Too complex, poorly targeted, too arbitrary: These are some of the criticisms The Institute for College Access and Success levels against the federal student loan program in a comprehensive white paper, "Aligning the Means and the Ends: How to Improve Federal Student Aid and Increase College Access and Success."
The Student Loan Ranger couldn't agree more, and suspects that most people who have struggled to understand the startling panoply of federal student loans, loan servicers and repayment plans would agree.
Fortunately, while the paper does not come to praise the student loan system, it doesn't come to bury it either. Instead, it proposes detailed solutions to a wide range of issues that include improving the student aid application process, rewarding colleges that serve low-income students well, increasing need-based grant aid such as Pell Grants, streamlining tax benefits and providing students with the basic information on college costs, aids and outcomes.
A key proposal is replacing subsidized and unsubsidized Federal Direct loans for undergraduates with a single loan that is easier to understand and administer.
This "One Loan" would have fixed interest rates – an important borrower protection – at rates that cover the government's cost of borrowing plus a fixed amount to cover the cost of running the program. Interest rates would be subject to a universal cap, just as today's federal loans are, to protect borrowers if interest rates rise precipitously in the future.
The One Loan has a few helpful innovations. It would have a low rate based on the government's cost of borrowing while students are enrolled at least half time and during their six-month grace period after graduation. The rate would rise by the fixed margin necessary to run the program described above once the student is not in school.
These provisions would protect students from exorbitant interest accrual while they are in school and give them an incentive not to stop or drop out.
Even more innovative is the paper's proposed interest rate insurance. This provision would lower the One Loan's otherwise fixed interest rate if market rates lowered significantly. Millions of borrowers who are currently paying high interest rates in a historically low interest rate environment would have been helped by this simple and automatic protection.
The paper also proposes reforms to simplify the repayment process. One would allow borrowers to make a single payment on all of their federal loans.
The only way borrowers can accomplish this right now is by consolidating their loans. This creates what the organization accurately describes as a "bureaucratic hurdle" and is not the most efficient way from some borrowers to repay their loans.
The Student Loan Ranger wholeheartedly supports the paper's recommendation to ensure every borrower has access to one income-driven repayment plan that will never exceed 10 percent of their income and provides forgiveness in 20 years.
Although well-intentioned, the plethora of income-driven repayment plans – including Income-Based Repayment, Pay As You Earn, Income-Contingent Repayment and a repayment plan for new borrowers that is slated to become available in 2014 – is needlessly confusing for borrowers.
Happily, the opportunity exists to implement some of these proposals to simplify the student loan system and make it work better for borrowers, especially since this appears to be a bipartisan goal. The slated reauthorization of the Higher Education Act, which expires at the end of 2013, provides one likely vehicle for such reform.
In the meantime, make sure you fully understand the current student loan system by purchasing our e-book, "Take Control of Your Future," from the Kindle Store. It clearly and accessibly details your borrowing, repayment and forgiveness options (and the proceeds go to fund our work helping borrowers like you). Enter promo code SLR1 for a chance to win a $100 Amazon gift card!
Isaac Bowers is a senior program manager in the Communications and Outreach unit, responsible for Equal Justice Works's educational debt relief initiatives. An expert on educational debt relief, Bowers conducts monthly webinars for a wide range of audiences; advises employers, law schools, and professional organizations; and works with Congress and the Department of Education on federal legislation and regulations. Prior to joining Equal Justice Works, he was a fellow at Shute, Mihaly & Weinberger LLP in San Francisco. He received his J.D. from New York University School of Law.