The student loan problem seems clear enough on the surface: students are incurring oversized student debt, and they are defaulting on that debt and threatening their ability to access future credit. The approaches to student loan debt collection are fraught with problems, including improper recovery tactics and informational asymmetry regarding repayment options.
But the current public policy conversations miss key issues that contribute to the debt mess, leading to proffered solutions that also miss their mark.
Start with these key facts about student loans:
The reported student debt loans represent averages, yet the amounts owed can differ dramatically from student to student. That is why solutions like the mandated debt calculator on college websites or the current College Scorecard do not resolve the issues; the disclosure of generic information does not impact student choice meaningfully.
Many of the problematic student loans are held by individuals who left college before graduation, meaning they have incurred “debt without diploma.” This reality distorts default statistics, making their indicia of school quality misleading. The cost of education is not necessarily commensurate with the quality of the education received, meaning some students pay more and get less, and we do not have an adequate system for measuring educational quality other than accreditation, which is a deeply flawed process.
Finally, students and their families are woefully unaware of the myriad repayment options, and therefore forgo existing benefits or are taken advantage of by loan servicers. This occurs because we de-link conversations of “front-end” costs of higher education from “back-end” repayment options and opportunities; students and their families are scared off by the front end without knowing that there is meaningful back-end relief.
Given these facts, it becomes clearer why some of the current government reform suggestions are misguided. Two illustrations:
First, evaluating colleges on a rating system based on the earning levels of their graduates assumes the overwhelming majority of students graduate and that the employment chosen will be high-paying. But we know that not to be true, and for good reason: some students proudly enter public service or other low-paying but publicly beneficial employment. And, in today’s economy, not all students can find employment directly correlated to their field of study.
We also know that those from high-income families have greater networking opportunities, given family connections. Yes, some schools offer degrees with little or no value, but the solution to student loan indebtedness does not rest on an earnings threshold.
Second, looking at loan default rates as a measure of the success of a college misses that many colleges welcome students from lower income quartiles, and these students have less collegiate success – understandably, although obviously many are working to improve these statistics. The fact that some of these students do not progress to a degree is not a sign of institutional failure any more than student success at elite institutions is a guarantee of those institutions’ quality. One approach to consider is linking default rates with the types of students being served by an institution. But one thing that should not change, to the dismay of some: many of the government student loans should not be based on credit worthiness.
Not that many years ago, private lenders dominated both the student lending and home mortgage markets. This created obvious parallels between lending in these two spheres. Lenders overpriced for risk, provided monies to borrowers who were not credit-worthy, and had loan products with troubling features like sizable front-end fees, high default interest rates and aggressive debt collection practices.
In both markets, there was an embedded assumption: real estate values would continue to rise and well-paying employment opportunities would be plentiful for college graduates.
Then several things happened. The federal government took over the student loan market, cutting out the private lender as the middleman on government loans on both the front and back end. The economy took a nosedive that led to diminished home values and lower employment opportunities. And, when the proverbial bubble burst in the home lending markets, lenders sought to foreclose, only to find that their collateral had diminished in value.
For student loans, the bubble has not burst and, despite hyperbole to the contrary, it is unlikely to burst because the government -- not the private sector -- is the lender. Indeed, this market is intentionally not focused on credit worthiness; if anything, it awards more dollars to those who have weak credit, specifically to enable educational opportunity.
And while Congress can debate the interest rates charged on student loans, the size of Pell Grants and the growing default rates, it is highly improbable that the student loan market will be privatized any time soon.
But, for the record, there are already signs that private lenders and venture capitalists have re-entered or are ready to re-enter this market, for better or worse. And if the government’s financial aid offerings are or become less beneficial than those in the open market, we will see a resurgence of private lending offered to students and their families. One caution: history tells us that the risks of the private student loan market are substantial; all one has to do is look at lending improprieties before and since the government became the lender-in-chief and the non-student loan predatory lending that targets our least financially stable borrowers.
There are things that can and should be done to improve the government-run student-lending market to encourage our most vulnerable students to pursue higher education at institutions that will serve them well. Here are five timely and doable suggestions worth considering now:
(1) Lower the interest rates on government-issued subsidized Stafford loans. The government is making considerable profit on student loans, and we need to encourage quality, market-sensitive, fiscally wise borrowing, most particularly among vulnerable students. Student loans to our most financially risky students should remain without regard to credit worthiness (the worthiness of the academic institution is point 2). Otherwise, we will be left with educational opportunity available only for the rich.
(2) Improve the accreditation process so that accreditors assess more thoughtfully and fairly the institutions they govern, whether that accreditation is regional or national. Currently, there are vastly too many idiosyncrasies in the process, including favoritism, violation of due process and fair dealing, and questionable competency of some of the accreditors. And the government has not been sufficiently proactive in recognizing accreditors, despite clear authority to do so.
(3) Simplify (as was done successfully with the FAFSA) the repayment options. There are too many options and too many opportunities for students to err in their selection. We know that income-based repayment is under-utilized, and students become ostriches rather than unraveling and working through the options actually available. Mandated exit interviews are not a “teachable moment” for this information; we need to inform students more smartly. Consideration should be given to information at the time repayment kicks in --- usually six months post-graduation.
(4) Incentivize college and universities to work on post-graduation default rates (and repayment options) by establishing programs where they (the educational institutions) proactively reach out to their graduates to address repayment options, an initiative we will be trying on our own campus. Improvement in institutional default rates could be structured to enable increased institutional access to federal monies for work-study or SEOG, the greater the improvement, the greater the increase.
The suggestion, then, is contrary to the proffered government approach: taking away benefits. The suggestion proffered here uses a carrot, not a stick – offering more aid rather than threatening to take away aid. Importantly, we cannot mandate a meaningful minimum default rate because default rates are clearly correlated to the vulnerability of the student population, and we do not want to disincentivize institutions from serving first-generation, underrepresented minority and low-income students.
(5) Create a new financial product for parents/guardians/family members/friends who want to borrow to assist their children (or those whom they are raising or supporting even if not biological or step children) in progressing through higher education, replacing the current Parent Plus Loan. The current Parent Plus loan product is too expensive (both at initiation and in terms of interest rates) and more recently too keyed to credit worthiness. The individuals who most need this product are those who are more vulnerable. And the definition of “parent” is vastly too narrow given the contours of American families today.
Home ownership and education are both part of the American dream. Both benefit the individuals and larger society. How we foster both is, however, vastly different. We need to stop shouting about the shared crisis and see how we can truly help students and their families access higher education rather than making them run for the proverbial hills.
Karen Gross is president of Southern Vermont College and a former policy adviser to the U.S. under secretary of education.
The golden age of unsolicited credit-card applications ended about five years ago. It must have been a relief at the post office. At least ten envelopes came each week -- often with non-functioning replica cards enclosed, to elicit the anticipatory thrill of fresh plastic in the recipient’s hot little hand.
For a while, I would open each envelope and carefully shred anything with my name on it, lest an identity thief go on a shopping spree in my name. But at some point I gave up, because there were just too many of them. Besides, any identity thief worth worrying about enjoyed better options than trash-diving for unopened mail.
Something started happening circa 2006 or ’07. More and more often, the very envelopes carried wording to the effect that approval for a new card was a formality, so act now! With the benefit of hindsight, this reads as a last surge of economic acceleration before the crash just ahead. But at the time, I figured that credit-card companies were growing desperate to grab our attention, since many of us were throwing the offers away without a second glance.
The two alternatives -- turbocharged consumerism on the one hand, the depleted willingness (or capacity) of consumers to take on more debt, on the other -- are not mutually exclusive. It was subprime mortgages rather than overextended credit cards that brought the go-go ’00s to an early end, but each was a manifestation of the system Andrew Ross writes about in Creditocracy and the Case for Debt Refusal (OR Books).
Ross, a professor of social and cultural analysis at New York University, was active in Occupy Wall Street, and Creditocracy bears a few traces of the movement, both in its plainspoken and inclusive expressions of anger (this I like) and its redeployment of old anarco-syndicalist ideas (that, not so much).
One commonplace account of the near-collapse of the world financial system in 2008 is that it was the product of consumer hedonism at its most irresponsible. It was just deserts for people playing Xbox on jumbo flat-screen TVs in subprime-mortgaged houses they shouldn't be in. Whatever the limits of its explanatory power, this interpretation allows for a pleasing discharge of moralistic aggression. Hence its popularity. The most familiar argument opposing it places the blame, rather, on bankers, brokers, and other criminals “too big to jail.” It was they who were greedy and short-sighted, not average people.
Besides the more obvious similarities, what these explanations share is an implication that the disaster could have been avoided with some self-discipline and the understanding that hyperbolic discounting is a very bad habit.
Ross leans in the anti-plutocratic direction, but he proves ultimately less interested in the morality of anyone’s decisions than he is in the framework that permits, or demands, those decisions in the first place. The system he calls “creditocracy” turns out debt as fast and efficiently as Detroit once did automobiles, and just as profitably:
“Financiers seek to wrap debt around every possible asset and income stream,” he writes, “ensuring a flow of interest from each…. [T]he tipping point for a creditocracy occurs when ‘economic rents’ – from debt-leveraging, capital gains, manipulation of paper claims through derivatives and other forms of financial engineering – are no longer merely supplementary sources of income, but have become the most reliable and effective instrument for the amassing of wealth and influence.”
At that level of description, Ross has simply given a new name to what Rudolf Hilferding, writing a hundred years ago, called “finance capital.” But what Hilferding had in mind was the merger of banking and industrial capitalism – the marriage of big money and big factories, with monopoly presiding. Creditocracy, by contrast, “goes small,” insinuating itself into every nook and cranny of life. The relationship between creditor and debtor takes many different shapes, some more overt than others.
When you take out a student loan or a mortgage, your submission to the financial system is more or less deliberate, and in any event explicit. It runs deeper, and proves less purely voluntary, if you have to use credit cards in lieu of unemployment insurance. The credit relationship is much more efficiently disguised if it takes the form of an unpaid internship – the “exchange” of your time and skills for intangible and impossible-to-quantify credit” toward a future job, if you’re lucky.
And if that doesn’t pan out, you might end up working in one of the less desirable positions at Walmart or Taco Bell, among other corporations that banks have persuaded, Ross writes, “to pay their employees with prepaid debit cards that are only lightly regulated.” The banks then “charge the users fees to make ATM withdrawls and retail purchases, along with inactivity fees for using their cards. Almost all of these are minimum or subminimum wage employees, compelled to fork over a fee to enjoy their paycheck." (The practice was described in a New York Timesarticle a few months ago.)
In next week’s column, I’ll consider Ross’s analysis of how the impact of creditocracy on education amounts to a ruthless exploitation, not just of present-day society, but of the future. We’ll also take a look at the comparable argument in a new book called The Falling Rate of Learning and the Neoliberal Endgame (Zero Books) by David J. Blacker, a professor of philosophy of education and legal studies at the University of Delaware.
Until then, I’ll sign off by mentioning that someone has just sent me an application for a $40,000 line of credit. This must be evidence of that “recovery” one reads about. If so, we’re in real trouble.