Op-ed: A simple new tool to combat the student debt crisis

Sheila Bair, former FDIC chair, serves as a senior adviser to the Peter G. Peterson Foundation for Student Debt Smarter.

Several years ago, after spending most of my career as a financial regulator, I became president of a small liberal arts college. One of my goals in accepting that position was to pioneer ways to reduce students’ reliance on loans to pay for their education in light of the skyrocketing levels of student debt plaguing the nation. During my first week, I found myself in a very confusing conversation with our director of admissions.

He kept talking to me about the amount of “financial aid” provided to our students, as I kept asking him about the size of their debt load. After 15 minutes of talking past each other, I finally realized that in the world of higher education, student loans were called “financial aid.” And therein lies the root of the student debt problem. It highlights the critical need for a transparent, free public resource to show individuals what it means for them to borrow from the federal government.

Federal student loans, which account for 92% of the $1.6 trillion outstanding debt balance, have long been promoted or misunderstood as a gift from the government — a benefit to take full advantage of, not a contractual obligation that will impose a burden on the borrowers’ financial future. Though disclosures have improved in recent years, most information provided to students continues to focus on how much they can borrow, not how much they should borrow. And clearly, too many students are borrowing more than they can manage. Sadly, according to a recent paper by the Bipartisan Policy Center, 40% of recent graduates are unable to pay down their principal by at least one dollar within three years of graduation. Repayment rates are much worse for those who do not complete their degrees.

Fortunately, the nonpartisan Peter G. Peterson Foundation is trying to address this problem by launching Student Debt Smarter, a unique resource and affordability calculator that helps prospective college students better understand the amount of debt that will be affordable to them before making any decisions about borrowing.

By providing four easy inputs — college, major, year of enrollment and post-graduation location — users can get a personalized assessment of the maximum amount they can comfortably borrow based on their projected income and living expenses. Young people do not need a “financial aid” offer in hand to use the calculator, nor do they need to answer invasive questions about their families’ wealth. They only need their ideas and aspirations for the future in terms of where they might go to school, what they might study, and where they might live when they graduate. They can analyze as many different scenarios as they like and see how changing the variables impacts the affordability calculation. The calculator is designed for students to use before they apply to college to help them evaluate prospective schools and majors, as well as the affordability of financial aid offers once they receive them. It provides much-needed simplicity and transparency in an overly complex college and career decision-making process.

The calculator is unique in that it uses the latest salary data from the College Scorecard and leverages economic outlook data from Moody’s Analytics to help forecast the impact economic conditions will have on graduates’ earnings and expenses. And it is entirely free to use. Importantly, Student Debt Smarter does NOT ask for personal information and will NOT sell users’ data to college marketing firms, as is the case with many other tools found on the internet.

Students are falling deeper and deeper into debt, with total debt growing from $642 billion in 2007 to $1.566 trillion in 2020. A universal “payment pause” on student debt payments, imposed two years ago in response to the COVID-19 pandemic, continues as policymakers grapple with the merits of loan forgiveness and other reforms. Whatever the outcome of those ongoing policy debates, we need to make sure future student borrowers do not eventually find themselves in the same financial straits as so many of today’s borrowers who endure the stress and uncertainty of owing far more than they can realistically expect to repay. The Student Debt Smarter calculator will help them navigate the system as it exists and avoid that fate.

As a former bank regulator, I have too often seen the trauma and heartache for individuals and families overburdened by debt obligations. As a former academic and college president, I have too often seen how students are encouraged to borrow to pay for college and then later struggle with loan repayment obligations they did not fully understand. Most college degrees lead to enhanced earnings and borrowing to pay for them can be smart — within reason. Unfortunately, for many borrowers, the financial benefits of their education have been more than offset by the decades-long repayment obligations that constrain their budgets and hinder their ability to save and build wealth.

There are many systemic challenges in higher education that need to be addressed, including cost, access, equity and skills-based learning. Student Debt Smarter is aimed at one facet by empowering individual borrowers to make smart choices in paying for college, so that they can keep more of their hard-earned money and enjoy greater financial opportunities and freedom in their post-graduate adult lives.