Is There a Student Loan Crisis?

It’s become hard to pick up a newspaper (oops, age is showing) or go to a news site and not see an article about lives being destroyed by student loans or that they represent the new bubble that will soon burst. The citations are familiar: over a trillion dollars in student loans; low repayment rates among underemployed graduates; they’re responsible for tuition inflation (don’t get me started); Millennials who borrowed $250K to earn a PhD in 19th Century Greenlandic Philosophy and are now making pretty designs with the milk on cappuccinos at an artisan coffee shop in Bushwick.

That’s all much better click bait than “Student Loans Help People Continue Their Education and Lead Better Lives. And Most Borrowers Repay Them OK.”

Those who attended the NASFAA conference in 2015 will recall that when the question that gives this entry its title was put up for a vote and the “no” vote won, the backlash was swift; student loan activists who are struggling with their debt accused our profession of being some combination of oblivious, uncaring, greedy, and in general, the face of the problem. Many attendees voted yes, we do have a student loan crisis, but as the only response choices were yes and no, it perhaps obscured the thoughts of many that perhaps many individuals have their own student loan crises, but the nation does not.

Student loans have helped generations of students earn degrees that have led to higher paying careers and better lives. Even during periods of high default rates, most borrowers satisfactorily repay, and the current average debt of about $29,000 is only slightly more than I just spent on a Subaru. And no one has said the economy is going to collapse because of all of these Subarus.  A good education is a good thing to have, in our country it costs money, and student loans have been providing some of that money for decades.  Crisis?  Not if they’ve helped so many people.

So maybe yes/no is a matter of semantics, but that might be weak argument in an environment in which many have been promised a better life by continuing their education, only to see it all go wrong, with misrepresented claims, closed schools, no degree or career advancement, but plenty of student loan payments due. To someone who borrowed thousands of dollars for a bill of goods that turned out to be false but still carries burden of that debt, they’ve got a crisis on their hands no matter what meta-statistics anyone can cite.  Public opinion and public policy should both be formulated by facts and data, but we all know that they are too often informed instead by anecdotes and headlines.  If lots of people have very negative experiences with student loans, even if they’re in the minority, it can do irreparable harm to the program moving forward.

Where does the truth lie? What role do financial aid professionals play?  Are we subjecting a generation to too much debt?  What can we do to make sure that sensible borrowing remains – or becomes – the norm?

2+2=4, But So Does 3+1

Many people are concerned about excess government spending.  Now, given the way politicians talk in code, when they say “reduce government spending,” I often find it means “I don’t want the government spending money on this program, I would rather that money (or even more) be spent on this program instead.”  But it’s reasonable to say that no entity – governments, businesses, families, individuals – should spend too much money, and that would be because, as we have learned at various times of our lives, money is among the things that does not grow on trees.  I suppose that gives us license to spend plenty of grapefruits or oak leaves or walnuts, as they do grow on trees.

So one would think that if the government was doing just the opposite, that would be a good thing.  The opposite, seems to me, of spending money, is making money.  So if the government spending money, or at least too much money, is a bad thing, wouldn’t the government making money be a good thing?  Well, maybe yes, maybe no.

According to a recent article in the Chronicle, the federal government will be pulling in $66 billion – that’s billion, with a B – from federal student loans made between 2007 and 2012.  Or $41 billion in profit in 2013 alone.  There have been estimates that the next decade will bring in a profit of $185 billion.

On one hand, there aren’t many government spending programs that result in Uncle Sam showing black ink in the ledger, let alone ones that for 50 years have helped education millions of Americans so they can have better careers and futures.  Programs that spend money but also make it can move towards self-sufficiency, so that at some point, it doesn’t cost taxpayers a dime.  Or the money can be used for something else, hopefully related, such as Pell Grants, so that maybe students and parents don’t have to borrow as much to begin with.

But then there’s the point of view being very clearly expressed in articles such as one recently published in USA Today.  They reported that “Student loans…continue to churn profits into the federal government’s pockets.”  Not exactly worded as an endorsement.  The article quotes a student loan borrower who is described as “steamed” about the government’s cash register going ka-ching while she’s struggling to repay, and then turns to Massachusetts Senator Elizabeth “Colleges Should Have Some Skin in the Game” Warren, who has been hinting that it’s not just the feds making too much money off of student loans.

So where does the truth lie folks?  Does the lender making money create a sustainable system that assures future funding for those who need it…or does it mean
that borrowers are being soaked?

2+2=4, But So Does 3+1

I once had a letter to the editor published in the Chronicle about how punishing schools for loan defaults is misdirected policy.  No matter what counseling we provide, we can’t make borrowers pay that student loan bill on time every month.  Washington was abuzz with suggestions on how to hold schools’ feet to the fire as an effective means of reducing student loan default.

Except when I wrote that letter, Ronald Reagan was President, women wore big hair and men wore Members Only jackets, Madonna was young and shocking, and my New York Mets were the best team in baseball.  Because it was the mid-80’s.  So how far have we come, as all reliable sources tell me it’s almost 2014?  Suggestions on how to hold schools’ feet to the fire as an effective means of reducing student loan default.  Or as Senator Jack Reed of Rhode Island (a one-time EASFAA Conference keynote speaker, I’ll have you know) said, colleges “will have to have skin in the game.”  Maybe Senator Reed would benefit from checking how much skin we have left.  Institutes of higher education can already face penalties up to and including removal from Title IV participation for high loan default rates, which has caused some to close up shop.  Schools have dealt with – and paid penalties for – audit findings for not just failing to provide proper entrance and exit counseling for borrowers, but even just failing to properly document doing so.  Attempts to convince lawmakers that financial aid professionals should have the authority to deny or reduce a loan they feel is excessive or unnecessary fall on deaf ears.  Numerous products and services to teach students about financial literacy (because many have absolutely zero) may be very high quality products and services, but have you had success getting students to pay attention to them?  What else can we do on our campuses to prevent loan defaults?

I wish I were a Senator.  In my job, when I see a problem, I need to a) make sure that it is a real problem, b) determine what the real cause of the problem is, and c) identify and implement a solution.  How well I do this is my skin in the game.  If I were a Senator (or a Congressmen, they work the same way), it would be much easier.  Then I could a) misinterpret the root of the problem, b) propose punishments on those who my limited knowledge and research tell me are responsible for the problem, and c) offer no solution whatsoever…even say “no” when experts offer real solutions.  No skin in the game for Senators.

So what is the solution, according to Senators Reed, Durbin and Warren (and that one really hurts…I see Elizabeth Warren as Presidential timber…)?  Financial penalties to schools based on their default rate.  Money would be used for, uh, student loan “delinquency and default prevention or rehabilitation.”  So give money to the federal government, and they’ll fix it.  Except if they know how to fix it, why haven’t they already fixed it?  Will they only be able to fix it if they collect money from colleges?  And how will the colleges get the money to pay these fines?  Uh, by raising tuition?  Which will lead to more borrowing?  Which will lead to…gosh, how ironic.

You want fewer student loan defaults?  Have you considered stronger grant programs, less confusing repayment options, more uniform and effective servicing procedures, and (I know this is a reach) a healthy economy for all Americans (not just the 1%) with real job growth?

Transparency?

As articles appeared about the Bipartisan Student Loan Certainty legislation which “averted the doubling of the interest rate”, we saw quotes from Washington based analysts and lobbyists which essentially said “market based rates are more predictable and understandable for students.”

Really?, Compared to what?

Now, we, who work in financial aid, understand that the parameters of the fix was driven by budget considerations given that the prior one year fix to keep the subsidized rate for undergraduates at 3.4% was a $6 billion cost item which was partially offset by the 150% program length provision for subsidized loans with savings of $1.2 billion. So, to get at a near budget neutral fix, we ended up with a market rate based rate pegged to the bond yield of 10 Year T-Bills for the last auction prior to June 1 for the academic year. As part of the finagling to get to budget neutrality, though to be technical – the fix ended up scored as a $715 million savings over a ten year period, each component of the program has a different add on to the T-Bill rate and a different cap on the rate. The timing of the setting of the rate leaves new students guessing about the rate for their loans in the upcoming Fall and the admissions staff are pulling their hair out as the financial aid office tells them they can’t give them a rate to put in their recruitment materials for the following Fall. Do we really think students will intuitively understand a program with three different interest rates and three different caps on the rate, a different rate for each year’s loans, and the rates are not known until two months before enrollment for the fall term?

Predictability?, even Nobel Prize winning economists can’t accurately forecast the rates in the current environment where the rates can fluctuate 50 basis points in a week when Ben Bernanke coughs while he is talking about when the Federal Reserve will begin to taper the quantitative easing effort. The yield, for purposes of setting the loan rates, was 1.81% in May but here we are, five month later, and the yield is around 2.7%.In fact, by the time the bill was passed in July, and signed into law in August, the yield was around 2.7%. Between August and now, the yield peaked at around 3%. Can anyone, much less students, really guess what it will be in May, 2014 when the rates have to be set for the 2014-15 year?

Wouldn’t a program with a fairly low fixed rate be more understandable and predictable?

Ah, but that would require some acknowledgment that the federal student loan program is a social program and that it would be appropriate to spend to make an investment rather than think of the programs in a capital market sense – the notion of considering market rates is an artifact from the FFEL program which had a yield to the lenders based on market rates so they could make money. Can we really expect this Congress to understand the difference?

George