The Conservative Approach to Student Loans

For much of the new year, Jason Delisle has taken every available opportunity to argue against a return to the bank-based federal student loan system that existed before 2010.

On panels, in policy papers and in guest columns and op-eds, the American Enterprise Institute resident fellow has made the case that returning to a bank-based system from the current set-up where the government originates all federal student loans -- a plank of the GOP platform -- is misguided policy. 

“I’m [generally] inclined to believe that if the market is involved, the product will be better," Delisle says. "This was a case where that wasn’t true."

With Republicans controlling the White House and Congress for the first time in a decade, questions about how they will approach federal student aid, and how far they will veer from the path on loan policy staked out by President Obama, are abundant.

Conversations with Delisle and other conservative policy analysts -- those seemingly likeliest to seed ideas for a party with renewed power -- suggest that the change might not be radical. Not surprisingly, they generally favor a bigger role for private capital in the student loan system, but they seem disinclined to undo the transformation wrought by the Obama administration. That's not because they love federal direct lending but because they don't think the previous bank-based system was truly market-driven either. Their other major goal -- simplifying the student financial aid system -- is shared by many across the political spectrum. 

The question is how to get there. And while denizens of the think tank world agree on some policy steps to reach those objectives, it’s not yet clear how effectively those ideas are reaching policy makers in the administration or Congress.

The Flaws in FFEL

Republican politicians, including President Trump, have argued for returning to lending done by private banks after more than half a decade in which student loans were made directly by the federal government. But there’s broad opposition to such a move on both the right and the left. 

Under the old system, the Federal Family Education Loan Program, banks made subsidized loans to student borrowers that were guaranteed by the federal government, with the rates set by Congress. Critics say the FFEL program was a giveaway to banks that didn’t improve loan performance or create any real competition among lenders.

“There’s this argument that it’s inserting private market competition, which it isn’t -- that’s not true,” said Alexander Holt, a policy analyst at New America’s Education Policy Program.

Just because market-oriented analysts don't want to blow up the direct loan program for undergraduates doesn't mean they're happy with the status quo. That the federal government originates more than 90 percent of student loans is a frequent lament on the right. But instead of a return to FFEL, they propose curtailing that government role by eliminating the Grad PLUS and Parent PLUS loan programs, two uncapped federal lending programs. 

Delisle is as vocal an opponent of the PLUS loan programs, which he says is “essentially crowding out the private market,” as he is of a return to bank-based student lending.

While the graduate loan program has high repayment and low default rates, Delisle and other PLUS opponents say, those students could get financing for graduate education from the private loan market. And they say the Parent PLUS loan saddles parents with loans they cannot repay. Headlines pulled from GAO reports about elderly borrowers having their Social Security benefits garnished to pay for loans have added fuel to calls for scrutinizing or eliminating the program outright. 

“We should roll back as much federal direct lending as possible,” said Lindsey Burke of the Heritage Foundation. “The path for doing that should start by eliminating the PLUS program altogether.” 

Groups like Heritage argue that the availability of government financing for higher education through programs like PLUS is actually driving increases in college tuition -- an example of the so-called Bennett hypothesis. Private lenders, Burke said, would also be able to differentiate interest rates depending on a student’s planned major or course of study if the law was changed to permit that. The U.S. could better keep student lending under control if private lenders could set the terms of a loan based on a students' educational achievements and plan of study for their next degree, they argue.

Conservative policy analysts are also agreed on the idea of simplifying the myriad choices for student loans and grants to something resembling a “one grant, one loan” approach.

There’s, again, some support on the right and the left for a simplifying the loan and grant options on offer to students. And prominent lawmakers like Tennessee Republican Lamar Alexander, the chairman of the Senate Health, Education, Labor and Pensions committee, have in the past proposed legislation to streamline the number of those options. 

“There’s this big mess of information that basically makes it difficult for students to know what options are affordable to them,” said Beth Akers, a senior fellow at the Manhattan Institute. 

Simplifying the number of aid programs available to students would also make possible a more coherent conversation about the costs of subsidizing higher education, she said. The existing complex financial aid system is less transparent because of its complexity; having fewer channels of aid would make it easier to understand how much the government is spending and who the money is going to, Akers said.  

It's not only on the front end of the higher education process, when students apply for loans and grants to finance their education, that complexity has taken hold. To manage their student loan payments after leaving school student borrowers can also choose from an assortment of income-driven repayment plans, which grew in number under Obama.  

“There is a recognition that we’ve been adding and adding layer upon layer and it’s gone too far. So you’ve got to do something about that,” Holt said. 

And there is growing support for expanding the role of novel financial products like income-share agreements to fund students’ postsecondary education and training. In contrast with a student loan, ISAs would require that students pay back a percentage of their income over a set number of years. That would be a better deal than a loan for graduates who earn low incomes but would be costlier for those who end up earning higher than expected incomes.

That would be the easiest change for policy makers to pursue because it wouldn’t require an ambitious new federal program -- Congress could simplify clarify the law to make clear what would be allowed under such agreements. There is some momentum for campus-based ISA agreements already but policy analysts say adding more clarity would lead to more involvement from the private market. 

While the Republican dominance in the federal government -- the GOP holds majorities in both houses of Congress and the White House for the first time in a decade -- is unusual, there would likely be big hurdles to carrying out much of this policy agenda. 

Progressive policy groups, organizations advocating for student access and higher ed institutions themselves would oppose proposals to eliminate PLUS loans entirely, even if they would be open to reevaluating the programs. 

Justin Draeger, president and CEO of the National Association of Student Financial Aid Administrators, said there’s an ideological assumption that the private loan market can better address the needs met by the PLUS loan programs now. But NASFAA and other advocacy groups argue that the PLUS loan programs provide subsidies to low-income and minority students to attend college and graduate programs who wouldn't otherwise. Removing those programs would cut out a critical source of financing for many students that wouldn't necessarily be filled by the private market, they say. 

“In a perfect world, I understand why that seems feasible. But we don’t live in a perfect world and the education space is an imperfect market,” Draeger said. “You’re just going to exacerbate inequality and achievement gaps.”

Draeger said NASFAA would be open to examining changes to PLUS, including assessing the ability of some parents to pay back loans. But seeking to eliminate the program entirely would unite a number of stakeholder groups in opposition, he said.

Graduate PLUS loans help offset the cost of other federal student loan programs, according to the Congressional Budget Office -- a finding that will provide ammunition to its defenders. Graduate borrowers are a better financial bet as they repay loans at a higher rate and default at a lower level. And under current Congressional budgeting rules, the Grad PLUS loans make money back for the federal government.

And recent attempts to modify how Parent PLUS loans are awarded have not fared well for federal policy makers. When the Department of Education under President Obama made it more difficult to take out Parent PLUS loans in 2011, the changes affected colleges of all sorts that serve large numbers of low-income students. But historically black colleges and universities were hit particularly hard by the changes and many leaders of those institutions were furious at the administration. The relationship between Obama and HBCUs never seemed to recover. 

Holt said the proposal may also draw opposition from the for-profit college industry, a sector that takes in a growing amount of revenue from federal federal aid attached to graduate enrollment. That could set up a clash between for-profits and lending companies that hope to play a bigger role in the graduate market, he said.

Progress on simplifying current student loan offerings could also run up against the reality that some aid programs that don’t appear significant in the aggregate can disproportionately benefit certain sectors or institutions, said Ben Miller,  senior director for postsecondary education at the Center for American Progress. 

“Simplification sounds awesome. Everybody wants it,” Miller said. “When you start to deal with money -- who it flows to and how much -- things get a lot more complicated.” 

Holt said while there’s broad consensus on simplification as a goal, there’s not much agreement on what that actually means. Delisle said that if policy makers are serious about the idea, they could set up an account-based system where students draw down a balance for loans or grants as they make progress toward their degree. 

There’s also acknowledgment in conservative policy circles that agreement between think tanks and policy shops might not amount to much on Capitol Hill.

“The question is: is that consensus meaningful at all?” Holt said. “Does it translate at all into what the GOP or the Trump administration would be listening to or thinking about?”

And unlike typical Republican administrations -- or even typical GOP candidates -- the current White House does not have deep ties to D.C. policy shops. Delisle, for example, served as an informal policy adviser on higher education for the Jeb Bush presidential campaign. Another former Republican presidential candidate, Florida Sen. Marco Rubio, has frequently consulted with organizations with Washington-based think tanks on higher education legislation. 

Trump had no such connections to organizations that study higher ed policy issues, either from government service, advocacy or from crafting campaign platforms. And since winning the Republican nomination, his team of education advisers was assembled basically on the fly. 

But even with an outsider president, Delisle said policy analysts like himself can definitely still make their case. 

“If anything, I think it’s easier,” he said. “Ten years ago, a blog was a pretty new thing. There’s more opportunities to get information out and do analysis and research and communicate it to folks.” 

And the dynamics on Capitol Hill have largely stayed the same, even if the objectives of the administration remain a mystery at this point. Alexander, Sen. Patty Murray of Washington, the HELP panel's senior Democrat, and Virginia Foxx, the chair of the House education committee, are known quantities for policy advocates. 

But Akers said Republicans for the past eight years have filled an opposition role, pushing back against policies that socialized higher education.

“My feeling is the GOP just did not anticipate being in a leadership position on any of these policy areas,” she said. “I think people are scrambling for ideas.”