3 minute read 3 Feb 2020
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Four potential solutions for the US student loan crisis

By Kasia Lundy

EY-Parthenon Principal, US Higher Education, Ernst & Young LLP

Strategist. Education industry thought leader. Wife. Mother.

3 minute read 3 Feb 2020

Solutions to federal student loan system’s increasing debt are needed soon so many Americans can continue to access a higher education.


The federal student loan system is a cornerstone of US higher education, granting access to millions of Americans over the past 60 years. However, mounting debt levels have raised concerns about the viability of the student loan system, sparking a national debate around the government’s ability to rein in costs of the system while continuing to provide access to higher education.

Federal student loan system figure 1

Over the last two decades, the burden of funding higher education has shifted to students. Consequently, students and families have come to rely more heavily on student loans, putting more strain on the federal student loan system.

The total amount of outstanding student debt has increased dramatically in recent years with cumulative debt rising almost 50% over the past seven years surpassing $1.5 trillion. Additionally, student loan delinquency rates have nearly doubled from 6% in 2003 to 11% in 2019.

Further, a recent study by the Brookings Institute estimates that 40% of the 2004 college-entry cohort that took out loans will have defaulted by 2023. This is perhaps unsurprising given that growth in the average size of a federal student loan is outpacing wage growth.

Federal student load system figure 2
Federal student load system figure 3

Currently there are several suggested remedies to this issue:

  • 1. Proposal to Reform the Higher Education Act

    This proposal from the White House includes consolidation of income-driven repayment plans, capping PLUS loans for parents and graduate students, and eliminating the Public Service Loan Forgiveness Program. In its place, loan forgiveness to all undergraduate students will be extended after 180 months of repayment. The administration hopes to streamline the student-loan system, shift responsibility for debt away from the government, and encourage borrowers to pursue high-demand fields.

    Critics are concerned that a simultaneously proposed $7 billion budget cut for the Department of Education may limit the effectiveness of suggested changes to Federal Work Study and loan repayment programs. Additionally, critics worry that borrowers may have fewer loan options, and thus pay higher prices, and that the new system that gives preferential treatment to specific career pathways.

  • 2. The College Affordability Act (CAA)

    This bill passed by the House of Representatives aims to address the rising cost of tuition, streamline student loan repayment, and create more generous repayment plans for existing borrowers.iSupporters of the CAA highlight its proposals to make community colleges free via a federal-state partnership and increase the Pell Grant value to assist students with tuition costs.

    Critics point out that a $500 boost of the Pell Grant still falls well short of covering the majority of four-year institutions’ cost of attendance and claim that the CAA is not comprehensive enough.

  • 3. Democratic presidential candidate proposals

    Senator Bernie Sanders proposes cancelling all $1.6 trillion of student loan debt through a new tax on financial transactions. Senator Elizabeth Warren calls for cancelling student debt for more than 95% of borrowers and simplifying the student loan debt forgiveness process.

  • 4. A. Wayne Johnson proposal

    Former Chief Operating Officer at the Office of Federal Student Aid, appointed by Betsy DeVos, and current candidate for the US Senate representing Georgia, offers what he believes is a middle ground. He calls for the government to forgive up to $50,000 for all borrowers, financed through a new 1% tax on corporate earnings. He believes his plan is a stepping stone towards replacing student loans with government vouchers to partially cover tuition costs, which would not need to be repaid.

Summary

Mounting debt levels have raised concerns about the viability of the federal student loan system. Rising tuition costs, student loan delinquency and loan forgiveness programs are all contributing to this swelling debt, sparking a national debate. Competing suggested solutions by both Republicans and Democrats are currently being discussed. It is imperative that we reach some resolution to both relieve some of the government’s financial burden yet still provide access to higher education for millions of Americans.

About this article

By Kasia Lundy

EY-Parthenon Principal, US Higher Education, Ernst & Young LLP

Strategist. Education industry thought leader. Wife. Mother.