Showing posts with label Sandy Baum. Show all posts
Showing posts with label Sandy Baum. Show all posts

Wednesday, August 1, 2018

"Broken and at risk of collapsing": Sandy Baum's excellent recommendations for reforming DOE's income-based student-loan repayment system

Sandy Baum published a short essay yesterday in Chronicle of Higher Education titled "Don't Get Rid of the Income-Based Loan Repayment System. Fix It."  As she said in her essay, the federal student-loan repayment system as it now stands is "broken and at risk of collapsing."

I have a few reservations about Ms. Baum's recommendations (which I will address later), but on the whole her suggestions for reform make sense.

"Create one income-driven repayment plan with clear requirements and provisions." 

As Ms. Baum attests, the Department of Education currently administers a "hodgepodge of repayment programs": PAYE, REPAYE, Public Service Loan Forgiveness (PSLF), etc.  She recommends one plan for everyone with borrowers paying a higher percentage of their income than the 10 percent rate that currently applies to borrowers in PAYE and REPAYE plans.

Baum also recommends that student borrowers be automatically enrolled in an income-based repayment plan just as soon as their repayment obligations begin. In addition, she endorses having student-loan payments added as a payroll deduction to student borrowers' paychecks.

This is a good idea. As Baum pointed out, "[p]ayroll deductions for student-loan payments would make it easier for required payments to adjust quickly when financial circumstances change, and also make it easier for students to meet their payment responsibilities."

More than that, automatic payroll deductions would make it impossible to default on student loans and eliminate the need for student borrowers to obtain economic hardship deferments. If the payroll deduction reform were implemented, it would be put the student-loan servicers out of business. No more 25 percent penalties slapped on loan defaulters; no more interest accruing on loans that are in deferment, no more robocalls from the debt collectors.

"As the total amount borrowed increases, extend the number of payments required to reach loan forgiveness."

Baum argues for longer repayment periods for people who acquired a lot of student debt. And this too makes sense. People who borrowed $20,000 or $30,000 to attend college should have a repayment plan that allows them to be debt free after 10 or 15 years.  But a person who borrows $100,000 or more should expect to make payments for a longer period of time.

"Place reasonable limits on graduate students' federal borrowing."

Student-loan debt is spinning out of control, partly fueled by the GRAD PLUS program that allows people to borrow the entire cost of going to graduate school regardless of the amount. In response to that incentive, universities raised the cost of their graduate programs exponentially--and I mean exponentially. As I have said before, I paid $1,000 a year to attend University of Texas School of Law. The current cost is $35,000 a year--35 times as much as I paid.

Not long ago, I wrote about Mike Meru, who borrowed $600,000 to go to dentistry school. With accrued interest, he now owes $1 million! A cap on the amount a student can borrow to go to graduate school would stop the insane escalation in professional-school tuition.

"Eliminate taxes on all forgiven loan balances.

The IRS considers a forgiven loan to be taxable income. Thus, with the exception of borrowers in PSLF plans, borrowers whose loan balances are forgiven under income-based repayment plans receive a tax bill for the amount of forgiven debt .

This is crazy. I doubt anyone in Congress supports the status quo on this issue. After all, what is the point of people enrolling in income-based repayment plans if they get hit with a big tax bill after faithfully making monthly loan payments for 20 or 25 years?

Baum's other good ideas

In addition to the recommendations she made this week in Chronicle of Higher Education, Baum wrote a book on the student loan program in which she endorsed easier accessibility to the bankruptcy courts for distressed student borrowers. She also supports an end to garnishing Social Security checks of elderly student loan defaulters.

I once opposed all income-based repayment plans on the grounds that they basically turn student debtors into indentured servants--forced to pay a portion of their wages to the federal government for the majority of their working lives simply for the privilege of going to college. I still believe that.

Nevertheless, Baum's proposals address reality--which is that 45 million student debtors now carry $1.5 trillion in student-loan debt.  The proposals Baum put forward this week in Chronicle of Higher Education won't fix this train wreck of the federal student-loan program, but they will make the system more humane.

References

Sandy Baum. Don't Get Rid of the Income-Based Loan Repayment System. Fix It. Chronicle of Higher Education, July 30, 2018.

Sandy Baum. Student Debt: Rhetoric and Realities of Higher Education Financing. New York: Palgrave-MacMillan, 2016.

Jason Delisle. The coming Public Service Loan Forgiveness bonanzaBrookings Institution Report, Vol 2(2), September 22, 2016.

Tuesday, December 27, 2016

Social Security offsets imposed on elderly student-loan defaulters: Heartless and Pointless

You can be young without money but you can't be old without it.
Tennessee Williams

If you are in your late 50s or early 60s, you've probably obtained an estimate for how much Social Security income you will receive when you retire. Most retired Americans depend on their Social Security checks to provide a significant amount of their overall retirement income. 

But if you defaulted on a student loan, you may not receive your full Social Security benefit. The government may deduct part of your Social Security income and apply the deduction to your unpaid student loans. 

A few weeks ago, the U.S. Government Accountability Office issued a lengthy report  (82  pages) on the government's Social Security offset activities. Here are some of the highlights.
  • In 2015, 173,000 Americans had their Social Security income offset due to defaulted student loans. This is a dramatic increase from 2002, when the government only applied offsets to 36,000 Social Security recipients (page 11).
  • Some Social Security recipients whose income was offset lived below the federal poverty guideline and others dropped below the poverty level after their Social Security checks were reduced (p. 27). In fact, as Senator Elizabeth Warren emphasized in a recent press release, "Since 2004, the number of seniors whose Social security benefits have been garnished below the poverty line increased from 8,300 to 67,300."
  • More than 7 million people age 50 and older still owe on student loans, and 870,000 people age 65 and older have student loan debt. Among student-loan borrowers age 65 and older, 37 percent are in default (figure 2, page 10).
  • The amount of money the government collects from Social Security offsets is small beer. The government  only collected $171 million from Social Security offsets in 2015, about one eighth the amount Hillary Clinton raised for her 2016 presidential campaign ($1.4 billion). 
  • Most of the money collected from Social Security offsets went toward paying fees and accumulated interest.  "Of the approximately $1.1 billion collected through Social Security offsets from fiscal year 2001 through 2015 from borrowers of all ages, about 71 percent was applied to fees and interest" (p. 19).
GAO also reported that several hundred thousand people who have experienced Social Security offsets are totally disabled and entitled to have their student loans forgiven, but only a minority of these people have applied for loan forgiveness (p. 31). Commendably, DOE has suspended offsets for people who are totally disabled whether or not they applied for loan forgiveness.  Unfortunately, the government treats the amount of the forgiven debt as taxable income (p. 31).

The GAO report is packed with additional information and findings, but the bottom line is this: The government is hectoring elderly and disabled student-loan defaulters even though the amount of money the government collects is a pittance. Most of the money collected goes toward paying down fees and accumulated interest and does not reduce the individual defaulters' loan balances.

In short, the Department of Education's Social Security offset practices is pointless. Elderly or disabled people who defaulted on their student loans and are surviving on their Social Security checks will never pay off their loans. 

Sandy Baum, a widely renowned expert on student loans, recommended in her recent book that the government stop offsetting the Social Security checks of defaulted student-loan debtors. Does anyone disagree? 

In fact, the government's Social Security offset practices strike me as an administrative form of sadism--the bureaucratic equivalent of small children who joylessly tear the wings off of insects.

Senator Elizabeth Warren has called for an end to the practice of garnishing student-loan defaulters' Social Security checks. Surely she can gather legislative support for a law that bans this practice. If she can't get that done, then Senator Warren is really not much of a consumer advocate.



References

Sandy Baum. Student Debt: Rhetoric and Realities of Higher Education Financing. New York: Palgrave-MacMillan, 2016.

Senator Elizabeth Warren Press Release, December 20, 2016. McCaskill-Warren GAO Report Shows Shocking Increase in Student Loan Debt Among Seniors

United States Government Accountability Office. Social Security Offsets: Improvement to Program Design Could Better Assist Older Student Borrowers with Obtaining Permitted Relief. Washington DC: Author, December 2016).



Friday, December 2, 2016

Sandy Baum's new book on student debt contains some good ideas

In the past,  I have been critical of Sandy Baum's work on the federal student-loan program. In my view, she sometimes drastically understated the enormity of the student-loan crisis. But her new book, titled Student Debt: Rhetoric and Realities of Higher Education Financing, contains some good ideas, which I endorse.  Here are some of her most important recommendations:

"Don't Garnish Social Security Payments." I have long argued that the federal government should stop garnishing the Social Security checks of elderly student-loan defaulters. Baum agrees. As she put it, it is one thing for the government to garnish wages of student-loan defaulters or scoop up defaulters' tax refunds, but "[f]urther diminishing the living standards of senior citizens . . . with no potential for labor market earnings who are struggling to make ends meet on their Social Security payments is quite another thing." Bravo.

Stop giving private lenders special protection in the bankruptcy courts. In 2005, Congress amended the Bankruptcy Code to make private student loans nondischargeable in bankruptcy unless the borrower could show "undue hardship," the same standard that applies to federal student loans. This is wrong.

As Baum observed, "[t]here is no good reason for the government to sanction these unsecured loans as student loans or to grant them any special provisions, particularly . . ., protection from bankruptcy proceedings." This is an eminently sensible observation, and other respected policy commentators agree with Baum on this.

Treat student loans like any other unsecured debt in bankruptcy. I have argued for years that student loans should be treated like any other unsecured debt in bankruptcy and that the "undue hardship" provision in the Bankruptcy Code should be repealed or at least interpreted far more humanely. 

I was heartened to read that Baum, a leading expert on the federal student loan program, agrees with me on this point. Indeed, reforming bankruptcy laws to allow distressed student-loan debtors relief from oppressive student loan debt is the key to reforming the entire student loan program.

Other reforms Baum proposes. Baum made some other good points in her book. For example, some limits should be placed on the amount of money people can borrow to fund their college studies; and some limit needs to be placed on the amount of interest that can accrue on student-loan debt. She also said limits should be placed on the amount elderly people can borrow to fund their studies since they won't work long enough to pay off enormous amounts of student-loan debt.

Baum makes other good points in her book. But the reforms I've listed here are critical.  If the policy makers aren't going to listen to me (and so far they have not), then perhaps they will listen to Sandy Baum.

References

Sandy Baum. Student Debt: Rhetoric and Realities of Higher Education Financing. New York: Palgrave-MacMillan, 2016. 

Sunday, December 20, 2015

Harvard Economist N. Gregory Mankiw Provides a Lazy and Self-Serving Answer to Why College Costs So Much

Harvard Professor N. Gregory Mankiw wrote a lazy and self-serving op ed essay in the New York Times today, in which he purported to explain why college costs so much.

Like most of higher education's shills (Sandy Baum, Susan Dynarski, Catharine Hill, etc.), Professor Mankiw began his pitch by assuring us that college is still a good investment. The median wage for a college graduate, Mankiw reminds his readers, is about twice as much as the median wage for a worker with only a high school education.

Of course it is true that college graduates generally make more money than people with only a high school education, but that fact doesn't justify skyrocketing costs across almost all sectors of higher education. Nor does it justify the ever-increasing amount of money people are borrowing in order to attend college.

Mankiw then goes on to give three explanations for why college costs are going up--all bogus:

First, Professor Mankiw instructs us, we have "Baumol's cost disease."  According to Mankiw, Baumol recognized that as wages rise across all sectors of society, salaries rise even for services that have seen no increase in productivity.

Of course everyone knows that. It costs more for a haircut today than it did a generation ago, even though barbers haven't grown more efficient. Likewise, the cost of higher education has gone up. We used to call that phenomenon inflation, but Professor Mankiw prefers to call it Baumol's cost disease.

But of course this blather does not explain why the cost of higher education has gone up three times the rate of inflation over the past 30 years.

Second, Mankiw argues, higher education seems more expensive due to rising inequalities in society as a whole.  Here I'll let Mankiw explain this argument in his own words:
Educational institutions hire a lot of skilled workers: It takes educated people to produce the next generation of educated people. Thus, rising inequality has increased not only the benefit of education but also the cost of it.
OK, Professor Mankiw, what you say may be true. But again, how does that argument explain why college costs have risen much faster than inflation?

Finally, Mankiw explains, college costs haven't gone up as much as the public thinks because most students aren't paying the sticker price.  Colleges engage in "price discrimination," with only the suckers paying full price. And of course this is true. On average, private liberal art colleges are only collecting about 60 percent of the sticker price because they give discounts in the forms of grants and scholarships to preferred students.

In other words, Professor Mankiw is trying to assure Mr. and Mrs. America that when their children go to college, they'll probably get some sort of brother-in-law deal and won't be paying full price.

All this is pure horse manure. At bottom, Professor Mankiw is merely defending the status quo in higher education, just as Vassar's Catharine Hill did a couple of weeks ago in the Times when she argued against free college education. In fact, when you read Professor Mankiw's essay closely, which he hopes you won't do, he really isn't saying anything at all.

The reality is this: the cost of higher education has gone up for a variety of reasons, and many of those reasons are tied to greed and laziness.  At the elite universities, tenured professors are teaching fewer classes--ostensibly to have more time to do more important things.  College costs could go down if every professor taught the typical teaching load of 30 years ago.  I would be surprised, for example, if Professor Mankiw teaches more than three courses a year.

Moreover, the cost of attending for-profit colleges is especially high, much higher than a comparable educational experience at a community college or public university.  Students who attend these rapacious institutions borrow more money than students who go to public schools. and their student-loan default rates are shocking. According to the Brookings Institution, the five-year loan default rate in the for-profit sector is nearly 50 percent.  But of course, Professor Mankiw didn't even mention the for-profit colleges.

College costs have also gone up because the number of ancillary employees has increased. For example, Harvard was recently ridiculed for printing special placemats that contained instructions to students about how to answer their parents' embarrassing questions when they went home for the holidays.  As if Harvard students are too stupid to know how to talk to their parents or to have their own opinions.

How much, do you suppose, Harvard is paying the person who dreamed up and printed those embarrassing placemats? Well--whatever it is, that amount adds to the cost of Harvard's tuition.

In truth, the cost of postsecondary education is out of control for multiple reasons, and the problem varies in its seriousness across higher education's many sectors. For-profit colleges charge too much; almost all objective commentators agree. Professional education is far too expensive. In particular, the law schools have jacked up tuition prices and are producing about twice as many lawyers as the nation needs. Administrators' salaries have gone up faster than professors' salaries, and numerous frills--fitness centers, luxury student housing, recreational facilities like LSU's "Lazy River"--all this has contributed to the spiraling cost of higher education.

About all these issues, Professor Mankiw had nothing to say.

Personally, I found Professor Mankiw's essay offensive. Millions of people can't pay back their student loans, and most can't discharge those loans in bankruptcy.  Meanwhile, the Department of Education and the policy wonks are urging the expansion of long-term repayment plans that will force Americans to pay on their student loans for 20 or 25 years. In short, the student loan program is a mess, and Professor Mankiw prattles on about Baumol's cost disease!

Professor Mankiw's op essay in the Times was nothing  more than a lazy and self-serving defense of the status quo--a status quo than benefits people like Professor Mankiw.
Professor N. Gregory Mankiw: He likes the status quo.









Sunday, April 12, 2015

The Urban Institute's Sandy Baum: Is She a Bag Man for the Higher Education Industry?

My favorite scene in the movie Michael Clayton is a dialogue between Michael Clayton (played by George Clooney), who is a lawyer in a 600-person law firm, and Arthur Edens (played by Tom Wilkinson), a senior partner in the same firm.

Edens is a manic depressive handling a major piece of litigation for an international corporation accused of intentionally marketing a product that causes people to get cancer. During depositions, Edens has a manic episode and his continuing bizarre behavior threatens to expose the corporate client's skulduggery, potentially costing it billions.

The firm's senior partner directs Clayton to get Edens under control, and Clayton talks to him very persuasively, while implicitly threatening to have him committed to a mental institution.

But Edens is having none of it.

"Michael," Tom Wilkinson's character kindly says to George Clooney's character, "I have great affection for you and you live a very rich and interesting life, but you're a bag man not an attorney."

If I ever meet Sandy Baum, I'm tempted to say very much the same thing. Baum is a senior fellow at the Urban Institute and a highly respected analyst of higher-education finance. For many years, she has co-authored the College Board's annual publications Trends in Student Aid and Trends in College Pricing; and she has conducted studies on college costs for the Brookings Institution. She has a Ph.D. in economics and is a research professor at George Washington University, a position she holds while working with the Urban Institute. Very impressive.

Over the years, Sandy Baum has emerged as one of the leading apologists for the higher education industry. Everyone knows that college costs have skyrocketed and that the federal student loan program is totally out of control. Millions of people have defaulted on their loans and millions more have obtained economic hardship deferments that excuse them from making student-loan payments.

Nevertheless, Sandy Baum coos soothingly that college costs are really not as high as they seem to be and, in any event, rising costs are not the fault of the colleges and universities. In 2013, Baum co-authored a report for the College Board that actually argued that college costs have not gone up much at all. It is true, the College Board acknowledged, that the sticker price for attending college has gone up significantly over the past ten years. But when discounts, grants and tax benefits are calculated, the real cost that students pay has remained virtually steady over the past decade. In fact, according to the College Board (as reported in the New York Times), when adjusted for inflation, the net cost of attending college (looking only at tuition and fees) has actually gone down over the past ten years.

Indeed, as Sandy Baum told the New York Times, "I think the hand-wringing about the trend [in college costs] is greatly exaggerated."

And--if there has been an increase in college costs, it is because the states have cut back on their support for higher education. "So it's not that colleges are spending more money to educate students," Baum told NPR radio. "It's that they have to get that money from someplace to replace their lost state funding--and that's from tuition and fees from students and families."

So which is it, Sandy? Has college tuition gone up due to reduced state funding or have costs not gone up after adjusting for inflation, grants, and tax benefits?

And if everything is under control, why did Baum praise President Obama for encouraging students to sign up for long-term income-based repayment plans--plans that can extend the student-loan repayment period to 20 or 25 years? In fact, Baum even recommended that long-term repayment plans be the "default option" for college students who take out student loans.

Paul Campos, in a New York Times op ed essay, challenged the notion that the states' support for higher education has gone down, which is the standard reason the higher education industry gives for rising college costs. According to Campos, "[P]ublic investment in higher education in America is vastly larger today, in inflation-adjusted dollars, than it was during the supposed golden age of public funding in the 1960s." 

Campos thinks a major explanation for rising college costs is "the constant expansion of university administration." Campos cites data that administrative positions at colleges and universities grew by 60 percent between 1993 and 2009, which is reportedly 10 times the rate of growth for tenured faculty positions.

In my opinion, Campos' analysis of college costs is more accurate and helpful than the self-serving explanations that are offered by the higher education industry and the entities that issue reports that align with its interests--the College Board, the Urban Institute, and the Brookings Institution.

Campos is right. An increase in the number of administrators is at least part of the reason for rising college costs. And a lot of those administrators are making too much money, particularly when their salaries are compared to the salaries of the faculty members who are actually teaching students.

References

Sandy Baum & Michael McPherson. Obama's Aid Proposals Could Use a Reality Check. Chronicle of Higher Education, August 26, 2013. Accessible at: http://chronicle.com/article/Obamas-Aid-Proposals-Could/141265/

Paul Campos. The Real Reason College Costs So Much. New York Times, April 5, 2015, Sunday Review Section, p. 4.

College Board. Trends in College Pricing 2013. Accessible at: http://trends.collegeboard.org/college-pricing

Andrew P. Kelly(2013, October 24. New data on tuition prices: Is it possible it's even worse than we thought? AEI Ideas blog. Accessible at: http://www.aei-ideas.org/2013/10/new-data-on-tuition-prices-is-it-possible-its-even-worse-than-we-thought/

Richard Perez-Pena (2013, October 25). Despite Risking Stick Prices, Actual College Costs Stable Over the Decade, Study Says. New York Times, p. A14.

Note: Quotes by Sandy Baum come from the Perez-Pena article or the Campos essay, both of which appeared in the New York Times and are cited in the references.

Monday, November 4, 2013

President Obama Pushes Income-Based Repayment Plans for Student-Loan Debtors: Madness! Madness!

The U.S. Department of Education is sending e-mails to selected student-loan borrowers, urging them to consider signing up for income-based repayment plans (IBRs) to pay off their student loans. Currently, about 1.6 million student-loan borrowers participate in IBR plans, but DOE wants to sign up 3.6 million additional participants within the next six weeks.  If DOE is successful, more than 5 million people will soon be making student-loan payments based on a percentage of their income over a long period of time--20 to 25 years.

A lot of the major players in higher education like IBRs--"pay as you earn" plans as some people call them. In a co-authored essay in Chronicle of Higher Education, Sandy Baum of the College Board lauded the President's plan for notifying students about IBRs and said IBRs should be the "default option" for student-loan repayment. In other words, unless student borrowers affirmatively opt out, they would automatically be enrolled in a student-loan repayment plan that would stretch their payments out over 20 or 25 years.  Wow, what a super idea!

And how will income-based loan repayments be collected? The details aren't clear yet, but I imagine the feds will do what the Brookings Institution recommends.  Student-loan borrowers will have their loan payments deducted from their payroll checks. The IRS will become the national debt collector, and a student-loan borrower's monthly loan payments will go up or down based on the borrower's current income, like income-tax withholding payments. 

Thus, the day may be coming when former college students will see their monthly student-loan payment appear as just another deduction on their paychecks--like Social Security, mandatory retirement contributions, and federal and state taxes. And for most borrowers, those deductions will last about a quarter of a century.

President Obama probably thinks he is doing college-loan debtors a favor by encouraging them to sign up for long-term repayment plans. He reminds me of Colonel Nicholson in Bridge on the River Kwai. Colonel Nicholson (played by Alec Guinness) is so obsessed with building a bridge for the Japanese army that he loses sight of the fact that he is hurting his country's cause, not helping it.. Not until the end of the movie does the Colonel realize that he has betrayed his country and the soldiers he commands.  The last lines of the movie are: "Madness, Madness!"
Col. Nicholson in Bridge on the River Kwai
"Madness! Madness!"

Why are all the insiders lining up in favor of IBRs? Two reasons:

IBR plans will hide the student-loan default crisis. First and most importantly, IBRs are a cosmetic fix for the soaring student-loan default rate.  As I've explained before, the true student-loan default rate is probably twice as high as the anemic three-year default rate DOE reports every year. In the for-profit sector, the overall default rate is at least 40 percent.  Over the long run, such a default rate is economically and politically unsustainable.

For years now, the for-profits have hid their institutional default rates by encouraging their students to sign up for economic hardship deferments so they won't be counted as defaulters. Millions of people have these deferments, but this shell game can't last forever. Eventually, the government will have to admit that a lot of people on economic-hardship deferments (probably most of them) are really defaulters who will never pay back their loans.

Putting people in IBRs is unlikely to increase the number of people who pay off their loans, but it will obscure the true student-loan default rate for several years. How? If people are automatically enrolled in IBRs, their loan payments will be lowered perhaps as low as zero for people who are unemployed or are in low-paying jobs.  These people won't be paying off their loan balances because interest will continue to accrue.  But they won't be counted as defaulters.

IBRs will take the heat off colleges and universities to keep their costs down.  Second, IBRs benefit the colleges and universities. If students pay for their college experiences based on a percentage of their income instead of the amount they borrow, they will have little incentive to shop for a college based on price. And governmental agencies will have less incentive to try to keep college costs down. Colleges and universities can perpetuate the status quo indefinitely, raising their tuition rates every year without being pressured to keep their costs down.

The for-profits will be the big winners if IBR plans become the default option for student borrowers because their student-loan default rates will drop to zero in spite of the fact that too many students who attend for-profit colleges are paying exorbitant tuition and getting substandard educational experiences.

For most students and for American Society, IBRs will be a disaster. Income-based repayments may make sense for a small percentage of student-loan debtors, but if IBRs become the default option for college-student borrowers, the consequences will be disastrous.

First of all,  as I just said, IBRs reduce students' incentive to borrow as little money as possible to attend college. In fact, many students will conclude that it makes economic sense to borrow to the max. Thus, if IBRs become popular, the total amount of money students borrow every year to attend college will  continue going up--perhaps at a faster rate than in the past.

In addition, mass adoption of IBRs will hurt the American economy. If young people are locked into making student-loan payments for 20 or 25 years, their take-home pay will be smaller and they will have less money to purchase homes, have children, and save for retirement.

But this is the most chilling fact about IBRs: They have the potential for creating a large class of people who are in essence share croppers for the federal government They will be forced to contribute a percentage of their earnings to Uncle Sam for the majority of their working lives. No one can say with certainty what the psychological impact of this arrangement will be on American college graduates, but it could reduce their faith in the American dream and lead to mass cynicism about the American political process.

And IBRs will not increase the number of people who pay off their student loans. I predict that a majority of students who select IBR plans as their student-loan repayment option will be students who pay too much to attend for-profit colleges and don't make enough money after they complete their studies to pay back their loans.  A lot of these people will be unemployed or working in low-wage jobs that entitle them to pay nothing on their loans or to pay so little that their payments won't cover accruing interest.

These poor people will see their federal loan debt grow, not shrink, over the years, even if they make all their loan payments on time.  For example, the New York Times ran a story about a veterinarian who borrowed $300,000 to attend a for-profit veterinary school outside the United States. Even though this individual found a job as a veterinarian and is making regular student-loan payments under an IBR, her current job does not pay enough to enable her to make loan payments that are large enough to cover the accruing interest on her debt. A financial analyst estimated that when this veterinarian completes her 25 year repayment period, the amount of her debt will not have been paid off.  In fact, it will have doubled--from the $300,000 she originally borrowed to more than $600,000!

In short--and I say this emphatically--wholesale adoption of income-based repayment plans is madness and its long term effect will be drive millions of people out of the middle class and into a new class of Americans--sharecroppers for the federal government.

References

Sandy Baum & Michael McPherson. Obama's Aid Proposals Could Use a Reality Check. Chronicle of Higher Education, August 26, 2013. Accessible at: http://chronicle.com/article/Obamas-Aid-Proposals-Could/141265/

David Segal. High debt and falling demand Traps New Vets. New York Times, February 23, 2013. Accessible at: http://www.nytimes.com/2013/02/24/business/high-debt-and-falling-demand-trap-new-veterinarians.html?pagewanted=1&_r=0

Michael Stratford. You've Got Mail. Inside Higher Education, November 4, 2013. Accessible at: http://www.insidehighered.com/news/2013/11/04/education-dept-will-email-35-million-student-loan-borrowers-about-income-based

Sunday, October 27, 2013

Only suckers pay the sticker price. The College Board says college costs at private colleges went down over the past 10 years. Really?

I think the hand-wringing about the trend [in college costs] is greatly exaggerated.

                                                  Sandy Baum, College Board

Year after year, College Board faithfully delivers two messages.  First, college is a fabulous investment when you consider the life-time difference in earnings between college graduates and high school graduates. 

Second, a college education does not cost as much as most people think it does. In fact, last week the College Board issued a report that said the inflation-adjusted cost of attending a private college is actually cheaper than it was ten years ago!  That's right. Even though college costs have risen faster than the rate of inflation for the past 30 years, the cost of attending a private college actually went down over the past ten years, according to the College Board.

Sandy Baum of College Board
It is true, the College Board admitted, that the sticker price of a college education has gone up over the past ten years, but only suckers pay the sticker price. When grants and tax benefits are calculated, the so-called actual price is only 57 percent of the sticker price. Adjusted for inflation, the net price has remained virtually unchanged from what it was 10 years ago.

To put it another way, college costs haven't gone up that much for some groups of people.  Colleges grant huge discounts to preferred customers.  Applicants with high SAT scores get scholarships or grants, because these students help raise colleges' rankings by the various rating entities like U.S. News and World Report.

And low-income students are eligible for Pell Grants.  As Andrew Kelly pointed out in a recent blog, Pell grant spending more than doubled between 2008 and 2011, growing from $16 billion to $37.5 billion in just three years.  The number of Pell Grant recipients grew by more than 80 percent between 2006 and 2012. 

And let's not forget affirmative action.  Not only do the leading colleges give minority applicants preference for admission, they generally give these students scholarships and grant aid--particularly at the elite colleges.

Who then pays the sticker price--the sucker price--to attend all these expensive elite colleges?  If you are a white person from the middle class with lackluster SAT scores, it's you. Citing a federal study, the College Board acknowledged that families in the second highest quartile of family income saw the cost of attending a private college go up by 8 percent from 2003-2004 to 2011-2012 (as reported by NY Times).

References

College Board. Trends in College Pricing 2013. Accessible at: http://trends.collegeboard.org/college-pricing

Andrew P. Kelly(2013, October 24. New data on tuition prices: Is it possible it's even worse than we thought? AEI Ideas blog. Accessible at: http://www.aei-ideas.org/2013/10/new-data-on-tuition-prices-is-it-possible-its-even-worse-than-we-thought/

Richard Perez-Pena (2013, October 25). Despite Risking Stick Prices, Actual College Costs Stable Over the Decade, Study Says. New York Times, p. A14.