This week, the White House delivered a piece of good news for the 40 million Americans who have student loan debt—and took a small step toward promoting economic mobility. On Tuesday, President Obama announced a new Student Aid Bill of Rights, which lays out a set of principles for making student borrowing fairer and more affordable.
The announcement dovetails with another recent proposal from the president to increase college access and affordability by making two years of community college free to all Americans. But unlike that proposal, which requires congressional action and has slim political chances, the Student Aid Bill of Rights relies on executive action to make several important policy changes that fall into motion immediately.
A Better Deal for Borrowers
For many students right now, staying on top of their federal student loans requires navigating separate customer service channels and account information. The average borrower has four different student loans, which may be held by different private contractors or sold from one servicer to another.
Under the White House’s new plan, the Department of Education will create a centralized website for students to view their loan information (as well as file complaints about dubious lender practices), greatly simplifying this process.
The White House proposal also tightens consumer protections on federal loans by making sure that any prepayments made by borrowers apply first to loans with the highest interest rates, and by providing clearer information for borrowers who become disabled or declare bankruptcy. And it simplifies the process for entering income-based repayment plans, which offer more affordable monthly payments for qualifying borrowers.
Reducing Default Rates
While these policies won’t address the overall size of the student debt burden, they do stand a good chance of reducing student loan default rates. One in every six federal student loans that entered repayment in 2007 has defaulted at some point since. Among loans from two-year for-profit colleges, more than one in three has defaulted.
When borrowers default on their loans, it sets in motion a chain reaction of economic decline that’s hard to reverse. Take the fictional, but typical, story of Jane (below).
See Jane Default: How Student Loan Debt Is Crushing A Generation
If Jane can avoid default, she’ll still face the uphill battle of finding a good job and continuing to make her monthly payments, but she’ll be spared the downward spiral of bad credit that would limit her professional, personal, and educational opportunities moving forward.
Lower default rates could make a difference in the lives of millions of Americans in the coming years. Moreover, it’s good for the nation when federal student loans stay in repayment. Our taxpayer dollars are on the line.
A Small Victory for Jane… and 40 Million Real Americans
We have a long way to go to make higher education the engine for economic mobility that it once was. Selective institutions need to increase economic diversity on campus and commit to need-based aid over non-need merit aid. Community colleges need greater resources to improve student outcomes and build bridges with the four-year sector. And we need tighter regulation of for-profit colleges, which enroll about 10 percent of all college students but receive roughly 25 percent of all federal student aid and produce nearly 50 percent of all student loan defaults.
The Student Aid Bill of Rights is an important step forward in the march to make college more affordable for all Americans who strive. Obama’s proposal will help more students receive fairer treatment from lenders and stay on track for loan repayment, securing their own economic futures—and returning taxpayers’ investments.