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Statement before the U.S. House of Representatives Committee on Education and the Workforce
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My name is Jason Delisle and I am a resident fellow with the Center on Higher Education Reform at the American Enterprise Institute (AEI), a non-profit, non-partisan public policy research organization based here in Washington, DC. My comments today are my own and do not necessarily reflect the views of AEI.
The federal government’s Direct Loan program dominates the student-loan market today, issuing 90 percent of all loans made across the country each year. Students pursuing everything from short-term certificates to master’s degrees qualify on a no-questions-asked basis for nearly $100 billion of these loans every year at terms more generous than most private lenders would offer.
The federal role in higher-education lending has grown ever since lawmakers enacted the first loan program under the National Defense Education Act of 1958. The Higher Education Act of 1965 expanded access to loans to more colleges and students through the Guaranteed Student Loan Program, but the interest rate subsidies it provided were restricted to students from low-income families. In 1980, Congress created a loan program for parents of undergraduates (Parent PLUS), and then in 1992, eliminated annual and lifetime borrowing limits for those loans. That year, lawmakers also authorized the Unsubsidized Stafford Loan program, which allows all undergraduate students to borrow federal loans regardless of their financial circumstances. In 2006, Congress created the Grad PLUS loan program, which removed limits on the amount graduate students could borrow.
This expansion, along with rising college costs and increases in student enrollments, have led to a rapid increase in the stock of outstanding debt in recent years. Now at $1.3 trillion, the student loan program rivals the Federal Housing Administration’s largest mortgage program in size.
Options to repay these loans have also exploded in number and in generosity. These include repayment plans with fixed or graduated monthly payments spread over 10 to 30 years, and a variety of plans with payments set according to borrowers’ incomes (which I collectively refer to as Income-Based Repayment, or IBR). Payments in IBR are set at 10 percent of adjusted gross income after an exemption of 150 percent of the federal poverty guidelines ($18,090 for a single person). Unpaid balances are forgiven after 20 years, or 10 years for borrowers working in a nonprofit or government job. While enrolled in any of these plans, borrowers can qualify for several types of deferments and forbearances that allow them to suspend payments for years.
Despite the ever-expanding benefits, loan types, and repayment options, delinquency and default rates suggest that the current system is not working. Over 8 million people are in default on their federal student loans today, a number that has continued to grow year after year, even though the country is now many years into an economic expansion with low rates of unemployment. Estimates also suggest that over 40 percent of all borrowers whose loans have come due are in default, are delinquent, or are in forbearance or deferment. Nearly one in four federal student loans issued to undergraduates this year is eventually expected to enter default.
Given the size, scope, and complexity of the student loan program, the data that the federal government makes available leaves much to be desired. While there have been some improvements in recent years, the data form only a patchwork rather than a complete picture. Many key questions about the federal student loan program cannot be answered with the data available to the public and researchers. Improving the quantity and quality of the data is imperative for ensuring that the program works well for all types of borrowers and does not waste taxpayer dollars. I’ll provide two cases to illustrate this point.
The available information points to an ongoing student-loan default crisis, but without better data about borrowers after they leave school, it is nearly impossible to fully understand the program or even begin to develop solutions. For example, reports suggest that many of the borrowers who default never even make the first payment on their loans.7 But it is impossible to analyze the data to better understand this issue. Some statistics also imply that a large share of defaulted loans are held by borrowers who left school over a decade ago, but many borrowers also leave default quickly and return to good standing. The lack of data means we do not understand what explains those very different patterns, and how policymakers might tailor solutions to these two groups.
Without better data, the government will continue to underestimate the cost of the loan program. Consider that when the Obama administration dramatically expanded the IBR program in 2010, Congress and the public were told this change might cost around $700 million a year. We are now learning from the Government Accountability Office and other federal agencies that the costs are substantially larger, running in the billions. And it is still unclear which types of borrowers (dropouts, graduate students, the unemployed, etc.) are benefiting from this program and its recent expansions. One can only wonder whether Congress and the Obama administration would have pursued different policies if they had known then what we know now.
The key problem is that the data are running far behind the policy, the exact opposite of how things should operate. Things are getting better: federal agencies have been working to make more data available to researchers and the public. But there are still dangerous blind spots in the information accessible to those outside the federal government.
Below I explain the type of questions that the available data can answer about the federal student loan program and, more importantly, which questions it cannot. Finally, I offer a few recommendations for how the government can improve the data it provides to researchers about the student loan program.
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