In February 2016, the Government Accountability Office released a report that suggests that the Obama administration’s policies have exacerbated student debt. Student loans account for nearly one-quarter of annual federal borrowing and it is estimated that only 37% of federal student loan borrowers are actually paying down their loans. In this regard, the federal student loan program has begun to mimic the pay-day lending industry. In April, the Wall Street Journal reported that approximately 43% of the 22 million Americans federal student loan borrowers were not making loan payments as of January 1. It also reported that 3.6 million Americans were in default on $56 billion in student debt. These trends suggest that the federal government may have to write down as much as $500 billion as a result of future defaults and loan forgiveness programs.
Currently, there are more than twenty Income-Driven Repayment Programs available to borrowers with federal student loans. These programs function in a similar fashion, allowing borrowers struggling with their finances to defer their payments. However, when payments are not made, the loan balance continue to grow. This is the case for over 20 million borrowers who are currently participating in such programs. The federal government will also have to deal with another student debt challenge as a result of the Public Service Loan Forgiveness Program. Passed in 2007, this program allows borrowers who work for nonprofit organizations or government agencies to have their loans forgiven after 10 years. According to the Congressional Budget Office, this law is expected to cost about $5 billion annually.
Congress has several options when dealing with the federal student loan program and its potential losses. One option is to demand that the Congressional Budget Office appropriately score the Income-Driven Repayment options. The federal government should use nonperforming loan standards similar to those used by banks. Additionally, it should be mandated that that Education Department reserve funds in anticipation of significant foreseeable write-offs. For example, if 20% of the current student loans end up being written off, the department will be responsible for writing off more than $20 billion annually.
Another option is for the Direct Lending Program to start leveraging its power to price loans differently based on the success of students. Additionally, the model by which colleges and universities receive programs should undergo necessary changes. Currently, colleges and universities receive Title IV funds at the beginning of the semester. These schools must return these funds if students drop out before completing 60% of a course. A proposed change to this program would give schools a portion of loan proceeds at the beginning of the semester instead of the full amount. Schools would only receive additional funds if the students enrolled are able to graduate and pay down their student loans.
Overall, changes to the federal student loan programs are likely to be the only solution when it comes to the problems incurred by nonpayment.
http://www.wsj.com/articles/writing-off-student-loans-is-only-a-matter-of-time-1471303339