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The Student Loan Crisis Everyone Saw Coming

President Obama has fought hard to ease the student-debt burden, but Republicans threaten his fragile gains.

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The Obama administration doesn’t deserve primary credit for those changes, however. The new rules were part of the  implementation of a law passed in 2007 during the George W. Bush administration, the College Cost Reduction and Access Act. But it’s probably worth noting that that law — the brainchild of liberal California Democrat George Miller — was passed by the Democratically controlled Congress that came into power in 2006 and was initially opposed by a majority of Republicans in both the House and the Senate. It might also be worth noting that back in 2005, when Republicans held power in Congress, and forced through a major revamping of the nation’s bankruptcy laws, a little-noticed-at-the-time provision ensured that private sector student loans could no longer — except under extreme circumstances – be discharged as a result of a bankruptcy declaration. This blatant handout to the private student loan industry set the template for what was to follow: Democrats have tried to make it easier for borrowers to cope with their debts, while Republicans have worked to make it more difficult.

The next major step, for which the Obama administration deserves a large amount of credit, came in the form of  a major revamp in how the student loan industry operated, passed into law in March 2010 as part of the Affordable Care Act. Prior to reform, about 65 percent of federally backed student loans  originated from the private sector, with the government guaranteeing the loans against the default. The system resulted in  rampant corruption – loan companies paying off college financial aid administrators — and was savaged by critics as an expensive government handout to the private sector. By cutting out the middle man and converting all federally guaranteed student loans to direct loans administered by the government, the Obama administration ending up saving an estimated $68 billion — money that was then used to pay down the deficit and help fund a top Obama education priority, the significant expansion of the Pell Grant program.

Republicans screamed  bloody murder – attacking the reforms as a  “Washington takeover” of the student loan industry — a criticism echoed recently on the campaign trail by Mitt Romney, who described Obama’s student loan reforms as a “government takeover.” It was an assault that never made much sense, as the industry would not have  existed without the federal guarantees and ended up costing taxpayers  more than a government-administered program. But with Democrats in control of both the House and the Senate, the GOP couldn’t stop it. And advocates working in the higher education sector generally gave the reform good marks, even while noting that there was much work to be done: “For students and families, this is all good news,” Lauren Asher, president of the Berkeley, Calif., think tank the Institute for College Access and Success, told Bankrate.com, at the time of the bill’s passing.

After the midterm elections, further legislation to address burgeoning student loan debt — such as Sen. Richard Durbin’s, D-Ill., efforts to once again allow  student loans to be discharged in bankruptcy hearings – became politically unfeasible. Indeed, at least one Republican presidential candidate, Rick Santorum, even called Obama a “snob” for encouraging the very idea that more Americans should go to college. But the White House continued to seek creative new ways to lower the student-debt burden. In October 2011, as part of his  “We Can’t Wait” initiative, Obama announced  an expansion of the income-based repayment program. Now borrowers would only have to pay 10 percent of their income, and the debt would be forgiven after 20 years instead of 25. The Department of Education also announced that borrowers who had taken out different kinds of federal loans would be allowed to consolidate them all together into a single payment plan with lower interest rates. Again, Republicans  protested, complaining that Obama’s measures would encourage “increased borrowing across the board.”

 
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