Analysts: Obama Student Loan Policies Ignore the Real Problem – College Costs

October 25, 2011 - 10:03 PM
Wall Street protests

Occupy Wall Street demonstrators dig in at Zuccotti Park, Tuesday, Oct. 25, 2011 in New York. Forgiveness of student loans is one of many issues being raised by the protestors. (AP Photo/Bebeto Matthews)

(CNSNews.com) – As President Obama prepares to roll out new student loan relief programs through executive order on Wednesday, policy experts say actions taken by the administration to date have not targeted the root problem – the rising cost of college tuition.

The president plans to announce steps he will take to assist people struggling to pay off their student loans. They will not require congressional authorization.

The announcement in Denver will take place on the final day of Obama’s three-day trip through western states. It also comes at a time when many of the Occupy Wall Street protesters are demanding forgiveness of student loans.

“I don’t think he would go as far as student loan forgiveness, but even if it’s just increasing federal subsidies, it’s problematic for a number of reasons,” Lindsey Burke, an education policy analyst for the conservative Heritage Foundation, told CNSNews.com.

“Any time you increase subsidies for student loans you are saying to the three-quarters of people who did not graduate from college that you are going to put the burden of paying for college on their backs – even though they did not attend college,” she said.

Andrew Gillen, research director for the Center for College Affordability and Productivity, was uncertain what the president would propose, but anticipates the possibility of plans to expand the income-based repayment plan.

Under Obama, the amount a borrower must repay was reduced to no more than 10 percent of annual income, a reduction from the previous rate of 15 percent. This applies to those living at 150 percent of the poverty level, or about $33,000 per year for a family of four.

“I don’t really see much he can really do just by an executive order,” Gillen told CNSNews.com.

“The cause of the problem is that tuition is too expensive and students need to take out unmanageable debt,” he added. “The solution to that is not to say, ‘OK, you can still take out the debt and we’ll pay it for you.’ It’s to figure out what’s causing all this so that students don’t have to take out unmanageable debt. That’s why I don’t like the income based repayment program.”

Beginning last July, new college loans were arranged directly through the Department of Education. The shift eliminated the federally subsidized Family Education Loan Program which involved private lenders, establishing a near monopoly by the federal government.

Under the previous subsidized system, private institutions would agree to issue student loans at government-determined interest rates. They could then be reimbursed by the government if they lost money.

There are still some private lenders in the market place, but American Banker reported earlier this month that the number has dropped from 25 percent of loans in 2007 to just 10 percent this year.

The changes to the income-based repayment policy was part of the 2009 American Recovery and Reinvestment Act, while the shift from subsidized student loans to direct government loans was part of the Patient Protection and Affordable Care Act, Gillen explained.

Another element in the new student loan rules enacted by Obama allows borrowers who make their required monthly payments to have the remaining balance forgiven after 20 years, down from 25 years under the earlier regulations – but only if they work in the public sector or for a non-profit organization.

Lindsey Burke

Heritage Foundation education policy analyst Lindsey Burke (Photo: Heritage)

“This is another example of this administration favoring the public sector over the private sector,” said Heritage analyst Burke. “I don’t know why we would want to favor people going into government work.”

Burke said more attainable student loans have only served to drive the cost of tuition higher.

“Just historically, when we look at federal involvement in subsidizing student loans, it does nothing to get at the real problem, which is the cost of college,” she said. “Pell grants increased 475 percent while at the same time the cost of attending college has increase 439 percent since 1982.

“You get this false sense of purchasing power that incentivizes colleges to raise tuition and sends the student scrambling back for more college loans,” Burke said. “It really creates a vicious cycle that does nothing to mitigate the cost of attending college.”

Putting greater focus on online courses and streamlining faculty and administration would lower the price of providing a college education, she argued.

“We need to think about encouraging state universities to put more content online. When we see this seismic shift to online learning, I think we’ll see the higher ed bubble burst,” Burke said.