Student Loan Proposal that Could Change How Students Borrow
The rate of default is driving up the cost of student loans for some colleges. Default rates two years out from graduation range from 12.4% to 37% and higher in some instances. This is a problem because of how higher institutions qualify for participation in Federal Direct Loans, FFEL (Federal Family Education Loan) Program loans and Pell Grants. Those that have student loan default rates of 25% or more may be barred from accepting students with these loans until the end of September 2015, unless they appeal. Richard Green, a contributor writing for the Forbes website wants to tie student loan rates to the ten-year treasury rate, currently at 2.66%, because student loans typically have a ten-year term. Federal student loan rates are now at 4.66%. Here’s his proposal:
“Pricing loans differentially based on the default performance of students at different colleges would give administrators a strong incentive to make sure their students did not default.”
How does this incentivize administrators? Making sure students get what they pay for, a marketable education, leads to lower default rates. Thus, the institution will be eligible to accept more students with lower interest rate loans. Lower rates for students attract a bigger student body, making the school more economically secure.
Does Mr. Green’s proposal have legs? It could be part of a comprehensive package addressing the student debt crisis. It ties student loans to the “real” economy. It may take a while for a proposal like this to make it to the halls of government. Private solutions for student debt are available now.