Stemming Student Loan Defaults

American taxpayers will pay off $2 billion in loan guarantees next fiscal year because many college and trade school students cannot or will not do it themselves. The federal government must reduce that high default rate and, with William J. Bennett no longer trying to dictate terms as education secretary, President Bush and Congress have a chance to do just that.

The current education secretary, Lauro F. Cavazos, has rejected a Bennett approach that would have canceled all federal student aid at colleges where default rates were extraordinarily high. Bennett’s proposal, which was no solution at all, would have punished all needy students at those schools because some of their fellow students were deadbeats--without trying to find out if there were some way they could pay back the loan. Bennett’s proposals so worried some lawmakers that last year they considered preempting the field with legislation. The attempt foundered on the question of how stringent the rules should be.

Last month the Senate returned to the problem, unanimously passing a bill that would require colleges and trade schools with 25% default rates to get more involved in trying to cut the losses. Those schools would have to work more intensively with students to produce more precise plans for repayment. If the default rate remained high, a state loan guarantee agency would decide whether students were willfully withholding payments or were in economic distress before a final decision to cut off federal aid could be made.

The Senate bill incorporates an important principle by giving colleges a bigger role in policing their own students’ loans. Schools have had a better record of holding down defaults in another federal program in which the loans go through the colleges rather than directly to students as in the guaranteed loan program. In 1987, for example, the Education Department declared that students at Pasadena City College had a 28% default rate on the guaranteed federal loan program. At the same time, students at Pasadena had only a 6.6% default rate on loans processed through the college.

There is another way that the Bush Administration and Secretary Cavazos could help. In addition to student loans, there is a program of direct grants, named Pell Grants after their sponsor, Sen. Claiborne Pell (D-R.I.). Over the eight years of the Reagan Administration, Congress stood firm against attempts to cut these Pell Grant funds, but it never was able to increase them, either, at a time when college costs were soaring. Ten years ago, Pell grants covered three-fourths of the aid a student required to attend college and student loans accounted for the rest. Today, those figures are reversed. The Bush Administration might save more money than it now spends on bad loans if it invested more in grants.

By passing its bill, the Senate has signaled the direction in which it would like to see the government go toward curbing the loss from loans. The next step is up to Cavazos. A realistic plan would give colleges a chance to help their students understand their obligations and the economic realities they face before the federal ax comes down.