Policy Proposal: Student Loan Default Essay

3839 words - 15 pages

Along with scholarships, fellowships, and grants, student loans are an important method of financing post-secondary education. With tuition costs rising, more students are borrowing to pay for college education today. However, not all students realize the burden of paying back their student loans. Many are defaulting.
Moreover, individual borrowers are not the only ones who face the consequences of the loan default. The federal government recovers around 80% of the total defaulted amount of student loans, losing billions of dollars each year. The latest data from the U.S. Department of Education indicates that student loan default rates have been rising. Official 2011 default rate is 10%. ("Comparison of FY 2011 2-Year Official Cohort Default Rates to Prior Two Official Calculations"). The New York Federal Reserve reported that as of March 31, 2013 outstanding student debt surpassed credit card debt and was approaching the $1 trillion mark (Quarterly Report on Household Debt and Credit). If student loan default rates stay unchanged, the federal government will lose $200,000,000,000 of taxpayers’ money over the next few decades because of student loan defaults. Below is the chart representing the outstanding credit card and student loan debt over the last ten years (Quarterly Report on Household Debt and Credit).
Recent studies show that the number of individuals who default on their student loans has been steadily increasing as well. Statistics from the Institute for Higher Education Policy (IHEP) show that between 2004 and 2009 only 37% of federal student loan borrowers were able to make uninterrupted payments; it is an annual average of 7.4% (Cunningham, and Kienzl). According to IHEP, for every one borrower who defaulted, two more fell behind on payment by 60 days or more and as a result faced damaged credit and higher interest rates on other forms of financing (Cunningham, and Kienzl).
It is important to understand that many students borrow big amounts in federal government loans to pay for high tuition. Statistics show that the for-profit sector has the highest numbers of defaults among all colleges (Comparison of FY 2011 2-Year Official Cohort Default Rates to Prior Two Official Calculations) as the tuition in proprietary colleges is higher than in other schools. However, the government cannot completely ban for-profit colleges from operating, because some of them provide flexible and valuable educational programs and schedules that meet demands of many working students.
To address this situation, I will look into existing studies to establish the reasons of why students go into default, will try to understand why students of proprietary colleges default more often, and will look into existing regulations on student loan approval process. Based on the acquired knowledge, I will try to develop a few regulatory policy options that can reduce the amount of the students going into default. The proposed options will include regulatory changes...

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