Federal efforts to alleviate the high and rising cost of attending college through student loans have morphed from a policy challenge to a fiscal time bomb threatening to blow up the financial future of tens of millions of Americans and the government’s own solvency. Dressed up as a progressive achievement, it is actually a failure – or more accurately, at least five intersecting failures. And the worst part is this: they would all be hard to fix — even in a “normal” political era.
The scope of these programs is enormous. More than 44 million Americans (about one in four adults) have student-loan debt totaling $1.5 trillion and rising. This debt is incurred (and encouraged) through a handful of U.S. Department of Education (DOE) programs for which public and private institutions constitute a powerful lobbying force. Here, I can discuss only five of the programs’ failures:
1) their unsustainable cost trajectory;
2) the immense debt burdens they impose;
3) high college dropout rates;
4) DOE’s relative neglect of career and technical education (CTE) which would better serve many of the neediest;
5) programs’ perverse targeting and incentive patterns, which magnify all of these problems.
DOE’s Unsustainable Cost Trajectory.
The loan programs charge borrowers interest and fees, so they should be budget-neutral or even profitable. This feature made them politically popular for many years, but a major Obama-era policy change – the income-based repayment plan (IBRP) – has sharply reversed the budgetary trajectory. The IBRP became available to new borrowers starting in 2014-15. It allows qualified students to cap their monthly loan repayments at an amount geared to their income and family size; Obama further lowered that cap to 10%. A 2017 DOE financial report, analyzed by the Wall Street Journal, projected a $36 billion shortfall, up from an $8 billion shortfall just a year earlier. (IBRP’s fiscal effect will inevitably grow as more post-2014 borrowers take advantage of it).
Here’s the Journal’s bad news: “Federal data never before released shows that the default rate [for borrowers who started repaying in 2012] continued climbing to 16 percent over the next two years, after official tracking ended, meaning more than 841,000 borrowers were in default. Nearly as many were severely delinquent or not repaying their loans (for reasons besides going back to school or being in the military). The share of students facing serious struggles rose to 30 percent overall.” This, in a period of (slowly) rising incomes and job growth.
By law, DOE must track default rates for only the first three years, yet this is only the tip of the iceberg: delinquencies increase sharply starting in year 4, and DOE’s reports do not include borrowers who are “severely delinquent” or “not repaying the loans.” The number of schools experiencing high default rates by that post-2012 group has also increased dramatically, fueled vastly and disproportionately by for-profits. Even these default rates will presumably rise; more schools now urge students to use options that temporarily suspend repayments, accumulating more interest and simply postponing the day of reckoning. Student loans have the highest delinquency rates of any federal credit program, and higher than for private auto, home equity, and mortgage loans. The New York Fed emphasizes that this actually understates the delinquency problem because of students’ deferred payment obligations.
Borrowers’ Debt Burdens
The statistics are scary. Students owe about $1.5 trillion – about $620 billion more than the total U.S. credit-card debt. The debt of the average Class of 2017 graduate was almost $40,000, up 6% from the previous year’s cohort. And this burden is greatest for lowest-income students eligible for Pell Grants; their loan debt is higher on average than for higher-income, non-Pell students. As college tuition inexorably rises – for public four-year institutions, more than doubling in constant dollars in the last 30 years, and roughly 5% a year in the last decade – debt burdens will increase accordingly, particularly for lower-income students who attend for-profit colleges such as the immense University of Phoenix (over 160,000 students on 38 campuses). According to the Hechinger Report, almost 80% of these students who had dropped out three years earlier had not yet repaid a cent of principal on their federal loans.
High College Dropout Rates
These burdens might be sustainable if borrowers were to graduate and then earn at levels reflecting their new credentials. But the reality is altogether worse. Only 57% of college students graduate from any institution within six years of entering. (Another 12% of that cohort are still enrolled after six years). Nearly one-third – disproportionately low-income, first-generation, and minority students – drop out entirely, carrying their student loan debts with them. Importantly, those who later transfer to a 4-year institution are not counted as dropouts. Dropouts are stunningly high at public community colleges (62%) and at 4-year for-profit colleges (64%). Unsurprisingly, dropout rates of 4-year public and private nonprofit institutions are much lower, reflecting the institutions’ greater resources and their students’ more prosperous families and better prospects.
The much higher dropout rate at for-profit institutions has various causes, including poorly-prepared and lower-income students, many who must simultaneously hold down jobs, and fewer support services for at-risk students. But an important factor is the well-documented fraudulent practices at many of these schools, practices that the DOE recently proposed to protect by easing “gainful employment” disclosure rules.
Fraud by Educational Institutions and Borrowers
The student loan programs have long been rife with fraud, which seems only to have increased since the Obama administration took over the programs from the private sector (although private for-profit agencies still do much of the collection and other work). Not all of the documented fraud is perpetrated by private for-profit institutions and collection agencies; some are by student borrowers and even Pell grantees. Indeed, in 2013 the DOE’s inspector general reported that this fraud included over 34,000 participants in crime rings. The Obama-spawned IBRPs, which include loan forgiveness options, have surely enabled more fraud. Just since 2015, the DOE has received more than 100,000 fraud complaints; according to a recent review cited by the New York Times, “almost 99% involved for-profit institutions.” The Trump DOE, widely criticized for weak enforcement against these schools, which Secretary Betsy DeVos is keen to promote, recently proposed new “Institutional Responsibility” regulations purporting to curb some of this fraud but, according to critics, will actually make fraud harder to combat.
these are five SYMPTOMS of the original problem
Free markets are self correcting over time
– governmental interventions do not
– instead governmental interventions require additional interventions
– often those additional actions compound the original issue
– respect prices
– there is information in pricing
if the price is too low
– it encourages marginal suppliers to leave
– it encourages additional demand
– this additional demand often squanders the assets
If the price is too high
– it encourages additional suppliers to enter the market
– it encourages the demand who are not using assets efficiently to stop buying
The government IGNORES the information of pricing
– ignores and/or misunderstands the inherent risks involved
– are much slower to react, if at all
– magnifies the problem on a larger scale
– as opposed to local markets