Interest Rates & Accountability: How to Solve the Student Loan Crisis

After leaving Congress, I spent three years teaching at colleges across Pennsylvania. But you don’t need to be on campus to know that young Americans and their families today worry greatly about college affordability.

From 1999 to 2009, college tuition rose by 73% while family income fell by 7%. The cost of higher education has eaten up an ever-increasing percentage of family income, forcing more and more students to borrow beyond what their families can sacrifice.

Today, 40 million Americans have at least one student loan account, with total loan debt at $1.3 trillion — more debt than America’s auto loans and credit cards, and the largest source of debt for households aside from mortgages.

We’re facing nothing short of a student loan crisis in this country.

If we truly believe that American prosperity is dependent upon how successful we are in preparing our young people to compete in this global economy, then our leaders must develop a balanced, comprehensive approach to tackle this problem.

So what should such an approach look like?

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There’s More Than One Fix Needed

We have to begin by addressing both sides of the affordability equation: federal aid and accountability from colleges for skyrocketing costs. Our leaders have focused heavily on restructuring federal aid — but we are seeing a drastic increase in tuition, too.

There are a couple of factors here. For one, most schools are governed by shared decision-making processes, where power and authority are given to people — often academic faculty without business credentials — who are not accountable to economics in times when finances are tight and changes must be made.

Also, at many schools, full-time professors are increasingly teaching only one or two classes a year — certainly not the most efficient use of staff time — and administrative hiring has outpaced educational.

College inefficiencies, in turn, have increased operating costs, which are then passed along to students through higher tuition and fees. And with extra costs being paid through student loans, school administrators have little incentive to adjust their practices.

This does not mean we should stop giving grants, loans, tax credits and deductions to students and their families. But it is time to start holding schools accountable because they cannot do it themselves. We could, for instance, condition government student loans to colleges and universities upon the institutions’ accountability in tuition and fees rising at or below inflation.

None of this, however, would work if we do not also tackle the structure of student financial aid. Based on current loan rate calculations, the government will make $127 billion in profits from student loans in the next decade as young Americans drown in debt.

We need to calculate interest rates in a way that makes them predictable for families, affordable for students and accountable to the taxpayer. But our politicians are at a philosophical impasse.

Some see education as just another market commodity, forcing students to face double-digit interest rates. Others want student loans set at the same rate the Federal Reserve gives to banks, which would be less than 1%, forgetting that the bank rate is meant for extremely short-term deposits to ensure liquidity whereas student loans are long term.

Both sides are wrong.

We could devise a lower rate based on a capital return on investment timeline, more reflective of the term of a student loan. One way to do this is to take the average of the 10- and 30-year Treasury notes as the base rate, with half of the percentage change in the Consumer Price Index added on top of that.

This is a better equation that takes into account a variety of factors, including our national need to invest in knowledge; the dual premises that the government should not be in the business of making money from students, but that students should bear a reasonable burden for the risk incurred; and, a student’s cost of living at the time of the loan. So, the government neither makes nor loses money, and student interest rates are lowered.

Finally, Congress must devote greater oversight to the practices of for-profit colleges. While some offer useful learning services, others take advantage of vulnerable populations — even veterans — encouraging them to take on heavy debt for degrees with little earning potential.

For-profit colleges serve 13% of students in higher education, but receive 31% of federal student loans, according to the U.S. Department of Education. More worrisome, half of all student loan defaults come from this group of learners. Default of any kind drives up education costs for everyone, which is why we need greater oversight and stringent regulation for how these schools operate.

Maybe it is because I am the son of a teacher, but I truly do not believe we can overinvest in knowledge. But we must ensure we do so in a way that is smart, efficient and fair.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.