The Biden administration is considering canceling federal student loans on a broad basis.
Reports state that a popular proposal would eliminate $10,000 of student debt for individuals making up to $150,000 per year. However, delays in the expected announcement suggest that the administration is having difficulty settling on a policy.
Meanwhile, this potential action has drawn criticism from progressives as being too restrained, and from conservatives as being unmerited, and representing a subsidy to those who do not need one. The American Association of Community Colleges (AACC) has not taken a formal position on loan cancellation, which the executive branch can undertake unilaterally.
Our students’ circumstance
When it comes to loans, community college students are in a dramatically different situation than students in other higher education sectors, largely because of low community college tuition. Nevertheless, a significant number of community college students do take out federal Direct Loans, and their unique, often-pressing needs are overshadowed by students who borrow much more.
Because potential action canceling certain loans will inevitably draw lightning-like attention to student borrowing across higher education, community college leaders may benefit from a quick review of two-year college student borrowing and highlights of AACC’s related policy agenda.
Facts about community college students and loans
- The average full-time, full-year tuition and fees of $3,800 allow most community college students to avoid borrowing to finance their education. When adjusted for inflation, community college tuition and fees have increased by just $250 over the last 10 years. This remarkable fact is not widely appreciated.
- Only 12% of all community college credit students take out Direct Loans, and they represent fewer than 25% of all borrowers with undergraduate debt.
- Community college students who left with debt owed a median amount of $9,750.
- Community college student default rates continue to decline, to 11.5% for the FY 2018 cohort, but for AACC that rate remains unacceptably high, making counseling, default prevention, loan servicing and other services critical.
- Students who do not complete programs are much likelier to default than those who attain a credential, underscoring the value of promoting program completion essential.
AACC’s federal loan policy agenda
Reduce borrowing by providing grant and other assistance when students enroll
- The federal Pell Grant maximum needs to be increased substantially to eliminate reliance on loans, encourage postsecondary participation and support students on the path to an academic credential. AACC continues to support doubling the maximum Pell grant.
- Congress should enact a federal program to make community college tuition-free to reduce the need for borrowing and promote community college participation more broadly.
Improve loan terms and conditions
- Loan interest rates should be lowered. Student loan rates should never be higher than the cost of capital to the federal government.
- Loan origination fees should be eliminated.
- Loan maximums should be prorated with enrollment status, as is done in the Pell Grant program.
- Debt relief and affordability solutions should be pursued with an eye towards equity (i.e., borrower income) and long-term sustainability (i.e., cost to the government). To that end, massive student debt concentrated at the graduate and professional student level needs a particular focus from policymakers.
Simplify and recalibrate income-based repayment
- Students should be automatically placed in income-dependent repayment (IDR), with an option to repay on a standard, fixed repayment schedule.
- As income increases, borrowers should be required to devote an increasingly greater percentage of their discretionary income to student loan repayments.
- The period at which loan forgiveness is granted should be linked to the initial amount borrowed. Borrowers in IDR who cannot repay loans of $5,000 or less in five years, or $10,000 in eight years, should have them forgiven. (This provision is of particular importance to community college students.)
- Caps should be set on the aggregate amount of student loan forgiveness to encourage more responsible borrowing and better program selections. These savings should be redirected to grant programs, which have a greater impact on college enrollment, persistence and graduation than back-end subsidies.
AACC will continue to keep its member colleges informed about developments in this area.