Financial Advice

What’s Missing from Hillary Clinton’s Student Loan Plan

Little by little, the mass of humanity that’s running for President of the United States is coming to realize something very important: Not only does the $1.2 trillion worth of higher education-related debt pose significant macroeconomic peril to the country, but solving this problem (or, at least, coming close) has the potential to rally widespread, enthusiastic support across the generational divide.

On Monday, Hillary Clinton became the latest presidential hopeful to make that play.

In her plan, the federal government would award block grants to states, which would in turn distribute those funds to public four- and two-year universities and colleges for no-loan and no-tuition plans, respectively.

In exchange for the cash, the recipient states would agree to “halt disinvestment” in public higher education (average state spending has declined by 23% since before the economic collapse, according to the Center on Budget and Policy Priorities).

The Clinton plan also proposes to permit the use of Pell Grant monies for living expenses, apportion all grants to take into effect the number of low- and middle-income students, and require family financial-need calculations to take into account the contribution value of at least 10 hours per week of the student’s part-time employment.

As important, her plan proposes to reduce the interest rates on federally-backed education loans to the level at which the government would cover its costs, but no more than that. Existing borrowers would also be permitted to refinance their loans at the new (presumably) lower rate.

Candidate Clinton also joins others in calling for schools to be held financially accountable for graduating too few students of the students they decide to enroll, and for failing to properly equip those who do manage to complete their studies with the tools they need to secure employment that pays enough to cover the bills.

Other elements of her ambitious proposal include accreditation reforms, expansion of the AmeriCorps public service program to 250,000 students per year from the current 75,000, and taking a “tough line” on for-profit colleges. Clinton pledges to “strengthen and defend” the Obama administration’s gainful employment regulations, and to continue to seek recompense for the schools’ alleged myriad abuses, which the industry segment and its political allies are strongly resisting.

Finally, the candidate proposes that the estimated $350 billion cost of her plan (over 10 years) would be paid for by certain tax-reform measures, including limiting deductions for high-income earners and eliminating “loopholes.”

A Closer Look at the Proposal

Clearly, this is a thoughtful attempt at comprehensively addressing a problem that merits such consideration. Yet, for all that’s good about this proposal, problems remain.

Let’s start with the idea of awarding block grants to the states. Why does the federal government insist on working with middlemen? Take for example the discontinued Federal Family Education Loan program. The feds ultimately realized that rather than add value to its higher education financing efforts, middlemen skimmed handsome profits from this taxpayer-funded program.

In this new context, the states would be the middlemen—the same states that are run by the politically motivated elite of all persuasions. Why permit taxpayer money to once again be used for selfish advantage or, worse, rejected because it runs contrary to party-specific dogma?

The government would be better off taking a capitation approach to compensating for higher education just as it and private insurers do with public- and privately-funded health care: agreed-upon payments for agreed-upon services.

According to a recent College Board analysis, the average cost of in-state tuition and fees stood at $9,139 during the 2014-15 school year. As it happens, the federal government is currently spending $164 billion on its higher education-related financial aid programs. If one were to divide this value by the nearly 15 million undergraduates who are currently enrolled in the nation’s public universities and colleges, there would be enough left over to cover the ridiculous cost of their college textbooks without monkeying around with the tax code.

What’s more, by making these student-specific tuition payments, the government would then be in a position to directly assess individual outcomes to help in determining the precise amount to charge back to the schools for their academic failures. The ensuing monetary recoveries can then be used to offset the write-offs that need to take place on uncollectable loan balances.

As for all of the other student debts that are currently on the books, although determining the “true” cost of the government’s student-loan program is long overdue, merely refinancing the remaining term of the existing obligations at a new and, presumably, lower rate will do little to help the burgeoning number of college grads who are unable to afford to move out of their parents’ basements.

Not only should loans that approach the size of small mortgages be refinanced over a longer duration than 10 years (I’m thinking twice that long), but those borrowers who are able repay their debts ahead of time should also be encouraged to do so. After all, in a break-even program such as what candidate Clinton proposes loans that are retired early end up saving the government money — savings that deserve to be shared.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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This article originally appeared on Credit.com.

This article by Mitchell D. Weiss was distributed by the Personal Finance Syndication Network.

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