(CNSNews.com) -- Current federal policies in place to alleviate the burden of student loans aren’t working because they don’t focus on the root cause of the problem, which is the high dropout rates at many postsecondary institutions, according to a recent Manhattan Institute report.
The report, entitled Is There a Student Debt Crisis? answers that question by stating that the real problem is not “ballooning monthly payments” for college graduates, but rather the debt that non-graduates carry without the ability to generate the income a college degree provides.
“Most graduates who borrowed to attend a four-year university face no debt crisis,” writes Max Eden, a senior fellow at the Manhattan Institute. “It is students who attended, but often did not complete, lower-quality for-profit and two-year public institutions who are facing financial hardship.”
An October 2015 Federal Reserve study showed a link between failing to graduate and being late on student loan repayments.
Borrowers with no degree owe an average of $12,542, compared to $24,133 owed by bachelor degree holders. However, the non-graduates were late on their loan payments 43.5 percent of the time, as opposed to 11.1 percent of graduates who earned a bachelor’s degree.
Even borrowers who graduated from for-profit institutions were delinquent 26.5 percent of the time, compared to 16.6 percent from public two-year schools, 11.6 percent from private nonprofit, four-year colleges, and 10.3 percent from public, four-year institutions.
Eden points out that the Federal Income-Based Repayment (IBR) program allows borrowers to make monthly payments equaling 10 percent of their discretionary income (15 percent if they were not a new borrower on or after July 1, 2014).
If they have not repaid the full loan at the end of 20 years (25 if they were not a new borrower on or after July 1, 2014), the debt is forgiven.
However, non-graduates who “need the IBR plan the most” often do not use it because of an “information and administrative bottleneck,” says Eden.
“Even as participation in IBR among non-graduates has floundered, the Obama administration modified the terms of the program to enable borrowers with graduate degrees to receive significant federal loan forgiveness,” he pointed out, even though only 2 percent of post-graduate borrowers default within two years, compared to 20 percent of non-graduates and 8 percent of undergraduate borrowers who earn a bachelor’s degree.
In an interview with CNSNews, Eden explained that the “bureaucratic complexity” of the IBR program is an issue.
“You have to proactively navigate the regulatory paperwork process,” he said. “It’s a much easier thing to do for folks who have gone through college or graduate school than for folks who have dropped out.”
“It shouldn’t necessarily be that hard, but to really fix it, you would need legislative action,” he added.
Moreover, he claims in the report that forgiving the debts of graduates with good job prospects ignores college dropouts who cannot find work.
Students “are consistently told that they need to go to college” to achieve success, leading to “a lot of unprepared students these institutions have no particular reason to vet or support,” Eden told CNSNews.
Colleges and universities would be incentivized to improve their programs if they were responsible for paying back part of their students’ unpaid loans, he pointed out.
“Even a small amount of risk would give postsecondary institutions a reason to contain their costs and offer a better education,” he wrote.
And if low-income students do manage to pay back their loans, Eden thinks their schools should be eligible to receive a bonus.
According to a report from Cleveland Federal Reserve economist Joel Elvery, only a quarter of borrowers make monthly payments of more than $400, while half pay $203 or less.
A Brookings Institute study found that the rise in loan defaults is associated with students who borrow to attend for-profit, two-year and other non-selective colleges which tend to have low graduation rates.
The number of these “non-traditional” borrowers – who are also the ones most likely to struggle to repay their student loans - swelled to half of all student borrowers during and directly after the Great Recession, according to another Brookings study that Eden references.
Eden told CNSNews that for-profit colleges “have no particular institutional incentive to make sure that students graduate” because the dropout rate “doesn’t affect their bottom line”.
According to the National Center for Education Statistics, just 26.5 percent of students at for-profit institutions who started in 2008 graduated within six years.