Loan programs

Fixing the student loan interest rate problem, at no cost (essay)

A no-cost solution to the impasse on extending the 3.4 percent interest rate on some federal student loans is hiding in plain sight.

Lawmakers can cut interest rates and lower student debt burdens at no taxpayer cost starting with the upcoming school year by pegging interest rates to those on 10-year Treasury bonds, plus 3.0 percentage points. This policy is better for all students, even those who would qualify for the 3.4 percent interest rate. Yet, in a show of election-year theatrics, lawmakers are deadlocked over how to offset the $6 billion cost of extending the 3.4 percent rate -- raise taxes or repeal part of the 2010 health care law -- and aren’t looking for what helps students most.

Why is Congress debating interest rates on student loans in the first place?

Since 2006, the Department of Education has issued most federal student loans (Unsubsidized Stafford loans) with a fixed 6.8 percent interest rate. In recent years, however, Congress has allowed undergraduates with greater financial need to get lower rates on Subsidized Stafford loans. Funding has now dried up for those lower rates -- which hit 3.4 percent last school year -- so all newly issued loans starting this school year will carry the 6.8 percent rate. That is, unless Congress comes up with more funding. So it is now a “how do you pay for it?” debate that is going nowhere.

Congress and the president should just call a truce and agree instead to peg the rate on all newly-issued loans (for graduate and undergraduates) to 10-year Treasury bonds, plus 3.0 percentage points. The Congressional Budget Office says this plan (which was introduced as a Senate bill on Wednesday) reduces the cost of the loan program by $52 billion over 10 years because the agency estimates that rates on 10-year Treasury notes will eventually rise and newly issued loans will carry rates higher than 6.8 percent.

Students would be better off under this plan than what Congress is currently debating. That is true even though the formula doesn’t get the rate on Subsidized Stafford loans down to 3.4 percent (at today’s 10-year Treasury rate it would be 4.5 percent). While Congress and the president have been focused on the seemingly magical number of 3.4 percent for Subsidized Stafford loans, they’ve overlooked the fact that a smaller rate cut applied to both Subsidized and Unsubsidized Stafford loans adds up to a better deal for borrowers. Here’s why.

Undergraduate students (who are still dependents) can borrow up to $5,500 in Unsubsidized Stafford loans their first year in school, $6,500 in the second, and up to $7,500 each year thereafter. However, Subsidized Stafford loans, those that qualify for the 3.4 percent interest rate, max out $2,000 below those annual limits. So undergraduates who qualify for the lower rate, but borrow the maximum in total federal loans, actually have both types of loans.

Under the proposed extension of the 3.4 percent rate, one loan would charge 3.4 percent interest and the other 6.8 percent. Under the 10-year Treasury note proposal, rates on both loans would be the same, at 4.5 percent based on today’s rates.

While the weighted average interest rates a student will pay under either plan are very close, the 10-year Treasury plan is more favorable because Unsubsidized Stafford loans accrue interest annually while a borrower is in school. (No interest accrues on Subsidized Stafford loans during that time.) As a result, lowering that rate on both loan types to 4.5 percent, as the 10-year Treasury note plan would do, means borrowers would leave school with lower overall loan balances than they would under current law or the pending proposals to extend the 3.4 percent interest rate on some loans.

For example, a first year student’s loan balance upon graduating four years later would be $6,044 under the proposed extension of the 3.4 percent rate. But under the 10-year Treasury note plan, it would drop to $5,860 because the Unsubsidized Stafford portion of the loan balance accrues interest at the lower rate of 4.5 percent while the student is in school. Therefore, the student’s monthly payment would be $3 lower under the 10-year note plan than if he were to take out a Subsidized Stafford loan at 3.4 percent.

Graduate students and undergraduate borrowers who don’t qualify for any of the loans at 3.4 percent also would realize savings under the 10-year Treasury note plan because they would pay lower rates, too.  Parent and Graduate PLUS loans rates would be lower as well.

So far Congress and student advocates haven’t warmed to this alternative, despite its clear benefits. Some would-be supporters are concerned that pegging fixed rates to the 10-year Treasury note would mean that rates on new loans could eventually be higher than 4.5 percent or even 6.8 percent. There is certainly a risk of that happening, but that’s the only way to reduce the cost of the loan program in the long run while lowering interest rates in the short run.

Besides, there is merit to pegging rates to a market index. Students will get lower rates when the economy is weak and will pay higher rates only if the economy improves. That’s a fair approach, for both taxpayers and students.

If only Congress would look past the politically charged 3.4 percent interest rate, they would see that a better plan for reducing student debt is right in front of them.

Jason Delisle is director of the Federal Education Budget Project at the New America Foundation.

U.S. should curtail student loans to help taxpayers and students (essay)

Of late, American higher education has been suffering more than its share of the shocks that flesh is heir to.  As a result, we will likely see soon a retrenchment in government-subsidized student loans.

First, the alarm has gone out following the Federal Reserve Bank of New York’s latest study of student-loan debt. In addition to finding that student debt now exceeds $1 trillion, exceeding credit-card debt, the study found that senior citizens are bearing an ever-greater burden of student loans.

Surprised to read “senior citizens” in the same sentence as “student loans”? The study found that fully 18 percent of delinquent student-loan debt now rests on the slumping shoulders of those 50 and older. Parents increasingly are taking out loans to help their children through college. These late-life excursions into debt threaten parents’ retirement prospects, producing the “possibility of another major threat on par with the devastating home mortgage crisis,” says a recent report by the National Association of Consumer Bankruptcy Attorneys.

With this gloomy prediction, Chase, America’s largest bank, appears to agree. Chase just announced that it will stop providing student loans to those who are not its customers. Bad student-loan debt at the bank has increased 72 percent since 2009. So in a move unnervingly reminiscent of the buildup to the housing-market meltdown, Chase Bank has opted to cuts its losses.

But will those ultimately on the hook for these unpaid, government-subsidized loans -- the American taxpayers -- likewise be able to cut their losses? Not according to Vice President Joe Biden.

The vice president took part recently in a Twitter town hall, at which he was asked, "Have you ever thought about lowering education costs by decreasing the role of government intervention in the education business?" His Twittered response conceded that reducing government subsidies “could reduce [tuition] costs.”

Biden’s concession is noteworthy. Generally, defenders of these loans have been loath to admit that the resulting distortion of market forces escalates precipitously both prices and debt in the same manner and for the same reason as occurred in the home-mortgage industry.

But Biden’s extraordinary concession immediately gave way to an ordinary dodge. Even allowing that reducing government intervention could lower tuition costs, it would be “against [the] national interest to do so,” he tweeted, because fewer students would then be able to attend college, cheaper though it may become.

According to the vice president, then, the trillion dollars of loan debt, the rising defaults on these loans, and the skyrocketing tuition prices (average tuition has risen four times faster than inflation over the past quarter-century) are all worth it. They are the price for increased access to a college degree. Refusing to pay this higher price would be “against the national interest.”

Give the vice president credit for honesty. The question then becomes, “What exactly are we taxpayers getting for the increased price he wants us to continue to pay?”

According to Academically Adrift, last year’s landmark national study of collegiate learning, the answer is “not very much.” Of the national sample of students it surveyed, 45 percent failed to show “any significant improvement” in “critical thinking, complex reasoning, and writing skills (i.e., general collegiate skills)” after two years in college. Even after four years in college, 36 percent continued to show only insignificant improvement.

The disappointment produced by these results magnifies when we consider the cost of the drive for greater access. Today, about half of the students who enter college graduate. Of this half, Adrift tells us, only two out of three succeed at demonstrating some substantial learning. In all, then, only one in three college-headed students leaves with both a degree and the learning a degree is meant to certify.

For this sad outcome, Americans are footing an unsustainable debt burden. The vice president urges that we stay the course nonetheless. Will his countrymen follow him, or will they make like Chase Bank and exit before the bubble bursts? Would growing numbers begin to abandon the quest for a college degree?

This is hard to imagine when for decades we have been told, and with some truth, that a college education is the alpha and the omega. Consensus regarding the value of a degree has served to justify the upward spiral of government subsidies, tuition prices, and student-loan debt. But Chase Bank’s move is only the latest bit of evidence that, for some time now, the benefits of college are plummeting proportionately as tuition prices and loan-debt soar.

Nevertheless, Americans, at least for the short term, likely will continue to borrow for college as long as government-subsidized loans are available. But the short term may prove to be very short.

If we continue on the course urged by the vice president, loan defaults will continue to rise, which means that the bill to the federal government, which guarantees the loans, will continue to rise. The increased dollars required to foot this bill can come only through raising taxes, or cutting funding for other programs, or government borrowing. In a still-stagnant economy, raising taxes is knotty.  Cutting other programs has rarely been an option for which our national leaders have shown much stomach, as it creates only a new class of aggrieved constituents.  Equally problematic is increasing government borrowing when the deficit and national debt already stand at historic highs.

What seems likely, regardless of who wins the November elections, is a cutback in government-subsidized student loans. It seems that as Chase goes, so eventually must go the federal government. As the federal spigot closes, so will be the number of students able to attend college, at least initially. But the resulting downward pressure on demand will force universities to reduce prices, restoring market equilibrium in time.

How and when this will transpire is a matter for speculation, but may be explained reasonably, and not without humor, by what is known in investment circles as the “greater fool theory.” According to this theory, market bubbles are caused by overly cheery investors (“fools”) who buy overvalued products believing that they will be able to sell them at a profit to other (“greater”) fools. The bubble stays intact so long as greater fools are available to prop up the market. The bubble bursts when there are no greater fools left. At this point, the last greater fool finds that he is in fact the “greatest fool.”

Mr. Biden’s critics charge him with betting that there are still fools out there (students, parents, and taxpayers) who will continue to invest in the overvalued asset higher education has become. However, a bubble requires more than the credulousness of fools. It also requires that they be solvent. Collective foolishness has driven the country to brink of insolvency, leaving even the foolish among us with no option save self-restraint.  As the maxim has it, “The wise man does at once what the fool does at last.”  In higher education, the country may be poised finally to do the right thing, having exhausted all other alternatives.

Thomas K. Lindsay directs the Center for Higher Education at the Texas Public Policy Foundation. He served as deputy chairman and COO of the National Endowment for the Humanities during George Bush’s second term.

Obama's focus on loan interest rate means another short-term fix

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The looming interest rate increase for subsidized student loans replays a familiar storyline: crisis, last-minute fix, another crisis. Meanwhile, the loans' future is in jeopardy.

Problems plague Education Department debt management process

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Problems with direct loan servicing have left borrowers trying to rehabilitate their loans in default for months and cost the government millions of dollars.

Company hopes to get alumni to provide private loans to students

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A company out of Stanford's business school hopes to transform the loan market by getting alumni to invest in students.

Higher education proposals in 2013 Republican budget

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A proposal announced Tuesday would cut Pell Grants and make student loans appear more costly on federal balance sheets.

For-profits that receive federal aid charge more, study finds

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For-profit colleges that participate in federal financial aid programs charge more than those that don't, according to new study, which also finds the for-profit sector much larger than most think.

Essay on how everyone can help erase student debt

Faculty members and administrators know on some level that their students are being saddled with lifelong student debt, but little is being done collectively across academe to deal with that embarrassing fact.

This fall ABC News anchor Diane Sawyer aired a report stating that 6 million Americans owe $950 billion in student loans, a sum greater than the entire credit card debt in this country. The report included interviews with graduates forced to live with their parents because of student loan debt.

To understand why, research your discipline’s starting salary vs. the average student debt at your institution. Then imagine yourself as one of your graduates paying monthly bills that vary according to state/city averages for student loans, apartment rent, car payment, fuel/transportation, utilities, and food and health-related expenses. You can use search engines for average data for your region as well as calculators for adjusted gross salary and student loan repayment.

After viewing the ABC News report, I did this exercise and found that journalism students from Iowa State on average will pay between $2,500-$3,000 per month for living expenses (assuming their employers cover medical insurance). That requires an income after taxes and Social Security of $26,000-$36,000 per year. Unfortunately, the average salary for a journalist in Iowa is $26,466, with a starting salary of $21,796. This explains in part why many graduates lessen expenses by living with parents (or move out of state for higher-paying jobs) and why those parents are irate about high tuition rates.

This is a national crisis. Fully two-thirds of college seniors who graduated in 2010 had student loan debt, an increase of 5 percent from the previous year, according to the latest report just released by the Project on Student Debt.

That report shows that my state of Iowa ranks third in the nation with an average student debt of $29,598. Some 72 percent of Iowa graduates have debt, ranking us fourth in the nation in this category. Worse, my land-grant institution — Iowa State University — is listed as one of the top high-debt public universities, with an average debt of $30,062 for the 69 percent of students graduating with debt.

This article is not about my institution. It is about yours. It doesn't matter if you work in a high- or low-debt state or university. You can do something now to ease the burden on students and make education more affordable rather than rely increasingly on higher tuition or annual appeals for more allocations from regents, trustees and legislatures.

Here are recommendations sorted top-down by rank:

Regents and Trustees: Understand the inner workings of your universities (including the status-quo disclosures below) but above all keep watch for "mission creep," especially by administrators of regional or lower-reputation institutions. They may have been founded originally for specialized purposes — such as teaching, nursing, agriculture, engineering, liberal arts, etc. — but aspire to be more comprehensive, competing with existing colleges. Mission creep also concerns how many employees are doing something other than teaching. A New York Times piece analyzed higher-education advertisements and found postings for "vice president for student success, residential communications coordinator, credential specialist, dietetic internship director, director of active and collaborative engagement, and coordinator of learning immersion experiences." Do an inventory of such positions at your institutions and evaluate whether these positions are more important than faculty members in classrooms.

Presidents: Leaders of institutions earn ever higher salaries in part by concentrating on fund-raising while allowing provosts to run the institution based on the added administrative title of "provost and executive vice president." When raising funds, presidents should focus more on student scholarships than on new buildings or programs that often fall outside the traditional mission of their institutions. They also should revisit organizational structures to see if their current configuration is financially viable. In the past, vice presidents for finance exercised budgetary oversight with authority over provosts who were the titular heads of the professoriate and often argued on their behalf, a task now largely left to unions and faculty senates. At the least presidents should take a more active role in overseeing how provosts allocate funds to academic units to ensure that priorities help ease student debt.

Provosts: In many states and institutions, provosts control how the increase in higher tuition is allocated. For instance, if tuition is raised by 3 percent, that extra money (often in the millions) might be dedicated to scholarships, student services, and special initiatives. The era of special digital initiatives, in particular, has ended after a decade of proliferation. See my 2008 IHE article about that. Rather, provosts should focus new money on scholarships to ease debt and maintain faculty salaries in as much as new searches drain the institution of funds and expertise. Also, if appropriate, they should modify budget models to reward units for graduation rates of 4-4.5 years. They can use timely rates to generate higher enrollment, especially in difficult economic times.

Chief Information Officers: Require technological assessment, reining in expenditures by academic units and teaching centers that waste student fees on gimmicky digital and virtual initiatives. What departments need now more than ever are IT specialists dedicated to maintaining systems, creating programming and repairing equipment. Find out which academic units or centers are spending student technology fees for gaming and role-playing applications, questionable clickers, pricey statistical analysis applications and other non-priority software. End funding for any non-educational item, and demand assessments with empirical data to support existing educational items to prove that indeed they are enhancing learning and/or research. See my 2008 Chronicle of Higher Education article for assessment specifics.

Deans: Reorganize academic units. Too many service departments with few actual majors may generate high student credit hours. But that is no reason why those programs also should be offering degrees requiring phalanx of adjuncts and graduate assistants teaching service courses while continuing professors handle small-section courses for minuscule cohorts. By reducing the number of small-major degrees, your colleges can dedicate tuition funds to high-priority programs with strong enrollment. See my 2011 IHE article on specific actions you can take to cut college expenditures.

Faculty Senate Officers: Some faculty senates realize that curricular glut increases workload. Other senates are oblivious to that basic fact, approving new courses each year without removing others that are antiquated, too narrow, or otherwise duplicative. Every faculty senate should have a curriculum council that oversees duplication and requires departments to justify not only the pedagogical arguments for the new course but also whether other units with similar courses have signed off on the proposal. Curriculum councils should ask how the unit will underwrite new courses without increasing workload for colleagues. See my 2008 Chronicle of Higher Education article for details.

Department Chairs: Raise external money. Do not use supplemental teaching funds for professor travel or development, because that reduces the number of courses you can staff, delaying degree progress for your students. Instead, get a donor to finance travel and development. Do not spend departmental funds for guest speakers but invite alumni or create an endowment for that. Make scholarships a priority to reduce debt. See my 2008 IHE article for fund-raising recommendations.

Faculty: Do not request course releases for vita-building activities such as journal editing or academic association appointments. Get a grant and buy yourself out or do the extra work without expectation of teaching less. Do not create courses associated with your research that few majors want. Do not insist on teaching small-section classes. If you publish textbooks, dedicate royalties for one book to be deposited directly to a scholarship fund in your name. (One of my textbooks has raised thousands of dollars for scholarships.) If you blog in your spare time, as I do, and have hundreds of followers, do not accept advertisements. Instead, ask your viewers as I will in 2012 to donate funds to your institution for scholarships.

Staff: Support personnel (budget and purchasing officers, IT specialists and secretaries) know perhaps more than anyone how to eliminate waste of public and private funds. Unfortunately, these employees are usually not empowered to make complaints to their immediate supervisors or have their budget-saving ideas considered regularly by upper administration. Advocate to your administration, employee councils and/or unions for the creation of a hotline to report abuses and of a digital suggestion box that rewards budget-saving ideas, especially those that can lessen student debt.

Everyone: Stop justifying the status quo concerning student debt by identifying weaknesses in the statistics of the Project on Student Debt. This is not U.S. News & World Report Best Colleges rankings, but documentation of actual problems verified by news organizations and government loan default data. Stop thinking this is not your job, especially if you are faculty or staff. Leadership is not a top-down phenomenon. Be courageous and prepared for pushback or worse by the very nature of addressing this issue. There are federal and state whistleblower statutes associated with reprisals for disclosures of mismanagement and waste of public funds.

At the start of the new year, let’s resolve to do what we can to lower tuition and ease student debt. Collectively, we can address these issues by making a commitment without excuses, justifications or finger-pointing. Many institutions have made such a commitment to sustainability initiatives, which also indirectly reduce debt through cost-savings. However, the biggest sustainability concern in our time just might be access to education and the value thereof after graduation.


Michael Bugeja is director of the Greenlee School of Journalism and Communication at Iowa State University. Bugeja chairs the Contemporary Leadership Committee of the Association of Schools of Journalism and Mass Communication.

Admissions officers on front lines of law school crisis

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In light of criticism about job placement and student debt in legal education, admissions officers discuss transparency in law school admissions.


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