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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Nov 14, 2012

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Universities across the United States are reforming their loan programs to prepare for a monumental change in government student loan policy.

North Carolina based Davidson College started an ambitious “no loan” policy. The college started the financial plan in 2007 and does not include loans in student financial aid award letters. Funding is provided through grants and student employment. In order for this radical plan to uphold, it must raise $70 million to permanently endow the financial policy. The college currently has 1,920 students: a small chunk of the nationwide student population.

Although less extreme, there are other universities vying to prevent a loss of government student loan funding. Elizabeth City State University in North Carolina and St. John’s College in Maryland provide support services for students through graduation, tailored specifically to keep students in college. Government student loan borrowers risk a higher default rate if they drop out early.

Other efforts include the State University of New York’s (SUNY) system-wide plan. The University will provide more information to students using their model Financial Aid Shopping Sheet, which aims to increase students’ overall understanding of financial aid. The new policy will be used at SUNY’s 64 campuses.

“We simply must do a better job to ensure that college costs are transparent, financial aid opportunities are outlined clearly and comprehensively, and students are only borrowing what they need and what they can afford,” Nancy L. Zimpher, SUNY Chancellor said. “Smart Track puts SUNY on pace to lead the nation in reducing student debt and creating a more financially sound future for our students and alumni.”

The new reforms are in response to a radical plan implemented by the White House. In January 2012, President Obama announced a new plan to limit college tuition costs. The plans will punish schools that fail to keep their rising prices down, thereby causing more student loan defaults.

Colleges with default rates of 30 percent or more for three consecutive years risk losing government financial aid. Furthermore, if a school’s default rate rises above 40 percent, it can be barred from the program entirely. Currently, two schools are potential candidates to lose federal funding: The Centro de Estudios Multidisciplinarios in San Juan, Puerto Rico and Tidewater Tech in Norfolk, Va. Both of those institutions have two-year default rates of 25 percent of more. The three-year rates will be tallied next year, and, if they have not improved, will result in a penalty. The full sanctions do not take effect until statistics are released in 2014.

“We can’t keep subsidizing skyrocketing tuition,” President Obama said to the press. “Colleges and universities need to do their part to keep costs down as well…We are putting colleges on notice—you can’t assume you can jack up tuition every single year.”

The current rate of student loan debt, including private and government student loans, reached a staggering $1 trillion this year. Many government agencies and individuals are worried that this will turn into the next mortgage crisis seen a few years ago, with defaults occuring across the nation. The student loan default rate is very poor, with more than one in 10 borrowers, or 13.4 percent, defaulting on government student loans.

As a result, the next few years holds a negative outlook for American taxpayers. Soon, they could be responsible for over $100 billion in government student loan defaults.

“We continue to be concerned about default rates and want to ensure that all borrowers have the tools to manage their debt,” U.S. Secretary of Education Anne Duncan said in a press release. “In addition to helping borrowers, we will also hold schools accountable for ensuring their students are not saddled with unmanageable student loan debt.”