DeVos Speech Warns of Student Debt Crisis, Addresses Issues with Federal Student Aid Program

Yesterday, U.S. Secretary of Education Betsy DeVos gave a speech at the annual Federal Student Aid (FSA) Training Conference in Atlanta focusing on student loan debt and warning of the program being in serious jeopardy if changes in policy are not made.

DeVos laid out the historical framework of the FSA program, showing its exponential growth in recent years:

It took 42 years—1965 until 2007—for the student loan balance to grow to 500 billion dollars. It took only six years for the loan balance to double—to one trillion dollars—in 2013. One-seventh the amount of time it took to get to 500 billion. And today, only five years later, FSA holds nearly 1.5 trillion dollars in outstanding loans. 1.5 trillion dollars is almost impossible to fathom. So, let me put it this way: 1.5 trillion dollars is more than 10 thousand dollars of someone else's student loan debt for each and every American taxpayer—145 million of them.

DeVos pointed out that this loan growth is primarily due to increase in borrower debt load. Since 2010, 70% of the loan growth was due to increase in debt load whereas only 30% was due to growth in the number of borrowers. The FSA portfolio progressed twice as fast as the growth of the cost of attendance for higher education and four times as fast as the growth of the economy. The cost of attending higher education (tuition, fees, room and board) has grown almost 2.5 times the rate of growth in median income.

Only 24% of student loan borrowers are currently paying down principal and interest, and nearly 20% of the loans are delinquent or in default -- seven times the delinquency rate of credit card debt. DeVos stated, "[I]n the commercial world, no bank regulator would allow this portfolio to be valued at full, face value. Federal Student Aid has a consumer loan portfolio larger than any private bank. Behemoths like Bank of America or J.P. Morgan pale in comparison."

The speech points some fingers at the federalizing of the student loan portfolio in 2010, the complexity of current repayment options, and higher education institutions increasing the cost of attendance as the government continued to hand out student loans. However, the speech largely aims to address the issue:

I'm here to raise a warning flag with American students and American taxpayers: We have a crisis in higher education. Our higher ed system is the envy of the world, but if we, as a country, do not make important policy changes in the way we distribute, administer, and manage federal student loans, the program on which so many students rely will be in serious jeopardy. This crisis demands the attention of Congress, the American taxpayer, colleges and universities, parents, and students. In a word, everyone.

Working toward a solution, DeVos is focusing on improving student financial literacy and helping provide students a resource where they can “easily and continually plan and budget for their education” by having easy access to their loan information and having hard numbers that they can plan and prepare with. She calls on everyone involved to take initiative in fixing the problem:

The federal government must become a more responsible lender. Congress must recognize and be honest about the unmistakable implications of its favored programs on students, on taxpayers, and on rising costs. Schools must become honest about their individual roles in the cost-value proposition. Every school should focus on helping each student find the right pathway. And they should help students graduate with high-quality career prospects and with low debt. Students—our human capital—must equip themselves to be responsible consumers of education with a serious commitment to their own success. They need to have the best possible tools, data, advice, and support. And then they need to understand the implications of their decisions. Each of us has a contribution to make and a role to play in resolving our present crisis in higher education.

DeVos points out that changes need to happen now rather than waiting until later when the problem has grown and a more "abrupt and jarring" solution is needed.

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insideARM Perspective

It’s important to see someone in a position of influence like DeVos focus on the root cause of the student debt problem rather than simply blaming servicers and debt collectors. This speech touches on something that insideARM’s CEO Stephanie Eidelman wrote in an article for Forbes back in 2011: the cost of higher education is growing at an alarming and largely unsustainable rate considering the lack of growth in starting salaries for recent graduates. It was a daunting thought back in 2011, it's even more daunting today. According DeVos's speech, the elephant in the room has exponentially grown in size. The speech, which can be found in the link at the top of this article, is well worth a read in its entirety.