It’s been nearly a month since President Obama unveiled his higher education proposal and embarked on a bus tour to promote it. Since then, chatter about student debt has all but disappeared in Washington.
But on Main Street, the debt conversation isn’t going away. Student loan debt is approaching $1.2 trillion, and one in six American adults are still paying off their student loans, according to a new survey.
The implications of that reality extend far beyond Main Street, too. “Student loan debt is a lifecycle issue and a broader economic issue,” Joe Valenti, the Director of Asset Building at the Center for American Progress, said. “Every dollar going to student loan debt is a dollar not going into the economy or future goals like home ownership.”
With that in mind, Obama’s effort to tackle the problem head-on is a promising step.
Unfortunately, a closer look at the proposed solution reveals that it likely won’t be enough.
“With the recent overhaul of the student loan bill and Obama’s proposal, there’s emphasis on symptom but not cause,” SoFi CEO Mike Cagney said. SoFi is an alumni-funded lending community seeking to improve the student loan landscape.
“You really need to drive reform around the fact that college tuition has risen faster than inflation. By giving folks a loan program from the government that says ‘you can borrow whatever the school says you need to borrow,’ you’re not keeping borrowing in check with the value of the service,” Cagney added.
Granted, Obama is pushing for a “College Scorecard” that will grade schools on access, affordability and outcomes — including graduation rates, graduate earnings and advanced degrees — and tie colleges’ federal aid to those rankings.
But colleges already have financial incentives tied to metrics, to some extent. As long as less than 20% of a school’s students have defaulted on their loans, schools can get aid.
And Cagney noted that schools are going to “fight tooth and nail” about being judged on earnings and employment data. Meanwhile, they’ve been nodding their heads to the graduation rates, he says, because they can easily meet those requirements by simply pushing student through — that is, even if they aren’t ready.
Of course, there are other factors in the rising price-tag of higher education too. Valenti from the Center for American Progress noted that state budget cuts and increased time to degree are also causes of rising costs.
“And another factor is the rise in non-education expenses,” he added. “Fancier dorms, athletic facilities, climbing walls — we see these non-essentials growing as schools compete for students, and student loans make these largely deferred costs that truly only add up after they graduate.”
“Plus, the difficulties in discharging student loans through bankruptcy also suggests to lenders that these loans are a safer bet than others, such as credit cards, so there is an incentive to fund higher education through lending instead of other means,” Valenti said — part of the reason the Center for American Progress is pushing a new system where “qualified student loans” can be discharged.
Bankruptcy isn’t a part of Obama’s proposal, though, as it’s out of the president’s jurisdiction and bankruptcy laws “are solely determined by Congress,” Valenti said.
Other issues besides bankruptcy laws cross over into Congressional waters, too. Obama’s plan requires the appropriation of funds for a new program, meaning its “unlikely to receive funding in the current fiscal environment,” Valenti added.
Still, borrowers and indebted graduates shouldn’t just throw their hands in the air as we wait for more progress; they should be smart about their debt in the meantime.
Cagney at SoFi, for example, says financial literacy is key to overhauling the system. He argued schools need to be responsible for informing incoming students about the cost of college and future earnings potential … but students can do some of that legwork on their own.
“There is an opportunity cost and a dollar cost to go to college,” he said. “You need to understand what those are. You need to realize that you’re taking four years out of life, incurring this much debt, and will come out and be in this position.”
That brings us to another cost-saver: Taking less than four years to finish.
“Reducing time to degree is a great example of what students can do now,” said David Bergeron, Vice President for Postsecondary Education at the Center for American Progress. “Taking courses at a community college during the summer to stay on track to complete more quickly is a great idea.”
And for folks already saddled with past debt, surveying repayment options — including whether or not you are eligible for income-based repayment — is the most important step.
“Once out in the workforce, make wise choices among repayment plans,” Bergeron explained. “Everyone should look to see if they are eligible for an income-based repayment plan like Pay As You Earn and then assess whether it is the right plan for them.”
The bottom line: Individuals should take every step possible to avoid taking out too much debt and to manage payments on whatever debt they already have.
And more than that, they shouldn’t sit around and wait for a quick fix for the growing problem. The student debt issue is huge, and Obama’s proposal has a long way to go.
Alyssa Oursler is an Assistant Editor at InvestorPlace. Follow her on Twitter @alyssaoursler.