(Posted June 9, 2014)

James Lakso, professor of economics Photography by Kelly Russo '14

James Lakso, professor of economics Photography by Kelly Russo '14

According to Forbes, student loan debt now accounts for $1.2 trillion of the national debt. In his second term, President Barack Obama has turned his attention to student loan reform as a way to strengthen the economy and ease the debt burden for students. To this end, he has been campaigning for this idea at colleges and universities throughout the US. James Lakso, former provost for Juniata College and professor of economics, talks about what might be in store for college students and their increasing debt.

Q: What is President Obama's plan for student loan reform?

A: Well, as I understand it, there are a couple of issues. The first is to cap the maximum payment that you have to pay on your loan at 10 percent of your income. If you were making $2,000 a month, your student loan payment couldn't be more than $200. There's some confusion on that. Some people say income, some people say adjusted income. Maybe [it is] one of those words that gets fleshed out as they have a conversation about it. And then, if you get paid at that rate for 20 years, then anything after that is forgiven, so if your student debt isn't paid off in 20 years, the rest is forgiven. The current cap, I think, is 15 percent of income. And you have to wait 25 years for the remainder to be free of it. So, there is some sort of easing of the debt burden that is being envisioned. Right now, you can either get your student loan directly from the government, or you can get it from a bank. If you have your student loan from a bank, right now, you can't consolidate it. It means that you can't take what you borrowed here and what you borrowed here and what you borrowed here and put it all together to get a single repayment option.

Q: What would be the advantage of consolidation?

A: I think the rate would be better. Typically, the benefit of consolidation is that you can get a lower rate or get a lower monthly payment, or you can extend the terms. People generally consolidate for a reason. They consolidate because it's good for them. So, the people who did their borrowing initially from banks weren't able to take advantage of that.

Q: Would the cap on repayment apply to public and private loans?

A: It would apply to any loans. My understanding is that any lending would be subject to that cap. Now, I'm not sure how banks feel about that. But most of the time, banks sell their student loan debt to Sallie Mae anyway, so I think at the end of the day, there's very little borrowing from the private sector.

Q: What would be some of the negative side effects of the reform?

A: I think obviously the upside is to reduce the debt burden and at the same time to get people to understand that they can pay for college by borrowing money. So, I think there's an access issue as well. I think the downside is the perception that if you make people think that it's easy to borrow, they borrow when they really shouldn't. There is what economists refer to as a moral hazard here. In the housing market a few years ago, people were borrowing money to pay for houses that they really couldn't afford, and they were doing that because it was in the interest of the lender to arrange things that way.

Q: What might happen if reform doesn't get passed?

A: Then I think you have the rules of the game as they are now: higher payments and a longer period of time before the lending is forgiven. A long time ago, people used to make the case that all student lending out should be paid based on outcomes, so that if you go to college and you borrow money and you're going to repay, it ought to be simply based on a fraction of your income at a certain time. So if you're going to make $250,000, we'll take one percent and that's how you'll repay your loans. The idea is that payment would be unequal, but it would be based on how much income you earn after college. That's not really gone anywhere in the United States, but I actually think that that's a plan that's sensible. Personally, I think it does increase access, which I think is the biggest problem we have with higher education. Studies show how much more college graduates make than non-college graduates. If we don't do what we can to make that accessible to people, regardless of their socioeconomic status, then I think that's just wrong.

Zach Lemon '14, Juniata College Online Journalist

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Contact John Wall at wallj@juniata.edu or (814) 641-3132 for more information.