I became a financial aid officer in the mid-70s. The mantra of that time was “access and choice;” in other words that every student who should be able to go to college, should go, and they should be able to go to the college of their choice. That eroded from “access and choice,” to “access” only, and now we have “access and success.”
WM: So what does this mean now? What does ASA actually do with students and institutions to try and help people manage debt?
PC: Internally, at ASA, it’s called proactive education debt management. This means getting a hold of the borrower before the major events occur, and make sure they have the information they need to make the right decision. We believe that all borrowers are working in good faith. We’re not trying to protect the federal government. We’re not trying to protect the lender. We’re trying to protect the consumer. The borrower wants to manage his debt. Very few people are trying to shirk it.
If you contact a borrower—if you’re proactive about it and you contact them beforehand—you can cut delinquency by 50 percent. And if you cut delinquency, obviously, that cuts default.
WM: Why does delinquency occur?
PC: If there are 30 million borrowers out there, there are 30 million reasons. But think of this in economic terms. The student loan, after you graduate from college, has zero utility. It’s like paying for a car that you crashed five years ago.
So you’re going to pay those things that have the greatest utility for you at the moment: You’re going to pay your credit card, your car payment, your rent, your food bills, all these things, your utilities. And somewhere down at the end of that list is your student loan. The student loan is the first thing that goes out, and the last thing that comes back in.
It’s a rational economic decision, and the intent is to eventually pay it. The borrowers don’t know the rules. They don’t know when they’re passing over these magic thresholds that put them in different categories. They’re just living their lives.
There’s zero reason for anybody to default on a student loan. There are enough remedies in this program to save anybody. There are deferments, there are forbearances, there are income based repayments. If people are given the right information at the right time, they shouldn’t become delinquent, and they should never default.
WM: I understand that there are a whole bunch of different things that you can help people with student loans to do to avoid delinquency but ultimately we’ve decided to finance higher education largely through personal debt. Does that work?
PC: I think there is a greater structural problem. But that threshold for that greater structural problem was passed in the 80s when debt became the primary means of financing access to higher education. There’s now approximately $100 billion in students loans made annually. Even if you froze college costs right now, the average indebtedness is $23,000 dollars. If by magic you were able to come up with another $100 billion for Pell grants, we’ve still got a problem. We’ve got 30 million people who are in debt and as the IHEP study shows, two out of five of them are in trouble, at least.
WM: Is there any reason to think that this is going to get any better?
PC: No. There is some rationale for student loans. From a public policy point of view — he who benefits, pays. You can’t work your way through college anymore, but you can use some debt. But the question is what the rational level for that debt is.
Yes, the federal government should pay for college, the states should pay for it, the parents should pay for it, the institutions should pay for it, and the students should pay for it themselves. But some 65 percent of college aid is now paid for in the form of loans. If we are doing that, what kind of services should we supply to the consumers afterward? No one has thought through the ramifications of this. If we are getting students into debt, don’t we have an obligation to help them get out of debt?
We have to come up with a better solution, but as long as there’s a loan program on the books -then we have to help manage them.
As soon as the promissory note is signed, the relationship between that borrower and the federal government changes. The federal government has an obligation to supply the kinds of services, consumer services, those people need to be successful.
Congress has done a good job of supplying the remedies. It’s just that there’s nobody charged with communicating with the borrower effectively. There’s no incentive structure anywhere to provide services to borrowers.
WM: What if people just stopped paying on the loans, would massive defaults draw attention to something unsustainable?
PC: Well, there are personal implications of that. The cost of defaulting on these federal loans is really high- it ruins your credit score; it shows up on anything from trying to rent an apartment, to buying a car. It increases your cost of any other consumer product you’re going to buy.
Most of the default, and a substantial portion of the delinquency, is actually on people who tried, but failed, to go to school.
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