Economists Gather to Debate Student Loan Limits
By Joelle Fredman, NASFAA Staff Reporter
As Democratic presidential candidates continue to introduce proposals addressing rising student loan debt, a group of economists gathered in Washington, D.C. Monday to debate the merits and drawbacks of instituting student loan limits, and to discuss whether loan defaults are due to flaws in the current repayment system or a lack of accountability in higher education.
During the discussion — hosted by the Brookings Institution — Adam Looney, a senior fellow at the Brookings Institution, and Dubravka Ritter, a senior research fellow at the Consumer Finance Institute at the Federal Reserve Bank of Philadelphia, discussed the consequences of instituting loan limits for students at poorly performing institutions.
Looney argued that both students and taxpayers would serve to benefit “if the federal government had stronger rules for how financial aid can be used,” adding that that the reasons borrowers are struggling today to afford higher education and repay their debt “stem from an erosion in the quality” of the education they are receiving.
Looney said because students at for-profit institutions tend to borrow more and are also “less likely to complete a degree, [and] less likely to get a job,” he suggested that students attending poor-quality institutions should be limited in how they much can borrow or be blocked from borrowing. Instead, he said, the government should focus its funds on high-quality institutions, and “prioritize those institutions in our aid formula.”
“We need a stronger accountability system,” Looney said.
Ritter warned, however, that limiting loans for students at for-profit institutions would not result in those schools shutting their doors, and that families would find other — and potentially more risky — ways to fund their education at those institutions.
Instead, Ritter said that policymakers should be focusing on issues with the current student loan repayment system, arguing that there are too many options for borrowers, and that “these complexities both produce a significant challenge for the loan servicing process and complicate the decision-making process for borrowers.”
Ritter pointed to other countries that offer borrowers different versions of income-driven repayment (IDR) plans to serve as a model for the U.S. In Australia, she explained, borrowers enroll in plans for lengthy periods of time with no option for forgiveness, and there are little to no caps on how much of a monthly income a student must pay toward their loans.
“It’s a true form of risk-sharing,” Ritter said.
Looney argued that while IDR plans are “a great idea to provide insurance against those hard times,” he warned that a problem could arise “where students are systematically not going to repay their loans.”
“Schools will want to take advantage of wanting to charge more for that education, [and] students are not on the hook for how much they take out in loans. Ultimately it will be very costly,” he argued.
Looney added that this particular IDR system worked well in Australia because it was originally limited to students in the country's flagship universities, which only accepted a certain caliber of students. Once it was extended to students in schools in other sectors, however, it began “eroding,” he said.
In a second panel Monday, Matt Chingos of the Urban Institute and Lesley Turner, an associate professor of economics at Vanderbilt University, continued to debate the implications of loan limits.
Chingos said that the discussion about limiting student lending boils down to a balance of providing access to higher education and not providing access to low-quality programs. He argued that one way to get at that balance is to restrict the institutions at which students can borrow.
Turner, however, presented data that showed that community college students who were not offered the option to take federal student loans took fewer credits, earned worse grades, and were less likely to transfer to a four-year institution. Turner said the attention should be focused on how loan limits could also negatively affect students in bachelor’s degree programs.
Regardless of whether students decide if and how much in loans to take out, “students should be made aware of their loan options,” Turner argued.
Chingos added that there are issues in how institutions make students aware of those options. He pointed to institutions' aid offers, and argued that students often don’t even understand that federal student loans are being offered or recommended to them because of a varying number of terms used to refer to loans.
This issue has been the subject of much debate, and lawmakers and think thanks alike have taken steps to work toward standardizing aid offers. As a term of its Code of Conduct, NASFAA provides its members with a glossary of aid offer terms to help students compare aid across the board.
While a financial aid literacy campaign won’t fix the problem of overborrowing and rising debt, Chingos said, “it would be good if people understood what they were doing.”
Despite the data on the negative implications for loan limits for some students, Turner agreed that “there is a role for the federal government to put some accountability measures on institutions.”
“It’s very tricky to think about what that system would look like, but it's easy to agree on a very low bar,” she said.
NAFSAA has long advocated for granting financial aid administrators the authority to limit loans for specific student populations, academic programs, credential levels, or other categories established by the school, such as enrollment status — a proposal that was also supported by a 2016 NASFAA working group. The working group added that certain schools, such as those with cohort default rates less than 75% of the national average, should be able to offer students an additional $5,000 in loans annually.
Publication Date: 10/8/2019
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David S | 10/8/2019 2:47:24 PM
If we didn't have T4-eligible, corporate-owned for-profits with nationwide enrollments the size of the population of Milwaukee and graduation rates of 15%, I don't think we'd even be having this discussion. Ritter's assertion that take federal loans away from these schools and people would pay for them some other way simply isn't true. They aggressively recruit veterans because VA benefits don't even count towards the 90% in the 90/10 rule, so they are virtually entirely funded by federal money, and inevitably close their doors the minute their federal funding is even in danger of being cut off.
There are too many schools using up copious amounts of limited federal funds that don't provide a quality education; the Obama Administration had it right when it announced that it would no longer recognize their rubber-stamp accrediting agency, but of course the Department of Ed led by an appointee of the Founder of Trump University changed all that...because these "private sector" colleges are good reliable Republican donors.
Ben R | 10/8/2019 1:12:49 PM
Limits are a must for many of the reasons listed below. We ought to strive for issuing loans that can be fully repaid, not merely managed through IDR.
Miriam E | 10/8/2019 12:3:43 PM
Compounding the interest on student loans is the one thing I have observed that has contributed to the resistance of individuals to remain current on loan payments, especially for those who are not privileged to maintain a Standard Repayment option. These borrowers are not motivated to continue to pay when they fail to see their loan balance go down. Rather than reduce, the outstanding balances stay flat or increase as payments are made. Interest capitalization occurs too often: at start of repayment, end of deferment or forbearance, and in some instances when students change repayment plans. Each capitalization leads to increase in loan balance and in many cases, an increase in the monthly payment amount. I have seen loans grow exponentially because of the above events. Congress should consider doing away with interest capitalization of any sort, or at the minimum limit it to just the start on the repayment cycle.
Ben F | 10/8/2019 11:17:29 AM
Students get them selves into more trouble when over borrowing to pay for housing or living expenses. Direct loans should only be allowed to cover direct costs. The DOE should create a separate, living expense loan for those that are requesting funds for their pocket. This would also show great transparency into how students are using their student loans.
Mary M | 10/8/2019 11:11:47 AM
Could loan entrance counseling at StudentLoans.gov include information about projected incomes for specific degrees/careers? Student need to better understand what kind of income their program of study will leads to and if their hoped-for careers will be able to sustain the loan payments they will have to make after graduation.
Cathy B | 10/8/2019 10:42:10 AM
I would like to see the Loan Providers have to limit the amount of interest that can be added to a loan. Often times students are not earning enough right out of college to pay the loan payment. Therefore, they will need to do the income based repayment which lowers their payment in the short run but increases their loan in the long run. This is not helping anyone reduce loan debt when the interest compounds at the end of the year. Interest added to the loan should not be permitted to exceed 50% of the initial loan. I have seen loans double due to interest.
James C | 10/8/2019 10:12:07 AM
I agree with the limits on the Parent PLUS loan. Many parents are using them for other purchases because they probably cannot get consumer loans. It is quite obvious when they have a 0 EFC and borrow up to the cost of attendance. I would even go as far as limiting them to $5,000 per year, roughly the same as the plus denial amount.
James H | 10/8/2019 9:18:30 AM
I have been seeing more and more students graduate from colleges with degrees that do not justify the level of debt they leave the college with. There is a cost and benefit to obtaining a degree. Many come out with degrees that the job earning potential makes the level of debt unsustainable to repay under a number of the repayment plans. This from great colleges, middle level colleges, and online colleges. Having a loan limit should apply to overall borrowing parents & student. We are seeing many parents who have also over borrowed for the earning potential of the degree their student earned. A rule of thumb in the old days was borrow no more then the expected salary when you graduate. A rule like that would be almost undoable but we need to think of better ways to have students and parents borrow wisely. I am from the old days.
James C | 10/8/2019 9:5:26 AM
I worked at a community college. Most students who need their loans limited are part-time students. Mandate loan pro-ration at the time of disbursement and that will solve much of that problem. I like the idea of having schools with better than average default rates be able to offer additional $5,000 in additional Stafford loans. The private borrowing has escalated to numbers I never thought I would see.
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