The sales pitch is enticing: Let students go to college for "free" and ask them to pay later by taxing a percentage of their incomes once they have jobs. The money coming in from graduates, then pays "forward," covering college costs for current students and alleviating the fear of debt that keeps many college-qualified students from even applying and that discourages college graduates from pursuing careers that may not have high salaries.
That’s the seductive premise behind Pay It Forward, billed as a "debt-free" approach to higher education, currently under consideration in Oregon. But like many sales pitches meant to lure consumers, Pay It Forward provides a superficial "fix" that has more downsides than up, thereby masking the real problems in higher education financing.
There is no disputing that higher education is facing a crisis of affordability. State funding per student has dropped to its lowest level in 25 years, shifting much of the financial responsibility for college costs to students and their families. The result? Too many students have to choose between avoiding college altogether or taking on overwhelming amounts of debt to pay for a degree.
We applaud state policymakers who are working to identify ways to rein in college costs. The United States needs more college-educated workers, and we won’t have them unless we make college more affordable. But we have to make sure that the solutions we put into place don’t work against students and taxpayers by inflating college costs even more, especially for the families who can least afford them.
Because Pay It Forward proposes to tax graduates’ income at a certain rate every year (say 4 percent) for up to 25 years, graduates will end up paying very different amounts for their education — often more than what that education actually cost. An analysis from the Oregon Center for Public Policy estimates that an average student could overpay more than $7,000 under Pay It Forward. Worse, the neediest students — those currently receiving federal or state financial aid — could be hit the hardest, potentially paying thousands more over their lifetimes than they would have under the current system.
Let’s not forget, either, that Pay It Forward only addresses tuition, which makes up just part of total college costs; room and board, books and supplies, and miscellaneous fees aren’t covered. At the University of Oregon, for example, those additional fees amount to almost 60 percent of a student’s total costs. Of the $23,370 total estimated cost of a year at Oregon for a resident of the state, about $9,300 is consumed by tuition. Under Pay It Forward, the average student would have to cover the remaining $14,000 out of pocket or through loans, creating a double whammy for students: They’d have to pay off student loan debt in addition to having their income taxed to "pay it forward."
Some of these concerns could be addressed in any final package. Our biggest concern with Pay It Forward, though, is that it doesn’t address the root issue: rapidly escalating college costs. By positioning higher education less as a public good than as an individual transaction, Pay It Forward absolves both state policymakers and institutional leaders of any responsibility for doing what it takes to slow the rapid increases in the cost of a college education.
Instead of demanding cost-consciousness among college presidents and an ongoing commitment from states to maintain or increase higher education funding, Pay It Forward simply puts a big Band-Aid over the current trend of state disinvestment and the transfer of financial burden from the state to students and their families. Ironically, although trying to ensure progressively that each graduating class opens the door for ones to follow, Pay It Forward could actually just open the door to more privatization of public education.
States should develop innovative solutions to the rising cost of college, but they should be transparent about them. If they’re going to sell students on debt-free college, they should offer debt-free college. Loan debt simply repackaged as delayed tuition payments may be a catchy sales pitch, but it’s a bad bargain for students.
Kati Haycock is president of the Education Trust, a nonprofit research and advocacy organization.
The Education Department is set to issue a package of final regulations on federal student loans that are aimed, in part, at helping distressed borrowers and preventing colleges from manipulating their default rates.
In a notice last week, the department said it would officially adopt the rules “within the next several days” (though they would not take effect until next July). In addition to making minor changes to reflect legislative changes, the 423 pages of rules also beef up some protections for federal student loan borrowers.
Under the new rules, a borrower who is at least 270 days delinquent in paying his or her loans would be able to be placed in forbearance based on an oral request as opposed to the current written request requirement. This verbal forbearance request, however, would have limitations in order to prevent colleges from easily coercing students over the phone into unnecessary forbearances that help the institution avoid a default on its books -- or at least defer the default until the end of three-year period that the federal government evaluates. Any forbearance based on an oral request would be limited to 120 days and could not be extended without a written request and supporting documentation for why a loan deferment is needed.
In addition, the new regulations set a limit on the size of the payment that loan servicers can demand of defaulted borrowers who are trying to avail themselves of the opportunity, under federal law, to rehabilitate their student loans by making “reasonable and affordable” payments. The new rules would automatically define that “reasonable and affordable” standard as 15 percent of a borrower’s discretionary income -- that is, what he or she would be paying under an income-based-repayment plan. The clarified standard reduces the amount of financial documentation needed from the borrower.
The Institute for College Access and Success, which pushed for many of the changes, praised the new regulations in a blog post Tuesday as “key protections” that will “make it easier for borrowers to get out of default and repay their loans.”
A third federal agency is now investigating Sallie Mae for violations of consumer protection laws, the company disclosed to investors in a quarterly report this week.
The Consumer Financial Protection Bureau in September sought information from Sallie Mae as part of the bureau’s investigation into “allegations relating to our existing payment allocation practices and procedures,” the company said. The CFPB’s inquiry, according to the report, is similar to a separate investigation of Sallie Mae by the Federal Deposit Insurance Corporation, which plans to issue an enforcement action against the company for violations of the Servicemembers Civil Relief Act and other laws. The Civil Relief Act provides service members special benefits while they are on active-duty, such as a cap on the interest-rate on their student loans.
The Department of Justice is also probing Sallie Mae about its compliance with consumer protection law. The company said that it is “cooperating fully” with all three agencies.
In a report last year, the CFPB said that military service members were missing out on important benefits because of problems with their federal student-loan servicers. In some cases, the errors could cost members of the military tens of thousands of dollars, the agency said. Earlier this month, a CFPB analysis of borrower complaints reveled that some private student-loan servicers were applying advanced payments on loans in a way that maximizes profits for the lender but often leads to the borrower paying more interest.
More than 330 consumers have received financial compensation as a result of complaints they have made on a new federal database about the lenders for their student loans, according to a report released Thursday by the U.S. PIRG Education Fund. The report examined the results of complaints filed with the new Consumer Financial Protection Bureau's public Consumer Complaints Database. The 330 represent about 8 percent of all complaints filed. Another 500 borrowers (about 12 percent of complaints filed) had complaints closed with non-monetary agreements, such as changes in collection proceedings. "The CFPB levels the playing field for private student loan borrowers who may feel at the mercy of their student lender," said Laura Murray, consumer associate for the U.S. PIRG Education Fund. "Filing a complaint to the complaints database can get real results for consumers."
Students who completed an undergraduate program in 2007-8 were more likely to borrow money to pay for college but less likely to be repaying those loans within a year of graduation compared with their counterparts who graduated in 1992-93 and 1999-2000, a new federal report shows.
The report, released Thursday, analyzes the borrowing and repayment trends of bachelor’s degree recipients within a year of graduation for three cohorts of students. The data were collected through the Baccalaureate and Beyond Longitudinal Study from the U.S. Education Department’s National Center for Education Statistics, which, like the rest of the federal government, returned to work on Thursday.
The study found that the percentage of college graduates who borrowed for their undergraduate education rose in each successive cohort from 49 percent (1993) to 64 percent (2000) to 66 percent (2008). The average cumulative debt of graduates also increased in each successive cohort. The number of borrowers repaying their loans within a year of graduation dipped in 2009 to 60 percent, compared with 66 and 65 percent in the previous cohorts. At the same time, the percentage of graduates not in repayment but who still owed money on their student loans (due to either deferments, forbearances or default) rose.
Other findings from the survey include:
One in four students who graduated with a bachelor’s degree in 2008 had enrolled in graduate school a year later, which represents a slight increase from previous cohorts. However, across all three cohorts, students’ decision to attend graduate school within a year of graduation was not correlated with how much debt they had already incurred.
Student debt levels were also not correlated with a graduate’s decision to move back with parents or other family within a year of graduation (only in cases in which the student left home for college in the first place). That scenario played out at a higher rate (27 percent) for the 2008 graduates than for their 2000 counterparts (18 percent) but at the same rate as 1993 graduates.
But the measure keeps intact the automatic government spending cuts for the current fiscal year, known as sequestration, at least through January 15. Higher education advocates have blasted those cuts as detrimental to scientific research. The cuts, which took effect in March, have already reduced federal research funding by billions of dollars and prompted universities to lay off researchers and close laboratories.
Funding levels for federal research and federal student aid programs will be at stake in the budget negotiations between the House and Senate this fall, which will occur because of the deal reached Wednesday night. Those negotiations, which are also aimed at producing a long-term agreement to reduce the budget deficit, will be led by Democratic Senator Patty Murray of Washington and Republican Representative Paul Ryan of Wisconsin.
Borrowers of student loans face obstacles not only when they seek flexibility from private lenders in reducing their monthly obligations but also when they seek to pay down their debt more quickly, a new CFPB report says.