3 Problems With Clinton's New Student Loan Plan

Hillary Clinton Campaigns In New Hampshire
Darren McCollester/Getty ImagesDemocratic presidential candidate Hillary Clinton speaks at a town hall meeting in Exeter, New Hampshire, where she discussed college affordability and student debt relief.
On Monday, presidential hopeful Hillary Clinton unveiled her New College Compact, with the ambition of making public colleges debt-free for students. Her plan is estimated to cost $350 billion over 10 years, and focuses on three key areas. First, federal grants of $150 billion would be given to states to fund public colleges. These grants would only be given to states that agree to increase funding for education and commit to making debt-free study a reality. If the state refuses to spend local money, federal money will not follow.

Second, the plan would make community colleges free. This provision echoes President Barack Obama's proposal. Third, the plan would reduce the interest rates for people who already have student loan debt, while making sure all borrowers can take advantage of a simplified version of income-based repayment. The massive refinance proposal has been promoted by Sen. Elizabeth Warren for a while.

Hillary Clinton hopes to make it easier for people who have debt to become debt-free. And she wants to help students attend college without having to borrow. To pay for this $350 billion expense, Clinton would cap the value of itemized tax deductions that wealthy families can take on their tax returns.

Although the goals are laudable, I see three big issues.

1. Spending by State Colleges Remains Out of Control

Many universities have been spending like drunken sailors over the last 20 years. In a battle to win tuition money, universities have been building ever more elaborate campuses, complete with rock climbing walls and athletic facilities that would make most country clubs jealous. In addition, the number of administrators has been growing at a dramatic pace. Investing in education is critical to our nation's success. Investing in a beautiful residential facility feels like a waste.

Tuition growth is slowing. However, the total cost of a college education has still increased 42 percent from 2004 to 2014. If the federal and state government money is used to fund continued runaway expense growth, the problem isn't solved. Spending growth at universities needs to get under control.

2. The Biggest Default Risk Is With Students Who Don't Graduate

Graduation rates remain shockingly low at some institutions. In her announcement, Clinton cited the statistic that 40 percent of college students don't graduate within four years. Some schools have atrocious graduation rates, often below 10 percent.

The highest default rates for student loans are with borrowers who have the smallest balances. Although that may seem counter-intuitive, it makes sense. If you only go to school for a few years and never graduate, you will have student loan debt but no degree. Without a degree, your earnings potential will be significantly reduced, along with your ability to repay debt for a degree you never received.

Colleges don't feel the impact of poor graduation rates. The federal student loan money continues to pour in, financing their schools. And the responsibility of repaying the debt remains with the student. Schools that consistently fail in their ability to graduate students should feel accountability.

3. For-Profit Schools Have the Potential to Remain Leaches on the System

Although Corinthian Colleges is the most famous, many for-profit schools with questionable practices remain. They charge high tuition. They are experts at obtaining federal financial aid and loans for their students. They profit, regardless of their graduation rate or education quality. And they disproportionately target people with lower incomes.

The flow of taxpayer money to questionable, for-profit educational institutions needs to stop.

You Don't Need To Wait

Student loan debt remains a big problem for this country. I applaud Clinton for making an early proposal, to ensure that we have a debate about the issue. However, you don't need to wait for the election if you want to refinance or are having difficulties repaying your debt.

The private sector has already noticed that many borrowers are paying interest rates that are too high on their student loan debt. A number of providers have started offering student loan refinancing, with variable rates as low as 1.9 percent. You can find a list of institutions offering refinancing at MaginifyMoney.com. If you have a good job and good income, you could qualify for dramatic savings.

If you are having difficulty repaying your federal student loans, help already exists with income-based repayment programs. You can have your monthly payments capped, based upon your ability to pay. The details are outlined by the Department of Education, and you should speak to your loan servicer. After an average of 20 years of repayment, your remaining balance would be forgiven. Just remember that if you ever refinance your federal student loan into a private loan, you give up the option for income-based repayment.

These solutions can help a number of people. But there is still a lot of work to be done. Hopefully Clinton's proposal is just the first step in a meaningful debate.

Nick Clements is a former banker, author and co-founder of MagnifyMoney.com. He used to run the largest credit card company in the United Kingdom, and now he is helping you save money.
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