Two important things will happen this November. First, after the longest and most expensive electoral campaign in world history, the United States will finally pick a president.
Second, Felice Goldman’s daughter will turn 27. But instead of starting her career as a special education teacher, Goldman’s daughter finds herself trapped in “major college loan debt,” Goldman says. Her daughter is living at home, working three jobs. Her parents even have helped pay off a few of her smaller college loans.
It still isn’t enough. The harder she works, the deeper into debt she sinks. “She… feels like she will never get out of this vicious cycle,” Goldman writes. “She has negotiated some of her loan’s interest rates down, but is now considering bankruptcy. This is a nightmare for so many young adults.”
And it’s a nightmare that has no end in sight, even in bankruptcy. That’s because student loans — both public and private — are the only type of debt that cannot be wiped away by declaring bankruptcy.
For Goldman and her daughter, then, this is a very important election. Under changes enacted by the Obama administration, Goldman’s government may qualify for income-based repayment program that cap her monthly payments at 10 percent of her monthly income. And she may qualify for the Public Service Loan Forgiveness Program, which clears away student debt after 10 years of payments if the graduate works in a career that serves the public good (like being a teacher).
Mitt Romney has promised that, if elected, he’ll repeal both programs. In A Chance for Every Child, Romney’s education plan, he decries a modern education system where “a government loan is an entitlement, default is the norm, and loan forgiveness is the expectation.”
For students, graduates and parents like Felice Goldman, then, this election could have a direct impact on their long-term financial futures.
“Governor Romney would end up cutting investment in student aid for post-secondary education, where Obama would maintain the status quo,” says Mark Kantrowitz, a student loan expert and founder of FinAid.org.
Here are three ways the 2012 election could affect future generations of students:
Will You Ever Escape?
Student loans have changed in two drastic ways in recent years, but few people other than financial aid experts seem to have noticed. First, President Bush signed the College Cost Reduction and Access Act of 2007, creating a program for income-based repayment in which college graduates making under a certain income threshold would have their monthly student loan payments capped at 15 percent of their salary, and any unpaid student debts would be forgiven after 25 years.
The second change came at the hand of President Obama, who lowered the payment cap to 10 percent of income, and shortened the forgiveness period to 20 years.
“It seems that a lot of borrowers aren’t aware of these changes,” Kantrowitz says.
If elected, Romney has pledged to end both programs. “(W)hile President Obama’s idea of sound advice to student borrowers is a promise that their loans will be forgiven if they cannot afford to repay them, Romney supports private-sector involvement to ensure students are clearly informed about their obligations when they apply for federal student loans, and that they receive support that goes beyond a call from a collections agent to help keep them on track to repayment,” Romney wrote in his education plan.
The plan does not mention specifics on what support graduates would receive to keep current on their loan payments.
Some debt experts have panned Romney’s proposal for helping lenders at the expense of student.
“It sounds like a good deal for private lenders, but that’s not a good deal for borrowers,” says Barry Paperno, a credit scoring expert and Credit.com’s community director.
Others say that Romney’s plan makes sense, especially if it’s followed by changes that give students more power to make education choices, and more incentives to do well.
“The federal government should get out of the student loan business,” Richard Vedder, an adjunct scholar at the American Enterprise Institute, a conservative think tank, wrote in a recent opinion article for Bloomberg.com. “It should provide educational vouchers (similar to Pell Grants) directly to students (not schools), and make those vouchers progressive (very low-income students receive the most).”
What Role for Private Lenders (and Their Fees)?
For decades, leaders of both parties bemoaned the way that the federal government gave loans to college students. Loan money from the U.S. Department of Education was funneled through private banks, which lent the money to students, and collected hefty fees from the government for making and servicing the loans.
As part of the health care reform act of 2010, President Obama pushed through changes ending that private system, and instead made the government directly responsible for lending taxpayer money to students. The change will save taxpayers $58 billion over the next decade by eliminating the fees paid to private lenders to make and service the loans, as well as the insurance against loan failure that the government extended private lenders, according to the Congressional Budget Office.
If Romney wins, he has pledged to reverse Obama’s policy, saying that the government should “welcome private sector participation instead of pushing it away.”
Many observers, including Kantrowitz, believe that bringing private lenders back would increase the cost of the program by tens of billions of dollars. Others wonder what the private lenders bring to the table, for either the government or borrowers. Since private loans enjoy the same protection from bankruptcy as government loans (even though the government assures they will be repaid), do not offer as many repayment options as government loans, and often come with significantly higher interest rates, some experts believe that letting private lenders back into the business of loaning public money could strip many graduates of the current protections from unemployment and salary fluctuation.
“The private lenders have done relatively squat,” says Mitchell Weiss, a college finance expert and contributor to Credit.com. “If you bring the private lenders back in, would you limit the interest rate they can charge? I can’t imagine the Republicans will do that.”
What’s the Future of Private, For-Profit Colleges?
After a series of investigations found serious problems at many for-profit colleges and universities, including billions of dollars’ worth of federal student grants and loans going to schools with abysmal graduation and job placement rates, the Obama administration created gainful employment rules that threaten to strip colleges of federal aid if more than 65 percent of their former students fail to pay their student loans, or if the average graduate winds up paying more than 30 percent of her discretionary income or more than 12 percent of her total earnings on student debt.
“These new regulations will help ensure that students at these schools are getting what they pay for: solid preparation for a good job,” Secretary of Education Arne Duncan said when the rules were announced.
Romney has criticized the rules, saying they stifle innovation in an industry that needs new business models to bring costs down.
“Ill-advised regulation imposed by the Obama Administration, such as the so-called “Gainful Employment” rule, has made it even harder for some providers to operate while distorting their incentives,” according to Romney’s education plan. “Rather than adding complicated and unnecessary regulations, the federal government should allow consumers in the market to make their own choices while providing the information to make those choices well.”