Student Debt Crisis and the Private Sector

By / 3.14.2013

Does the government have a conflict of interest when it comes to student debt? On one hand, the government fills an important role in providing financial access to higher education. But on the other hand, it needs to deleverage a record-level debt that now amounts to over 70% of GDP.

This question may seem odd given the government’s move to bring the student loan market in-house over the last few years (ending its guarantee program in favor of direct loans). But it may be an important question if we want to develop a politically viable solution to the growing student debt crisis.

Bringing loans in-house saved interest and administrative costs, but it didn’t actually decrease tax payer risk: the government now has $850 billion in student debt exposure on its books, up from $381 billion in 2005. And as tuition keeps rising, public funding keeps falling, and more people pursue college, new debt issuance is growing fast – new government loans were over $100 billion last year. This is potentially problematic, especially given the recent rise in default rates, because it means fewer government assets are available to respond to future crises. Not to mention it leaves tax payers increasingly vulnerable.

At the same time the government plays a very important role in providing low-cost access to higher education, a role that cannot be played by the private sector. The government is willing and able to lend on terms by which many people could not afford to go to college otherwise. It can’t stop issuing student loans even if its debt exposure becomes too large. And as the financial crisis showed, the government plays a critical role in stepping in when private student loan financing is unavailable.

One way to address these seemingly conflicting priorities is through a proposal like PPI’s Student Debt Investment Fund (SDIF). The SDIF would match need for student debt relief with available private capital, by using profits currently held abroad to create a secondary market fund for student loans. The SDIF would transfer debt exposure from the pubic to private sector and take on the cost of debt relief by purchasing existing loans, restructuring the debt, and potentially applying a discount to the loan amount. Meanwhile, since the SDIF is just a secondary market, our proposal would keep the direct loan program and the Dept. of Education’s role as loan originator intact to promote equal access to education and guard against private lending scams.

The best solution to the $1 trillion student debt crisis will be a public-private partnership like the SDIF, one that takes advantage of available private sector capital to solve a public problem. And in the process, it will provide much needed financial relief for debt strapped college graduates.