Evidence of Ability to Repay Student Loans Essential

The Joint Select Committee on Deficit Reduction, the “Super Committee,” is looking for ways to cut $1.2 trillion deficit over the next decade. In order to achieve this goal, however, Jackson Toby at The American believes the Super Committee must not overlook a design flaw in the federal student loan program that threatens to blow a huge hole in the federal budget.

The federal government guarantees repayment of most student loans and that means each loan default eventually adds to the deficit. As the current student debt bill is estimated to be at $1 trillion, that’s a lot of weight on the government’s shoulders.

Toby writes that the Department of Education has recently announced that the overall default rate for federally guaranteed student loans had risen to 8.8 percent for the fiscal year ending on September 30, 2010, up from 7 percent the previous year. Toby notes that this was the highest default rate since 1997.

But this 8.8 percent only refers to the 320,000 graduates out of 3.6 million who defaulted within two years of their first payments being due. Toby notes that longitudinal studies of student borrowers show that defaults peak in the fourth year after payments begin to be required and continue in subsequent decades; estimates are that about 40 percent of student borrowers will default sooner or later.

The Department of Education needs to and does everything it can to prevent students from falling into the default category, however, the student’s only permanent solution to student-loan debt is obtaining a job that pays well enough to start repaying the loan. But a weak economy makes getting these jobs difficult.

But Toby points out that there’s also a flaw in the student loan program. The Department of Education and banks gave students loans without scrutinizing their ability to repay them.

Toby believes that the Super Committee should recommend that student loans require evidence of ability to repay them by examining students’ academic records, credit histories, and other criteria of credit-worthiness.

“This change would treat student loans as risky investments and ensure they are given only to student borrowers with a good chance of being able to repay them.

“Such a student loan system makes better economic sense than one that gives loans promiscuously to all needy college students. Needy college students are still eligible for Pell and other college grants. Grants do not impose a requirement of credit worthiness.”

Toby points out that it would save taxpayer money, too.  Evoking what Senator Everett Dirksen has been famously reportedly as saying, “A billion here and a billion there, and before you know it, we’re talking real money.”