He introduced an executive overhaul of the federal loan system at the University of Michigan in January. Its $10 billion price tag for work study positions and supplemental grants accompanies two important power shifts.
The proposal lets Washington fix interest rates and offers more control over the loan process. Further, it adds federal oversight to state universities with restrictions on campus-based aid.
I criticized this model in January because it creates state spending on compliance and doesn’t encourage budget reform on campus. The controls reward states with their own money and are even a tough sell to universities.
The plan lowers forgiveness terms from 25 years to 20 years and reduces minimum payments from 15% of discretionary income to 10%. It eases repayment obligations and removes private industry, effectively making a tuition loan an entitlement.
Spending your student to college
More students will borrow when repayment is optional, though interest rate savings are insignificant at $10 a month. Students have incentive to attend a college or graduate program they can’t afford over one less preferred. Monthly payment caps and interest rates become the political equivalent of Medicaid or Social Security.
For example, the less a graduate earns the greater the loan forgiveness. Universities will raise tuition when enrollment numbers increase backed by taxpayer loans.
A group of chancellors, including UNC’s Holden Thorp, blame state legislatures for tuition hikes and expect loans to carry higher interest rates when Washington lends directly.
CNBC produced Price of Admission: America’s College Debt Crisis examining $1 trillion in student loan debt. It argued the bubble could burst if students can’t find jobs to make loan payments, noting underemployment for 50% of graduates in the last two years. For-profit universities drove a significant increase in spending and defaults.
College administrators control campus spending and tuition rates. The UNC Board of Governors appropriates state funding to universities from a sum budgeted by the General Assembly.
This system relies on responsible spending by university officials. I am studying the deliberations of faculty committees on budget cuts and tuition to gain a better understanding of priorities for the short session. That process will create a dialogue about costs among educators, lawmakers and families.