Three Steps Congress Can Take to Fix the Student Debt System

Three Steps Congress Can Take to Fix the Student Debt System

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Higher education reform will be front and center in 2017, as historic levels of public concern about rising college tuition and student debt levels pressure Congress to turn to the overdue reauthorization of the Higher Education Act. This wide-ranging federal law covers everything from student loans to Pell grants for low-income students to the transparency of consumer information on college prices.

Congress has already proven it has the ability to pass major education legislation. Sen. Lamar Alexander (R-TN), the chairman of the committee responsible for education, took the lead last year in the bipartisan reauthorization of the main K-12 education law.

We offer three policy proposals that would benefit students and taxpayers, based on the analysis in our new book, “Game of Loans.” These are ideas that lawmakers from both parties can get behind, with the goal of simplifying the process for student loans.

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First, we desperately need a more streamlined system of financial aid. In the current system, a complex application — the dreaded FAFSA — stands between students and the grants and loans for which they’re eligible. Research has proven that this form is a barrier, especially for students from low-income families. The federal government, through tax records, already has more than enough information to effectively distribute aid based on financial need. Congress should eliminate this bureaucratic red tape that’s keeping too many potential students out of college.

Second, we need to make it easier for potential students to understand what aid is available to them. The current system subsidizes higher education in a number of different ways, including Pell grants for low-income students, subsidies baked into the interest rates in student loans, and tax credits that largely benefit middle-income families. This combination of policies — all with the admirable goal of getting more students to enroll in and complete college — produces a system that is complicated to understand and difficult to navigate.

The solution is simple: Consolidate all existing aid programs into a single, easy-to-understand grant program. There’s no reason to think that a credit on next year’s tax return or a lower interest rate on loan payments six years from now is more effective than providing students with funds to pay for college. While we’re at it, we should also streamline loans into a single program. Receiving no more than one grant and one loan will help students understand exactly what they’re getting into, and make more informed financial decisions.

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Finally, we need to address the severe problems facing too many student loan borrowers. We share the view that our country has not a student loan crisis but a repayment crisis. Borrowers repaying their student loans can tell you that the system of options for loan repayment is a jumbled mess. Safety nets exist to ensure that borrowers never need to face an unaffordable student loan payment, but they are so difficult to access that more and more borrowers are defaulting on their loans every day.

This problem could be solved swiftly and effectively by replacing the current system of student loan repayment with a single, income-driven loan repayment program that operates through the existing employer withholding system. Just like taxes, borrowers would have their loan payments withheld from their paychecks so they’d never have to take action to make a loan payment. Since withholding would be based on income, borrowers would see their payment fluctuate with their earnings so that, even without any action on their part, their payments would always be affordable.

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The federal government cannot fix all that ails higher education. But the concrete steps outlined above would increase the impact of existing federal investments in higher education, and could be accomplished without spending an additional dime. Doing more good with taxpayer money should be a bipartisan priority, and one that’s unlikely to rankle our unpredictable president-elect.

Beth Akers is a senior fellow at the Manhattan Institute and Matthew M. Chingos is a senior fellow at the Urban Institute. They are the coauthors of Game of Loans: The Rhetoric and Reality of Student Debt (Princeton University Press, 2016).