Student Debt Peaks: Help on the way

On average, students taking out loans to pay for college these days now have $26,600 in debt to pay off when they graduate. Those in medical school owe $200,000 on average upon completion.

Nearly one in five (19 percent) of our nation’s households struggle with student debt, more than double the share two decades ago. That is a 15 percent increase from 2007, just before the recession hit and Barack Obama was elected President. 40 percent of all households headed by someone 35 years old or younger carry this burden like 21st century indentured servants.

The worsening crisis in student financial aid is a serious, long-term problem, especially if we want to invest and build a broad-based, middle-class 21st century economy. During the past decade, the U.S. has fallen from second to 16th in the world in the percentage of young adults with college degrees. A major cause for this precipitous decline is that tuition costs nationwide have been going up at twice the rate of inflation for several years running. Not surprisingly, since the economy crashed in the last year of President George W. Bush’s administration, many students dropped out because they or their families couldn’t handle the mounting debt load.

Many people don’t realize that President Obama tackled this challenge head-on and persuaded even the sitting, gridlocked Congress to do something. Working together for constructive change, they enacted landmark legislation in 2010 to reform the student loan system. Arguably, this was the greatest, forward-looking bipartisan achievement of the past four years.

First, Congress allowed the old, wasteful model to expire, developing a new one wherein the federal government paid private banks to make student loans at market interest rates. Those loans were subsidized and backed by 90 percent federal guarantees, if and when students defaulted. Many students accumulated debts they increasingly feared they could never repay and dropped out. Uncle Sam and all federal taxpayers got left holding the bag, while the private banks, acting as middlemen, took 90 percent on each loan in default. Sound familiar?

Thankfully, a new and far less costly model has been put in place to get better results. The federal government has set aside a student loan reserve, while universities determine who is eligible for loans. The federal government then lends money directly to students. Interest rates are lower. Even more encouraging, student borrowers now have the option to repay their loans as a low, fixed percentage of their income for up to 20 years. This means that no student will ever have to dropout because of a daunting, short-term debt problem. Furthermore, it is a sound problem-solving investment. If a student wants to work in rural Montana, for example, or inner-city Chicago to become a family practice doctor, nurse, teacher, firefighter or police officer, he/she can do it because student loan repayment is now determined by salary, not vice versa.

Believe it or not, this new and improved student loan system will also save at least $60 billion more over the next 10 years than the old, contrived approach. The new law ensures those savings are used to ensure that Pell grants keep up with the rate of inflation for the next decade. It will also make certain that the existing tuition tax credit will remain available for financially-strapped families.

On Election Day, remember that President Obama’s position is to fully implement this smarter, more effective and less costly student aid system by 2013, moving it up a year from 2014 when it was originally intended to fully kick in. Mitt Romney’s position is to repeal the reform law and go back to needlessly funneling taxpayer monies through subsidized private banks acting as middlemen. Once again, student loans will become more expensive because market rates for comparatively short-term loans are customarily higher. The dropout rate will increase because it will become harder and more costly to repay loans.

President Obama is throwing you a life preserver in uncertain, roiling economic waters, while Mitt Romney is busily pulling up the ladder behind him on his yacht.