The following is a guest article provided by J. Randy Green, Director of Financial Aid at Wittenberg University
This morning, a local reporter called me with questions about student indebtedness. She raised some interesting points on the recent changes made by the Department of Education to ease the repayment burden on federal loans.
For example, the new Income Based Repayment guidelines should not only reduce the financial stress imposed by education debt, but also allow graduates greater flexibility in selecting a job that best fits their skills and preferences. Someone who will make a great teacher will now be more able to afford accepting that teaching position, rather than being forced to work in a different field for the higher pay it may provide.
But the reporter’s focus was on the level of indebtedness and how that has changed in recent years; this echoes many other stories I have read lately. Having this focus risks ignoring two important facets of borrowing – the rate of defaults and the impact of borrowing on daily activity – and one looming challenge.
If a student borrows money to attend college, and after completing college is able to repay that money, then the system is working. The student may choose to borrow more to attend a higher cost institution, or less to attend a lower cost one, but the decision is left to the student and the equation does not change. A school should prepare a student to repay the loan taken to attend. One measure of this relationship is the default rate, which is the percentage of students who default within a given period and which the Department tracks for every institution.
Independent of this, the amount a student borrows may impact other aspects of life – the ability to rent an apartment, to be offered a job at a bank, the rate of a car loan – but the most closely felt impact is on day-to-day bills and purchases. A student shouldering a large monthly loan payment (large relative to monthly income) will be less likely to be able to afford the activity that drives the economy.
An item that has not been discussed recently is the fact that the interest rate charged to financially needy students is set to double on July 1, 2012. Currently, subsidized Federal Direct Student Loans are made at 3.4%. Unless Congress or the Department of Education takes action, these loans will carry a rate of 6.8% for 2012-2013 and beyond. Regardless of debt level, this change will increase the repayment burden students already face, raising the risk of delinquency, default, and diverting borrower income from the economy and into the government’s coffers.
Given the tremendous level of attention given to the cost of education and the indebtedness of graduates, it seems appropriate for some discussion to occur about this pending increase in the cost of that borrowing.
Parents and students have to wait until January 1st before they can officially submit their FAFSA for the upcoming academic year (2012-2013). Very few actually submit the FAFSA on January 1st but I am guessing that there are always over achievers amongst us that make the process part of their New Year’s Eve tradition. A financial aid director friend of mine once shared his opinion on how the festivities probably take place for those that are on top of their FAFSA game: “Oh look the ball has dropped in Times Square. We should probably smooch because that is what everybody does. Ok, now lets go submit our FAFSA form!”.
The Joint Select Committee on Deficit Reduction (aka The Super Committee) has until November 23 to come up with a plan to reduce the federal deficit. Certainly not an easy task… Unfortunately, federal student aid could be at the top of their list when it comes to cuts.
A family begins the lobbying process for their fair share of federal student aid when they start the
Holding true to the 
Richard Gordon, Chief Information Officer for Federal Student Aid, recently made an announcement about an “isolated” issue they are experiencing with the online FAFSA application.
