7 ways to tackle the nation's student debt crisis

AP Photo/Jacquelyn Martin

When the Occupy movement reached hundreds of college campuses last fall, protesters focused largely on the crippling student debt that millions of borrowers face.

Some protesters urged Congress to forgive all student debt, which now totals roughly $1 trillion dollars, but that was clearly a non-starter.

Leading financial aid expert Mark Kantrowitz, the publisher of Finaid, recently posted a paper on the website of the National Association of Student Financial Aid Administrators that outlines ways to help reduce student debt.

Here are seven of Kantrowitz's suggestions, including perhaps the most controversial -- allowing graduates to once again be able to discharge student debt in bankruptcy court.

1. Congress should repeal the exception to bankruptcy discharges for federal and private student loans. There are anti-abuse provisions in the U.S. Bankruptcy Code that are sufficient to prevent deadbeats from walking away from their debt after graduation.

2. The buying power of the federal Pell Grant has dropped significantly and needs to be dramatically boosted. Twenty-five years ago, the Pell Grant covered a third of the cost of college for low-income students, but now it covers less than a fifth of the cost. Raise the Pell Grant from $5,550 to $11,000.

3. Congress should make the income-based repayment plan available immediately for all federal student loan borrowers, including borrowers already in repayment. Currently only 2.25 percent of the 36 million federal student loan borrowers are participating in the income-based repayment option, although 10 percent are eligible.

4. Congress should explore making the income-based repayment plan available to borrowers of Parent PLUS loans.

5. Make all incoming students participate in a financial literacy mini-course during orientation or their first semester.

6. Students should be required to read and sign a statement about their cumulative debt before they can borrow more money. Kantrowitz proposes something like this:

You have borrowed a total of $_____ so far to pay for your education. If you continue borrowing at the same rate, your debt at the start of repayment (including capitalized interest) will total $_____. This money is a loan and must be repaid with interest. The loan payments are estimated to be $______ a month, assuming level repayment with a standard 10-year repayment term. You are responsible for repaying this loan even if you aren't satisfied with the quality of the education you received or are unable to get a good job after graduation.

7. Colleges must take steps to prevent students from graduating with excessive debt even if that means students enroll at different institutions.

[cp102]

What about people taking responsibility for their debts. I couldn't afford to go to college full time, I knew it would be that much harder to pay back. Sorry you got an education for the money, they gave you exactly what you signed on the line for. I am all for looking at the persons paycheck and changing interest rates if needed to help repayment but not wiping it out.

[studentloanjustice]

What about a lending system that isn't predatory and inflationary? What about a lending system that plays by the same rules as all other lending systems in this country? I'm all for borrower responsibility, as soon as this egregrious and intolerable lending system defect is corrected. Until then, comments like the above are just so much cheap, arrogant, greedy, banker's rhetoric.

[DDGresham1]

It's about time someone used some logic and reason when it comes to student loans. If Newt gets into office this will never happen though.

[studentloanjustice]

The republicans have every reason to champion the return of bankruptcy protections. This is an essential free market mechanism that serves to both foster entrepeneurship, control price, ensure good faith in lending relationships, etc. Every free market economist would agree as would any true fiscal conservative. Why some "conservative" legislators have fought so hard the other way is beyond comprehension.

Middle class citizens of all stripes already bristle at the "corporations are people" mantra. This is an opportunity for the republican candidates to show the citizens that the invisible hand can and must work for citizens, as designed.

[AlleLanza]

Here's an eighth way to tackle the nation's student debt crisis: Proactively make borrowers aware of their existing repayment options. Only 2.25% of borrowers currently use income-based repayment because the majority of eligible borrowers simply don't know the option exists. The nation's student debt crisis would look much different if every borrower knew how to take advantage of IBR, graduated repayment, consolidation, deferments, forbearances and the like. The failing of our nation's student loan system isn't that there aren't enough flexible payment options; it's that no one bothers to communicate these options to borrowers in a timely manner, before payment problems start. Proactive education and communication on ways to successfully manage the debt should be a required service provided to every student loan borrower.

[studentloanjustice]

The problem with the student loan system goes much deeper than lack of awareness on the part of the borrowers (although I agree they are badly uninformed in this regard). Disclosure of basic, important facts, such as the unique absence of nearly every consumer protection that we assume are present for any loan has not happened for decades, causing tens of millions of citizens to be woefully misinformed prior to taking out the loans. Similarly for the True, lifetime default rate associated with their schools. I suspect that the corporate culture and institutional financial motivations within the Department of Education are such that the fewer borrowers who use these programs, the better. This is yet another example of egregious, anti-student behavior that comes about when the governing authority is making, not losing money on defaults- and making more on defaults than loans which remain in good stead! This is a defining characteristic of a predatory lending system, enable not just lacking government oversite, but actual adversity between the Department of Education and the students/borrowers, an unthinkable circumstance, yet here we are.

Of course, the absence of bankruptcy and other fundamental consumer protections are the cause of this. Conversely, their return will also return the fiscal motivations to where they have to be to have a functional, well-behaved system where the elements fulfill the roles that they were meant to fulfill.

[studentloanrefugee]

Kantrowitz's public endorsement of returning bankruptcy protections to student loans is welcome, but the financial literacy stuff really misses the point. It shifts the burden back to students, when society really should have no reasonable expectation for young people to make these life determining decisions. How many young people have the emotional and neurological maturity to benefit from these types of programs? If these things are necessary to get bankruptcy reform through Congress fine, but let's keep the focus where it should be: greedy banks, incompetent government and bought legislators.

[ajvw]

Have to wonder how much of the increased cost of college is directly attributable to the ease of acquiring these loans.

[sevenoutofnine]

If you aren't going to give bankruptcy protection at least give students some rights. I went to college when there was 10%+ tuition hikes. My loan company sent me a paper stating my loan will be paid off at this date. Then I received a statement saying that I had 3 more months of payments left. I tried everything to get them to honor the first statement. They were very rude and demanded the extra 3 months of payments. I had to pay because I had no recourse. I hope others don't have to face the same situation that I did.

[Doodledogsmom]

You are only talking about federal student loans that are minimal amounts to most students. It's the private student loans that are astronomical. These students will never be able to catch up....

[studentloanjustice]

Bankruptcy must be returned at the soonest opportunity, I agree. Insodoing, The Department of Education should be compelled to take its oversight duties very seriously, and used its considerable leverage over the colleges and universities to lower their prices, and improve their quality. It's long past time for a major shift at ED to a good governance model. The sooner the better.