Time to Rethink Standards for Student Loans

student loan

With over $1.2 trillion outstanding in federal student-loans, the issue of student debt has become a hot topic, especially in the early stages of the 2016 presidential campaign. In fact, free tuition is one of the major tenets of Democratic candidate Senator Bernie Sanders’ agenda.

However, according to the Wall Street Journal, “A recent surge in the share of Americans defaulting on their student debt is generating support for an obvious but controversial idea: restrict who can borrow for higher education.”

There are currently no underwriting standards when it comes to the federal aid in the form of student loans. This is surprising when you consider that loans are generally priced under a risk-based pricing methodology. When it comes to student loans, there are many factors that could and should be considered, especially performance-based lending. While some may argue that this restricts a person’s ability to get a degree and, presumably, a higher income and quality of life, the truth is it gives the borrower a sense of personal responsibility.

In general, your first mortgage payment comes due one full month after the last day of the month in which your mortgage closed. For auto loans, depending on your financier, you first payment may be 30-45 days after closing. When it comes to student loans, many programs offer a grace period of 6 months after graduation. In other words, it can be more than 3 years until you make your first payment. With such a far off date, it’s easy to get apathetic about grades, especially when the money will keep coming regardless of  performance.

Another benefit to performance-based lending is it keeps people who are unlikely to complete their degree from taking on debt. You generally don’t keep investing in a company whose performance has gradually been declining. Similarly, in theory, you shouldn’t keep financing a poor-preforming student, at least not at the same rate.

Student loan debt is not just a legislative issue. An easy solution that doesn’t seem to be publicized is just simply not taking on debt to pay for school. Out-of-state tuitions can be 3 to 4 times more than in-state tuition while community college tuition can be a fraction of in-state tuition. Many companies also offer tuition reimbursement, making it possible to get your education subsidized by your employer.

With the price tag of college tuition steadily rising, one should consider the full cost of a college degree and their willingness to pay those loans back that made it possible to attend. Absolutely everyone should have the opportunity to get an education, but they should also be held accountable.

WSJ: Should Anyone Be Eligible for Student Loans?

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