How Washington Can Serve the

tudent Borrower
PAUL COMBE

he goal of the Higher Education Act of 1965 was to extend postsecondary education to anyone who would benefit from it, regardless of financial circumstances. Part of the Great Society legislation, the law created a number of education financing programs to provide access to higher education to the nations poorest citizens. In the early years, this visionary law offered education opportunity primarily through federal and state grant programs. What relatively few loans were available were targeted toward less needy families with greater capacity to repay. But the emphasis changed in the 1980s, as federal budget constraints and politics intervened. There wasnt enough public money for grants to meet the needs of all who could benefit from higher education. As tuitions rose, middle-class Americans demanded their share. Soon, loans became the predominant means of financing access to higher education. The rationale used to justify the policy shift was that since the student is the primary beneficiary of higher educationthe median income for families headed by four-year college graduates in 1999 was $33,000 higher than for those headed by high school graduatesthe student should pay against new and improved, future earnings. Today, 60 percent of all financial assistance is provided in the form of loans. Of course, the education of an individual enhances not only the success of one person, but also that of the larger community. If higher education is the key to participation in the information economy and a compelling necessity for the individual and society, then over-reliance on loans is an inexcusable barrier to access. For students whose parents rely on checkcashing services, lack a checking account and cant qualify for credit cards, the very idea of borrowing may create an insurmountable barrier to higher education. So where are we now? Federal and state grants have not kept pace with fast-growing college costs. As a result, students have had to take out more loans. Between 1990 and 2000, federal and state student loans grew by 186 percent, according to the College Board. The needier the student, the more debt

required to get basic access to higher education. The more debt, the more handcuffed the student will be in terms of post-graduation career and economic choice. Moreover, by relying on loans, society is pushing the responsibility for financing higher education off to the next generation. This intergenerational shift is hardest on students with the greatest financial need. In and of themselves, loans are not the problem. Loans are a useful tool for financing education as long as they are part of an appropriate mix of grant and work aid tailored to the financial circumstances of the individual. The problem is simply too little grant funding at the state and federal level. According to the congressional Financial Aid Advisory Committee, unmet need is now almost equal to the average annual federal education loan. Until there is a concerted effort to increase the availability of need-based, grant funding, loan limits will continue to grow to keep up with unmet need and rising tuition.

IF STUDENT LOAN DEFAULT RATES ARE LOW,

THE LOAN INDUSTRY IS HAPPY TO TAKE CREDIT. IF DEFAULT RATES ARE HIGH, WE BLAME THE BORROWER.

Even with more grants, loans will always be a part of the picture. But if, as a society, we rely on loans to pay for college, we should at least provide borrowers with economic literacy and financial support services before during and after graduation to ensure that they successfully complete the financing of their postsecondary education. With loans, education financing ends with the last loan payment. We must assume greater responsibility for assisting and educating borrowers so that they can complete their education and successfully complete the financing and repayment of education loans.
CONNECTION SPRING 2002 43

Most students make their borrowing decisions as teenagers but will have to live with the consequences a decade later as adult wage earners. The 1998 reauthorization of the Higher Education Act did not provide adequate post-graduation support for student borrowers. Indeed, the federal loan program is structured such that the borrower is ignored if in good standing and aggressively pursued if having difficulties. If student loan default rates are low, the loan industry is happy to take credit. If default rates are high, we blame the borrower. Applying for financial aid can seem daunting to some. Navigating deferments, forbearances and repayment options on multiple loans from multiple lenders after graduation, is genuinely complex. Yet, after graduation, borrowers, for the most part, are left on their own to navigate the system. Default has serious consequences, making a borrower ineligible for a mortgage, car loan, further education loans or other credit. And federal student loan debt cannot be discharged in bankruptcy. There are sufficient repayment options in the program that no borrower, working in good faith, should default. But many borrowers lack information on these options.

So what can we do to help student borrowers upon graduation? Employers, who also benefit from education, need incentives to assist employees in repaying their education loans as a fringe benefit. Repayment options need to be simplified with incentives for early and timely repayment. We must also create incentives for guarantors to work closely with the student from loan inception through successful repayment. The experimental Voluntary Flexible Agreements entered into between a few guarantors and the U.S. Department of Education under the last reauthorization provided important new ways for guarantors to proactively interact with and counsel borrowers to ensure that they repay their loans successfully. The results of these experiments should form a new model for guarantors in the 2003 reauthorization. Rather than rewarding guarantors as a collection agent after the student defaults, rewards should be focused on default prevention and borrower success. We must shift from punitive to supportive, from reacting when a borrower defaults to proactively helping borrowers manage their debt. Paul Combe is CEO of American Student Assistance.

The New England Council is an alliance of businesses, academic and health institutions and public and private organizations throughout New England formed to promote economic growth and a high quality of life in the New England region. The Council is dedicated to identifying and supporting federal public policies and articulating the voice for its membership regionally and nationally on important issues facing New England. The New England Council is also committed to working with public and private sector leaders across the region and in Washington, D.C. through educational programs and forums for information exchange. For membership information, contact: James T. Brett, President and CEO The New England Council 98 North Washington Street, Suite 201 Boston, Massachusetts 02114 (617) 723-4009 Fax (617) 723-3943 newenglandcouncil@msn.com On the internet: www.newenglandcouncil.com
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