amount that borrowers are expected to repay monthly from 15 to 10 percent of their discretionary income. Although recent graduates and many current students will not benefit from the new repayment plan, it might encourage prospective students to use federal loans as a mechanism by which to further their education.
Moreover, the reduced monthly payments increase the likelihood that loan recipients will graduate on time since they may no longer have to work part-time jobs while in school to earn money for eventual loan repayment. And once they do graduate, loan recipients benefitting from the lower monthly payments will have more money in their pockets to spend on other goods and services that will generate additional economic activity.
For all this, the steps taken by the president are meager compared to the challenges facing contemporary students, recent graduates and higher education, in general. Yet they represent the limit to what can be accomplished with a non-functioning Congress that is unwilling to contemplate more significant reforms that would incentivize efficiency at universities and restrain the cost growth in other economic sectors that is driving up tuition. Thus, in addition to the knowledge they may gain in the classroom as a result of the president's reforms, students can take away from this episode a lesson in political science that reveals congressional dysfunction to be among the biggest obstacles to more affordable higher education.
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