Introduction

The federal government’s policies are the single biggest factor in the ruinous increase in college costs, including both tuition and student fees, in the last thirty years. The federal government has encouraged students to borrow more than they can afford to repay by making large student loans easy to obtain.

Federal student aid has fed an enduringly high rate of inflation in college tuition; created incentives for colleges and universities to compete with each other on the basis of student amenities more than the quality of academic programs; plunged many students into deep and sometimes insurmountable debt; and created perverse opportunities for federal bureaucrats to exert undue influence or control over colleges and universities that have grown dependent on the federally-approved flow of student loan dollars.

Inadvertently, Title IV of the Higher Education Act has turned American higher education into a special interest more devoted to protecting its access to public funds than to advancing the education of students or America’s international competitiveness.

Policy Recommendations

Student Aid Program Reform

Congress should reform Title IV regulations governing disbursement of student aid to cap federal loans per borrower, streamline aid by merging student assistance programs, and add basic requirements for aid eligibility.

Legislative Language: Congress should:

1. Add to 20 U.S.C. § 1078–2. (Federal PLUS loans) a subsection stating that “total loans made to a student or parent, including Federal Stafford Loans, may not exceed $75,000 per borrower.”
2. Add to 20 U.S.C. §1091. (Student eligibility) subsections specifying that to be eligible for Title IV federal student aid, students must
   1. have family incomes below 150% of the poverty level;
   2. maintain a 2.5 grade point average; and
   3. have received federal loans and/or grants for no more than four previous years.
3. Amend 20 U.S.C. § 28 (Higher education resources and student assistance) to streamline student aid into just two programs, a grant program and a loan program.

Discharge in Bankruptcy and University Co-Responsibility

Congress should reform Title IV regulations to require that colleges and universities assume partial responsibility for student loans.

Legislative Language: Add to 20 U.S. Code § 28 (Higher education resources and student assistance) subsections that

1. permit students to discharge their debts into bankruptcy and require institutions of higher education to accept responsibility for 50% of loans (including accruing interest) defaulted on by students at their institution, to be repaid to lending institutions over a 20-year period.

Income Share Agreements

Congress should provide a legal framework for income share agreements offered to students to finance student loans.

Legislative Language: Enact S.2114—116th Congress (“ISA Student Protection Act of 2019”).

Student Loan Buyback Program

Congress should mandate that colleges and universities that accept Title IV funds establish a student loan buyback program.

Legislative Language: Add to 20 U.S. Code § 28 (Higher education resources and student assistance) subsections that

1. require colleges and universities that accept Title IV funds establish a student loan buyback program to purchase Stafford Loans from lenders and replace them with new loans at a capped interest rate of no more than 1% a year.
2. Colleges and universities must finance this program at a level equal to at least 10% of the Title IV funds that they receive.
3. Student eligibility for the buyback program will be limited to borrowers who have successfully completed a financial literacy program and who have graduated from college with a GPA of 3.0 or higher.

Empower Students with Knowledge about Loans

Congress should empower students to make knowledgeable decisions about how much debt, if any, they can afford.

Legislative language: Add to 20 U.S.C. §1087cc–1. (Student loan information by eligible institutions (a) Disclosure required prior to disbursement) subsections that:

1. require colleges and universities to inform students of the expected total cost burden of attending the institution as a precondition of any student submitting an application for federal student loans;
2. require students to specify their preferred loan amount (up to the federally mandated annual limits), and update and reauthorize their preferred amount every year prior to loan disbursements, with the proviso that
   1. students may not be given loans in excess of the amount requested; and
3. require loan applicants to take and pass a short examination demonstrating knowledge about compound interest, interest accrual, their responsibilities to repay their loans, and the various loan repayment plans available.

State Disbursements

Congress, by steady, incremental change, should redirect a portion of student aid disbursements from the federal government to the states.

Legislative Language: Add to 20 U.S. Code § 28 (Higher education resources and student assistance) subsections that:

1. transfer 50% of the current Title IV allotment to the states over the next ten years, at a rate of 5% a year, the transfer to begin two years after the passage of the law;
2. grant each state the right to establish its own procedures and qualifications for disbursing student aid; and
3. require each state to report annually to the Department of Education the procedures and qualifications it has used to disburse student assistance, along with a complete accounting of its student aid disbursements.