No More Collegiate Debt
Could the next drag on America's economy come from student loans?According to StudentLoanHero.com, America's student loan debt burden hit $1.56 trillion – more than any other kind of household debt except for mortgages.
Student loans are one of the most pervasive debts. The Department of Education offers assistance programs, but participants who don't exactly follow loan servicer instructions can rack up unanticipated interest charges or lose debt forgiveness. If you fall behind with payments, you're stuck dealing with debt collectors – because student loans generally can't be discharged in bankruptcy.
Help for current and future students may come from Congress, thanks to the recently proposed Debt-Free College Act. The bill's sponsor, Sen. Brian Schatz (D-HI), aims to improve state funding for public universities through federal incentives. The proposed bill would set up federal matching dollars for state spending programs to fill the unmet financial needs of college students.
Not Just Tuition This Time
The Debt-Free College Act goes a step further than earlier legislation by making aid eligible for all college costs, not just tuition. According to data from the College Board's Trends in College Pricing for 2018, students at four-year public in-state schools paid more in room and board costs ($11,140) than they did for tuition ($10,230).
The goal is to create a combined state-federal safety net to make college affordable for everyone without the need for student loans, but how would the Debt-Free College Act work in practice?
State participation is the linchpin. States that receive grants must accept responsibilities, like capping tuition and fees for state universities within certain inflationary limits and maintaining minimum support levels. States don't like ceding flexibility to federal programs, especially with limited control over the corresponding federal funds.
If a majority of states refuse to participate, the program will collapse. Expect compromises over time to get greater state compliance.
If enacted, the Debt-Free College Act won't affect private universities. You'll have a debt-free option, but that may not be at the university of your choice.
Note that debt-free college is not the same as free college. The bill is focused on filling unmet needs, not covering all costs. The bill would give priority to Pell Grant recipients. The "expected family contribution" is still in effect, financial aid packages still play a role, and you'll still have to fill out the dreaded FAFSA form.
Hey, What About Us?
The Debt-Free College Act is not without flaws, starting with how to pay for the estimated $80.1 billion for the first year of federal-state partnerships – not to mention future effects of inflation and soaring college tuitions.
In addition, the Debt-Free College Act won't do much for graduates that share the majority of the current debt burden. Progressives have kicked around the idea of cancelling student loan debt, but it's unrealistic to expect Congress to deal with both past and future student loan debts in the same session – and enthusiasm for student loan debt reform may be dampened without assistance for current debtors.
Relief for existing student debtors might be an easier economic sell. A 2018 report published by the Levy Economics Institute of Bard College determined that wiping away college debt ($1.4 trillion at the time of the report) would boost GDP between $86 billion and $108 billion annually for the ten succeeding years. Given the double-digit default rate for student loans, that's not a bad economic payback. If you want to reduce your interest payments and lower your debt, join MoneyTips and use our free Debt Optimizer tool.
Expect any final version coming out of the 116th Congress to be a watered-down version that combines some relief for future and existing student loan debts. For now, it's important to plan as if no help were coming at all.
Will the Debt-Free College Act become law this year? The odds aren't good for passage through both houses and a signature from President Trump. Don't wait around for assistance to magically arrive.
Future students should take all steps possible to reduce potential costs. Consider grants, scholarships, work-study programs, and paid internships. Your collegiate career is an investment. Is your planned degree/university choice likely to lead to a job that pays enough to pay off your debts?
If you're already struggling with student loan debt, review options like income-based repayment plans on the Federal Student Aid website. Loan consolidation is another choice, if you can get favorable terms that make your payments more manageable.
Minimize your student loan debt while you're in school. Afterward, set up a manageable monthly student loan payment plan and make at least the minimum payment every month. We realize that's far more difficult than it sounds, but it's important to face your situation head on. Waiting on Congress for help is just above lottery tickets on the list of bad financial strategies.
Find out quickly at what rate you can refinance your student loan.