Don't 'Cancel' the Federal Student Loan Program – Fix It

Mack Wallace is the Head of Product at MPOWER Financing, recognized as a leader in innovative, mission-driven student finance. A former financial regulator at the Consumer Financial Protection Bureau (CFPB), Mack also advises organizations like the Aspen Institute on financial access and wellbeing, designing policy solutions that drive towards a strong, better financial system for all.

Every year, the federal government lends more than $80 billion¹ to students, yet almost 40% of students will never finish their degree.² There is now more than $1.6 trillion in federal student loan debt owed by more than 42 million Americans.³ The current Trump administration is considering cancellation, loan forgiveness, and agency transfers as possible solutions, but none of these address the real problem – how we provide affordable, responsible, and broad access to higher education while limiting the cost to taxpayers.

A Broken System That Needs Front-End Reform

The federal student loan program was created to fill a market gap. Private lenders that use traditional underwriting methods rely on credit history, income, or assets – three things young people generally lack. As a result, the federal student loan program emerged to provide American students and families broad access to affordable credit for higher education. The program has been highly successful: 38% of U.S. adults now hold a bachelor’s degree,⁴ with 60% of them borrowing to make that happen.⁵

However, the current system is also deeply broken. Many students and their parents can borrow unlimited amounts without an assessment of their ability to repay, leading to unsustainable debt and poor financial outcomes.⁶ Meanwhile, schools with low graduation rates and weak employment prospects continue to receive full federal loan support, with limited accountability.

This isn’t just a crisis for individuals – it’s an economic problem that affects all of us. An educated workforce fuels national economic growth, productivity, and innovation.⁷ College graduates earn significantly more over their lifetimes: those with a bachelor’s degree earn almost $1 million more over their lifetime compared to high school graduates.⁸ The gains for graduate degrees are even greater.

Yet, a system that saddles students and parents in unsustainable debt – while failing to ensure they graduate – undermines these benefits. Further, repayment struggles disproportionately affect borrowers from lower-income backgrounds, who are twice as likely to default compared to households with incomes greater than $75,000.⁹ It is a cruel irony that a program designed to facilitate socioeconomic mobility disproportionately traps these individuals in unsustainable debt.

Instead of relying on back-end fixes like forgiveness, cancelation, or deferments after a loan is already made, we must redesign the student loan system to set students up for success from the onset by:

1. Ensuring students and parents borrow what they need and only what they can reasonably repay.

2. Increasing degree completion rates by removing financial obstacles to remain enrolled to maximize the return on investment on their education.

The Consequences of Over-Borrowing

Unlike other types of consumer lending, federal student loans are issued without evaluating a borrower’s ability to repay. Most students and parents can borrow up to the full cost of attendance with virtually no restrictions. Under today’s regime, students and their parents are expected to determine for themselves how much debt is reasonable.

This results in a heavy financial burden for many. Consider: 

The hard truth is that not all degrees yield the same financial returns. The current federal loan system ignores the critical relationship between loan size and expected post-graduation earnings. 

Consider two students: one borrows $40,000 to complete a STEM-designated degree at a state university where over 80% of students graduate and typically earn high post-graduate salaries. Another student borrows the same amount for a comparable degree from an institution with graduation rates below 40% and significantly lower median salaries. The first borrower is likely to comfortably repay their loan within ten years, while the second likely faces an extended period of financial hardship. Yet under the existing system, both borrowers receive identical federal loan support, despite their vastly different repayment prospects.

Post-graduate earnings data should guide lending decisions, ensuring students and parents are not burdened with loans they cannot reasonably repay. The Department of Education already collects post-graduation earnings data by degree and program through the College Scorecard, which could be further supplemented with income data from the IRS. Yet programs with low completion, high default rates, or both continue to benefit from full access to federal loans.¹³ This must change.

Solution #1: Institute Ability-to-Repay Standards for Federal Student Loans

The federal loan program should transition from an open-ended lending to a structured system based on employment outcomes and repayment capacity.

1. Tie Loan Limits to Post-Graduation Earnings: Policymakers should replace the existing $31,000 undergraduate federal loan limit – and nearly unlimited borrowing for graduate students and parents – with loan limits that reflect empirical graduation, employment, and earnings data. At the undergraduate level, loan limits would initially be set based on the institution’s (or college-level at larger institutions) overall average outcomes, such as graduation rates, default rates, and average employment prospects, with adjustments later if program-specific data becomes available. At the graduate level, where programs are known upfront, loan limits could be more precisely calibrated based on each program’s demonstrated return on investment (ROI), including graduation rates, default rates, and employment outcomes.

2. Hold Schools Accountable: Schools offering programs with consistently lower graduation rates, poor employment outcomes, or higher default rates should face targeted lending restrictions. These schools could also be required to co-invest in support programs aimed at improving student success – aligning financial incentives of the school, their students, and the government. Programs failing to show measurable improvement within a 3-year evaluation period would face increased oversight or lending limits.

3. Reform Parent PLUS Loans: Parent PLUS loans should adopt ability-to-repay principles, focusing on debt-to-income analysis.

4. Integrate Public Service: Currently, the Public Service Loan Forgiveness (PSLF) program forgives any remaining student loan balance after 10 years of eligible employment at qualified nonprofit, social service, or government organizations. Policymakers could build on PSLF by granting higher initial lending limits for undergraduate and graduate programs explicitly preparing students for essential public service careers, such as teaching, social work, nursing, or health – fields with clear societal benefits that may not offer high financial returns. Similar to how STEM (science, technology, engineering, and mathematics) programs currently receive targeted support, policymakers could designate these public service-oriented programs for enhanced funding from the onset.

Solution #2: Improve Degree Completion Rates with Targeted Financial Support

If we want to fix student loans, we must focus on helping more students graduate. Graduating, more than any other factor – including the type of degree or total debt amount – predicts a student’s ability to repay. Students who leave school without completing their degree miss out on the substantial earnings boost that makes student debt manageable; as noted earlier, 59% of students who drop out ultimately default.

Financial instability is a major driver for dropout rates: reports show that a shortfall as small as $300 for emergency expenses can cause a student to leave school permanently.¹⁴ More than 1 in 4 of current undergraduates are at risk of dropping out, with financial strain cited as the primary reason.¹⁵ Ultimately, many do: the six-year bachelor's completion rate is roughly 60%.¹⁶ Solutions include:

1. Emergency Spot Loans for Students: To improve degree completion rates and reduce defaults, the federal student loan program should enable students to access immediate “spot loans” of $300-$500 per semester to cover unforeseen, short-term financial emergencies. These loans should be seamlessly integrated into the student’s existing loan balance and repaid post-graduation, minimizing the risk of dropout due to short-term financial shocks. 

2. Hold Colleges Accountable for Institutional Support and Retention: To address institutional factors contributing to student dropout rates, schools with consistently low graduation rates should be required to develop robust non-financial student support programs. These initiatives should include academic advising, mental health resources, and career counseling designed explicitly to increase retention and completion. Institutions failing to demonstrate measurable improvements within 3-5 years should face increased oversight and potential lending restrictions, thereby aligning the school’s incentives directly with student success.

3. Expand Pell Grants: To reduce students’ financial vulnerability and minimize risk of unsustainable debt, policymakers should consider a substantial increase in Pell Grant funding. This targeted investment would provide greater financial resilience for low- and moderate-income students, directly supporting higher degree completion rates and lower default risk.

These front-end reforms are explicitly designed to protect low income students and their parents – the most vulnerable population, and the one that can benefit the most from the increased lifetime earnings of a degree. Coupled with robust expansions of Pell Grants, targeted financial support like ‘spot loans,’ and enhanced institutional accountability, these measures help low- and moderate-income students to have the financial resources and structural support they need to graduate, repay loans comfortably, and achieve their educational and economic dreams.

A Smarter, More Sustainable Student Loan System

Cancellation and forgiveness alone won’t solve unsustainable student debt. We must proactively address the root causes – excessive borrowing and low graduation rates – by implementing front-end solutions that prioritize ability-to-repay standards and targeted financial support. 

This approach will improve the long-term financial security for millions of Americans, while preserving broad, affordable access to higher education needed to strengthen the workforce, boost economic growth, and maximize the public return on investment in education.

Policymakers have an opportunity – and an obligation – to act now. Without decisive reforms, unsustainable debt will continue to erode the promise of higher education, widening the wealth gap, and leaving millions of Americans buried in debt.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1] U.S. Department of Education, “Trends in Federal Student Loans for Graduate School.” August 2023.

^[2]  National Student Clearinghouse Research Center. “Completing College: National and State Reports.” November 2023.

^[3] U.S. Department of Education, Federal Student Aid Portfolio Summary. https://studentaid.gov/data-center/student/portfolio 

^[4] U.S. Census Bureau. Educational Attainment Data. February 2023. https://www.census.gov/newsroom/press-releases/2023/educational-attainment-data.html 

^[5]  Federal Reserve Board. Survey of Household Economics & Decisionmaking (SHED). “Economic Well-being of U.S. Households: Student Debt.” 2023. 

^[6] The lack of an assessment of their ability to repay is also why many private lenders did not extend such loans in the past, because such information was lacking or unavailable. Changing to a model in which the government makes the student loans directly did not solve the ability to repay, or underwriting, problem. It is a policy approach that subsidizes risk rather than underwrites it. Notably, other countries have chosen different policy paths, typically one where the cost of education (i.e., tuition and fees) is directly subsidized rather than loans that are subsidized.

^[7] Economic Policy Institute. “Higher Education and Economic Growth Study.” August 2013.

^[8] Georgetown University Center on Education and the Workforce, "The College Payoff" Report. 2021.

^[9] Pew Charitable Trusts. “Who Experiences Default?” March 2024.

^[10] National Center for Education Statistics. Data Lab. https://nces.ed.gov/datalab/ 

^[11]Pew Charitable Trusts. “Borrowers With Certain Educational Experiences Appear More Likely to Default.” January 2024

^[12] Federal Reserve Bank of New York. Center for Microeconomic Data. “Quarterly Report on Household Debt and Credit.” May 2024. We don’t have data from the past five years due to various pandemic relief programs. With pandemic era repayments and credit bureau reporting resuming in 2025, a clearer picture of the economic hardship of student debt will re-emerge.  

^[13] An additional, secondary outcome of this approach is that low-earning programs at schools are likely to slowly go away once loans become conditional on post-graduate earnings. Such a market-based feedback loop would result in schools, over time, refocusing on higher-earning programs and could result in the closing of underperforming programs. This is likely to hit arts, humanities, and related programs hardest that tend to have lower post-graduate earnings on average.

^[14] National College Attainment Network. “Cost Remains the Largest Barrier to Higher Ed.” September 2024. 

^[15] Sallie Mae. “How America Completes College.” 2024.

^[16] National Student Clearinghouse Research Center. “Completing College: National and State Reports.” November 2023.

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