The Intractable Student Loan Mess

Student loan debt has reached crisis proportions and shows no sign of abating. It has reached $1.16 trillion, according to the New York Federal
Reserve, with $31 billion added in the 4th quarter of last year alone. The aggregate is more than credit card debt and auto loans and is exceeded only by home mortgages. Incentives on all sides have seen to a situation that has veered out of control.

National policy is to create a college-educated public and a globally competitive workforce, so it is not too great an exaggeration to say that the government willingly loans money to any student, of any qualification, to take any course, at any school, at any price.

Colleges and universities have been overjoyed by this arrangement. With the government willing to pay whatever is the going rate, the rate has been going ever upward, causing borrowing limits to rise so that students can borrow ever more to pay the higher tuitions.

Then there is Congress, which charges interest on the loans. Those just starting out in life are viewed as a kind of profit center for the government, with vigorous opposition to lowering the rates. The base rate was once an indefensible 6.8%, was reduced to 3.4% in 2013, but is on the rise. Depending on who is the borrower and the degree sought, current rates run from 4.66% to 7.21% — this at a time in which banks can still borrow from the Fed at close to 0%.

Students earn their share of blame by spending their loans on courses that simply interest them — what The Weekly Standard neatly summed up as "trendy classes on race, class, and gender" — but are of no interest to employers. If they graduate, they too often have earned their degrees in fields with limited employment prospects or that don't pay enough for them to retire their debt.

In 1993 that debt for the average undergraduate on leaving college was $9,300 (inflation-adjusted). But the quartet of players above has combined to produce an expected debt load of $35,000 for the student leaving college this year (his or her parents may have borrowed a good deal more). Even if our student were able unfailingly to pay about $200 a month, that amount, borrowed at the lowest 4.66% rate, would still take nearly 25 years to pay down, interest having added some $20,000 to the principal.

There was a leniency provision put in place during the Clinton administration when the federal government was only in the business of guaranteeing student loans made by banks. Loan repayments were limited to 20% of net income after deducting an allowance for living expenses, and any balance after 25 years of payment was forgiven.

With the banks and the economy weakened by the 2008 crash, a bill amending the Affordable Care Act ended the bank guarantees, turned the Education Department a direct lender to students, cut the maximum payment from 20% to 10% no matter how much was owed, and cancelled debt after 20 years rather than 25.

As tuition rose and the burden for students worsened, President Obama made further changes — a more generous deduction for living costs reducing the income subject to the 10%, and wiping clean remaining debt after only 10 years for persons working in "public service" (liberally defined) and not even requiring them to declare the forgiven balance as effective income for tax treatment. Steam rises about that one from the editorial desk at The Wall Street Journal — the special treatment accorded by Obama to those whom the writers pointedly call "aspiring community organizers" and "do gooders".

As if fighting against the colleges and the Congress for the harm they have visited on students, the administration offers additional ways to mitigate payments. If a student returns to college for additional courses or an advanced degree, payment on prior debt is suspended. A benefit called "forbearance" is freely granted by loan-servicing companies; it suspends payments for as long as three years from debtors who can show simply that their payment to income ratio is problematic. Forbearance can be granted even after a few payments have been missed, and it wipes the delinquency slate clean. Debtors have flocked to this avoidance option; already, payments on $125 billion in loans are in suspense under the forbearance plea.

Interest is accruing all the while, of course, so by taking advantage of forbearance or other deferrals, students add to the ultimate debt they owe, or that will be left to taxpayers to pay come 10 or 20 years when the debt is cancelled.

Three years ago, when the administration provided an estimate, $41,000 was the average amount of debt forgiven under the income-based repayment plans.

These many easements have caused the number of loans in default to gradually decline — by 1% between 2013 and 2014 — to the current level of 13.7%. But loans can be delinquent for nine months before they are counted as being in default and in addition, as BloombergBusinessWeek points out, roughly half of loans are in some form of payment deferment which, for a sizable portion may be hiding difficulties in making payments.

The 13.7% also is presumably measured against the full universe of student loans, which includes active students from whom no payment is as yet due. If measured against loans that have come due, the default percentage rises to an alarming 19.8%, says a Journal op-ed citing the Education Department as its source. That's 7.1 million borrowers with $103 billion in balances outstanding.

The bill for forgiven debt or default is sent to the taxpayers. There will then be the fundamental unfairness that those who never had the opportunity to go to college could find themselves paying for those who did, and those who did will be paying twice.

By far the most serious pathogen in the student loan contagion are the for-profit colleges, which we covered some time ago in a story titled "For Profit Colleges — A National Disgrace". The scent of easy government money that students can indiscriminately spend set large corporations, private equity and even hedge funds baying in the chase to fund any outfit that calls itself an educational institution. Some 2,000 self-proclaimed colleges sprung up, willing to accept any applicant waving proof of a loan.

The outcome has been that, while the for-profits account for only 12% of students, they account for nearly half of all loan defaults. Only 32% of students stay to graduate from the four-year programs, earning degrees viewed as inferior by employers. The other two-thirds drop out with nothing to show for their mistake but a debt that Congress has made sure cannot be discharged in bankruptcy court. Of 21 institutions that last fall were running default rates so high that they could lose the right to accept federally issued students loans, 20 of them were from the private, for-profit ranks.

Certainly the greatest failing has been the willingness to pay any price with the result that colleges and universities gleefully raised tuitions to draw in more money. Indeed, they even compete for students, bidding for superstar professors who are promised they will barely have to teach, and adding so-called "amenities" from welcoming dormitory rooms to food courts that accommodate the latest fetishes. The student of fifty years ago, when Spartan rooms were minimally heated and certain dishes served up in the dining hall were awarded unprintable names, would be stunned by a visit to a campus of today.

The loan system let this happen, with students and taxpayers the ultimate victims, by not restricting loan amounts to force down tuitions. Fed by perverse incentives, college tuitions soared by 79.5% in just the ten years between 2003 and 2013, says the Labor Department. Compare that to the 43.1% rise in medical costs and the 26.7% increase in the consumer price index. This has been going on unchecked for decades. Since 1978, tuitions have risen by 1,225%, nearly twice the rate of health care costs.

The Obama administration is developing a rating system meant to staunch the flow of student loan dollars to poorly performing schools. First announced in 2013, its ratings criteria are scheduled to be announced this summer. But progress has been slowed by factions holding their self-interest higher than that of our youth.

College administrators are of course up in arms, fearful of being made accountable for what they produce. And enter the politicians. The Republicans who are outraged at the bad debt write-offs of the administration's loan forgiveness programs are the same as those opposed to any federal oversight of education that might cure the problem. Democrats are concerned that inferior colleges in their districts might see less money and fret about what might happen to liberal arts programs.

The ratings criteria are no easy matter and a subject on their own — our educational system should not be based solely on whether graduates get jobs — but some scheme is essential to shut off parasitic operations that only dupe students and harm their lives.

But these fixes have to do with eliminating waste and fraud in the programs in place. Of greater concern is how the country should think of the role of higher education going forward. Once again, America is an outlier in a world that places a much higher value on education. To be sure its youth is educated, Europe believes college should be essentially free, with tuition costing just a few hundred dollars, as seen by scrolling through this website. High taxes pay for it. The U.S. has gone in the opposite direction, with heavy tax cuts across the board, except for a few percentages added recently to the topmost brackets. The conservative right wing equates taxes with socialism and preaches a free market doctrine that believes that our universities should be at liberty to charge prohibitively, blocking millions from a higher education and saddling the rest with a debt that can take much of their lives to repay. An Obama proposal for free community college has been hooted down, and to be fair, was probably too hastily considered given the damage that would do to funds and applicants at four-year universities. Some think education should be entirely free.

All of which says that we have not really considered what the answer should be.