Carlo Salerno in Directors and Executives, College, Loans and Mortgages Private Consultant • Self Oct 10, 2016 · 4 min read · +300

From for-profit colleges to student loans, at what point does sensible policy start to become political bullying?

From for-profit colleges to student loans, at what point does sensible policy start to become political bullying?                          Source:

We can be remarkably two-faced as a nation when it comes to our higher education system. One day it's the greatest in the world and the next it fails to meet students' and employers' needs and is a financial rip-off. It gets exhausting to keep track of whether we're really good or really bad at all of this.

Mark Twain once said we shouldn't let the truth get in the way of a good story. There are a number of things about college that pundits and policymakers know but won't discuss or even address, be it to protect their political stance or simply because they know that even just acknowledging them sets off the "do not touch" alarm bells regardless of whether they'd have a profound impact on how we view what's wrong with our system, as well as how to make it right.

I discuss what are arguably two of the biggest cases in point below.

1. Public higher education isn't really cheaper or better-performing than private higher education

There's how much something costs to make and how much people have to pay for it. Public colleges seem like cheaper alternatives to private non-profit and for-profit education but that's only because taxpayers, depending on which state you're from and which institution you attend, foot between 30 and 70 percent of the cost. Take that subsidy away and students at, say, the University of Georgia or Montana State University would be paying - and likely borrowing - one and a half to twice as much as they do now.

That'd be fine if we had some idea what states and federal government were getting in return for their investment but: 1) we don't require these colleges demonstrate that their graduates find gainful employment or have undue debt burdens the way we do with for-profit colleges, and 2) the numbers we do have don't paint a very pretty picture.

You want surprising? There are more than 1,200 public 2-year and 4-year college campuses in the United States - enrolling some 8.9 million students - with 6-year graduation rates that are lower than 50 percent.* Yep, roughly 3 out of every 5 college students in the United States attends a public school where their chance of graduating is as good as a coin flip. Even uglier: at 900 of those campuses, which serve about 6.6 million students, those odds drop to a gut-wrenching one in three.

In other words, were it not for state subsidies, anywhere between 4 and 6 million students at public colleges would be borrowing far more than they do today and not earning a college degree to help pay it back. Before you go any further, yes, those numbers are a bit sloppy since some 2-year students end up at 4-year institutions but successful transfer rates are still pretty dismal.

Don't get me wrong, there are a lot of students out there who earn great public educations (yours truly included) but let's not confuse individual schools with the entire system. The abrupt closing of ITT proves the Department is serious about protecting taxpayers when institutions go awry. The absence though of similar scrutiny and sanctions for poor-performing public colleges makes it hard to stomach that this is just about students.

It's awfully sanctimonious to cry foul at how much private universities charge, or question the value for-profit colleges provide, but then turn a blind eye to the hundreds of billions of state taxpayer dollars or federal student aid money that gets pumped into public colleges that potentially leave millions of students worse off than if they'd not gone to college at all.

The only real difference is that taxpayers are shouldering the loss and since it's spread so thinly across so many people, the impact to any one person ends up being negligible enough to neither notice nor care.

2. Not every person who's not paying their student loans off on time is poor.

Payment affordability is about far more than what someone earns. It's also about how much they spend and, importantly, what they spend it on.

We know that people who borrow the least tend to default the most, which is a puzzle in it's own right since monthly payments on balances under $10,000 are, at worst, about the cost of a monthly cellphone bill. We also know that what we really have is a delinquency problem, owing mostly to the fact that unlike every other loan product people have access to, student loans are the only one that let borrowers miss an entire year of payments before moving them into collections.

Many of those borrowers don't earn a lot of money but a lot of them do; they just find themselves extremely over-leveraged. Some estimates suggest that as many as one out of every seven people earning between $40,000 and $100,000 currently spends more than they take in, as do one out of every 10 earning more than $100,000.

For folks in these situations, unable to pay isn't about not having the money; it's aboutchoosing not to pay their student loans over other obligations because different creditors place different penalties on late- or non-payment (think having your car repossessed). The sad part is, once people find themselves in this situation, unless their economic circumstances dramatically change, their problems typically only end up getting worse.

Over the past 10 years the federal government has bent over backwards to make borrowers' monthly loan payments more affordable by creating almost half a dozen income-driven repayment plans. While the cost of these plans is deceptively enormous, if unaffordable payments really are the root of the problem at least we know that student loan servicing problems should practically disappear. After all, the millions of students enrolled in these programs should never default and, technically, never even really be delinquent.

Which gets us to the weird part. If this is this case then why hasn't the Department of Education released any statistics showing the delinquency and default rates of borrowers in these income-based repayment plans?

We're talking about a decade-long policy affecting millions of borrowers where the definition of success is crystal clear. If they really can't afford their payments then, by definition, a program that specifically makes payments affordable solves the problem. Done. Turn off the lights. Go home. Pop the cork and celebrate.

The fact that instead of releasing these statistics, the Department just touts how many people are signing up for the program should be cause for serious concern. From the Secretary of Education to every congressman who favors income-based repayment, findings like this are the kind of political gold that they'll tell anyone and everyone to no end about. That nobody at the Department mentions these statistics or makes them publicly available can really only mean one thing: some very expensive programs likely aren't curbing delinquencies and defaults the way that their advocates hoped or expected they would.

Ignore the man behind the curtain

Policymakers don't like to talk about these things because at the end of the day Mark Twain was right; inconvenient facts ruin a good story. Consumer welfare and taxpayer dollars though aren't a story; they're a stark reality. It's frustrating to see the federal government aggressively take on for-profit higher education providers but quietly sanction the losses that a hundred million taxpayers and millions of students incur at public institutions. It starts to look less like sensible policy and more like political bullying.

If the federal government truly cares about students and protecting its federal student aid investment, then there's absolutely no good reason why it wouldn't apply it's gainful employment regulations to all colleges. There's also no good reason why it shouldn't be providing the public with basic performance statistics on how successful a decade's worth of income-based repayment policy has been. If the policy works, great. If it doesn't then let's stop throwing scarce taxpayer dollars down a well and put those resources into ideas that have a better chance at success.

We live in a time of very ugly politics where admitting you're wrong is political suicide and doing anything that even comes close to upsetting the status quo is met with immediate scorn and ridicule. Then again, if we're not willing to ask the hard, uncomfortable questions that could lead to better, more thoughtful policy, we can't expect the politicians who represent us to do so either.


* The data for this came from the Chronicle of Higher Education's College Completion database.

Carlo Salerno Oct 10, 2016 · #2

#1 it's one of the serious problems with the system. I've actually written about that topic here:

Phillip Hubbell Oct 10, 2016 · #1

My concern is the willingness to lend tens of thousands of dollars to 18 year old kids who have never had a job or credit. The availability of easy money, has driven the cost of college up, but has done nothing to ensure that the people getting the money are good for it. If an 18 year old without a job or credit wanted to buy a house, no way…if they wanted to go to college, fine. The risk of default is the same or worse.