The Year in Student Loans – 2013’s Hits, Misses & Milestones

2013 was a year of changes for student loans. While uncertainty over the future of federal interest rates had many borrowers on edge this summer, it reenergized the important conversation around student debt.

Interest rates were a hot topic for sure, since high rates are a big part of the reason borrowers struggle with student debt. But rates aren’t the only big issue. The focus on setting loan rates diverted attention from the real problems: financial literacy and school accountability. Addressing these two issues will be the key to students making smarter borrowing decisions.

As we enter 2014, we’d like to reflect on the events of the last 12 months and offer up our recommendations on how to continue moving forward and improving the state of student debt.
1.  Interest rate legislation: Addressing the symptoms, not the cause of high student debt  

It was a rocky road for federal student loan interest rates this year.  In July, when Congress was unable to agree on a plan, the rates for subsidized federal education loans doubled to 6.8% for college students. Fortunately for these borrowers, lawmakers were able to come to a new agreement in August tying all federal student loan interest rates to the market. Going forward, interest rates will be set annually for the coming school year in accordance with the yields on 10-year Treasury notes. While the rates will vary from year to year, the interest rates are locked in for the life of the loan.

At SoFi, we are in full support of this decision, a move that actually lowered rates for the 2013-2014 school year.  If you’re borrowing money before or during school, we strongly encourage you to exhaust your federal loan options before taking on private loan debt.

That may sound like a surprising stance for a private student lender to take, but our view is that borrowers who are still in school – and still experiencing uncertainty over their futures – can benefit from the protections offered by federal loans.  After graduation, when your career and economic prospects are more certain, you can refinance your student loans at a lower interest rate with a private lender like SoFi.

While we applaud the new legislation, we think there’s much more work to be done to curtail the student loan crisis. Schools need to be more transparent about salary prospects for each area of study and career path, so that students can make smarter borrowing decisions. When we finally curb the over-borrowing problem, it should make the debate over interest rates significantly less material.

2.  Obama’s College Affordability Plan: A step in the right direction, but falls short

Also in August, Obama introduced his College Affordability Plan intended to rein in tuition costs by rating colleges and tying their federal aid to institutional performance. After putting colleges “on notice” to keep tuition costs from outpacing inflation in his 2012 State of the Union speech and hinting at a push for performance-based funding models in his 2013 address, we were thrilled to see a more developed plan take root.

While we support the President’s efforts to address the need for school accountability, the plans falls short of what we think is needed for real college affordability.

First, tying college ratings to graduation rates is good in theory, but is ripe for misuse.  It may encourage colleges to graduate folks who didn’t perform and are unprepared for work that comes next.  We’ve already seen this happening in secondary education at the state level. While schools are paid to push volume, they still lack accountability for the quality of that volume. Instead, we support the argument that federal aid should be tied to student loan default rates. This would drive down tuition costs and lower debt burdens immediately.

This plan also neglected to address colleges who fail to teach students about the realities of job prospects and earning potential for different majors.  As a result, students are not given information to make educated decisions about post-graduation career planning and how much they can afford to borrow. Colleges, parents, and both federal & private student lenders should be working together to ensure students have the financial literacy they need before taking on debt.

3.  CFPB ramps oversight of non-bank lenders: Becomes a key player in evolution of student lending

The Consumer Finance Protection Bureau (CFPB) built up its presence as a regulator of non-bank lenders throughout 2013 leading to the most recent announcement that the CFPB will oversee the largest student loan servicers. From soliciting input from individuals and organizations on how to “stop the student debt domino effect” to providing a platform for complaints about student lenders and servicers, the CFPB did great work this past year to serve those with student debt.

At SoFi, we’re big fans of the CFPB and believe a well-regulated, transparent environment for student lending is essential to protecting borrowers and providing them new ways to take down their debt. We’re particularly supportive of the CFPB’s efforts to seek out new solutions to the student loan crisis, which is why we’ve been vocal in response to their requests for ideas about tackling this important problem.

Earlier in 2013, CEO Mike Cagney shared his recommendations on how policy changes could facilitate greater innovation in student lending, particularly related to refinancing high quality borrowers. Today, we are fortunate to have overcome some of the challenges in accessing capital markets to fund our loans, but will continue to look to the CFPB for guidance and support as we grow. The Bureau’s desire to promote increased refinancing options for graduates with student loans is aligned with our own goals, and we look forward to working together to make these options more affordable.

4.  Annual TICAS Report on Student Debt: Recommendations on the right track if implemented

Every year, The Institute for College Access and Success (TICAS) releases their annual report on student debt. While it was discouraging to see the average student debt obligation continue to rise, we were happy to see TICAS prepared a list of recommended actions that help address rising student debt. We agree with many of the report’s proposals, including:

• Reduce students’ need to borrow
• Provide students with key information when they need it
• Collect better data on student debt & outcomes
• Strengthen college accountability
• Reduce reliance on private loans & strengthen consumer protections for private loan borrowers (We agree with this for in-school students, but we’re confident private lenders can provide smart refinancing options for grads)
• Improve and promote awareness of federal loan repayment options (We would add that in addition to awareness of these options, borrowers should be educated on what’s right for them. As our CEO noted in a blog post earlier this year, some repayment options can actually cost you more over time.)

Ultimately, these recommendations are only that – recommendations. Lawmakers, schools, borrowers, and lenders must work together to implement these changes if we want to curb the amount of debt the average student incurs.
                                                                                                                                                                  
Looking back on 2013, we’re encouraged by the increase in conversations, plans, and recommendations for how to improve the current state of student loans, but 2014 will need to be a year of action if we want to really resolve the crisis. There’s still much to be done to improve borrowing habits, eliminate negative lending practices, increase school accountability, and ultimately make student debt more manageable for those who have it. At SoFi, we will continue to work towards this positive change. Happy New Year!