The Brookings Institution Makes A Proposal for Student Loan Reform: Let's Turn College Graduates Into Sharecroppers

The Hamilton Project, a public policy initiative sponsored by the Brookings Institution, issued a report this month that offers some promising ideas for reforming the federal student loan program. At the same time, not all of the ideas are good.

The Hamilton Project Proposal in a Nutshell

In a nutshell, the Hamilton Project proposes a simple income-based repayment plan for student borrowers that will replace the hodgepodge of repayment options now in place. Students will make loan payments based on a percentage of their income for a maximum of 25 years. Any unpaid balance owing at the end of this 25 year period will be forgiven with no tax consequences for the debtor.

Loan payments would be paid through a payroll deduction similar to Social Security deductions and debtors would be free to make larger loan payments than the minimum if they want to pay off their loans early. The proposal calls for the government to manage the repayment program instead of contracting out this work to private loan servicers.

In addition, the Hamilton Project recommends the elimination of interest subsidies for low-income borrowers while they are in school. The authors point out that these subsidies do nothing to increase the number of low-income students who enroll for college since the subsidy doesn't really benefit them until they enter the loan-repayment phase.  In the authors' opinion, money spent on subsidizing interest rates should be directed toward grants.



Long-Term Student-Loan Repayment Plans Will Create a New Class of Sharecroppers
Sharecropper cabin, 1936
Photo by Carl Mydans

Finally, the Hamilton Project proposes important reforms for the private student-loan industry.  Most significantly, the Project recommends the repeal of a 2005 Bankruptcy Code provision that makes it almost impossible for borrowers to discharge private student loans in bankruptcy.  The Project recommends that private student loans be treated like any other unsecured debt in bankruptcy.

The Hamilton Project's Proposal Contains Some Good Ideas

I like some of the Hamilton Project's proposals.  First of all, I heartily endorse the Hamilton Project's proposal for providing better bankruptcy protection for people who took out private loans from the banks. Congress made a mistake when it amended the Bankruptcy Code in 2005 to make it almost impossible for debtors to discharge their private student loans in bankruptcy. As I have said before, repealing the 2005 provision would probably have the salutary effect of driving the banks out of the private student- loan business.

I also like the Hamilton Project's proposal for simplifying the process for student debtors to participate in an income-based repayment plan and for having the government handle loan repayments through payroll deductions rather than having private student-loan servicers manage the repayment process.  Some of the private loan servicers are harassing delinquent student-loan debtors, and I would like to see their operations shut down.

Flaws in the Hamilton Project's Proposal

But  the Hamilton Project's proposal has some flaws.  First and most importantly, the plan calls for student-loan repayment obligations to stretch out for as long as a quarter of a century. In essence then, student-loan debtors will become sharecroppers for the government, paying a portion of their wages over most of their working lives in return for the privilege of going to college. I am opposed to lengthy income-based repayment plans as a matter of principle.

And, as I have said before, income-based repayment plans reduce students' incentives to borrow as little as possible and they reduce the colleges' incentives to keep their costs down.

The Hamilton Proposal is Based on a False Assumption

The Hamilton Proposal is based on the premise that most students don't borrow that much money, and thus they should have no trouble paying off their loans under an income-based repayment plan in just a few years. It points out that almost 70 percent of student-loan debtors borrow less than $10,000.

But as the Hamilton Project acknowledged in footnote 7 of its report, by the time people go into default, they owe considerably more than they borrowed due to penalties and accruing interest. If interest rates accrue for low-income borrowers while they are in school or if low-income borrowers' income-based payments are too low to cover accruing interest, then the amount of their debt will become larger--probably much larger--than they originally borrowed.

Conclusion: Some of the Hamilton Project's Proposals Have Promise, But We Should Avoid Putting Student Loan Debtors in Long-Term Repayment Plans

Some of he Hamilton Project's proposals have promise.  Restoring bankruptcy protection for private student-loan borrowers and eliminating the private student-loan repayment servicers are good ideas.

But the people who have been hurt the most by the federal student loan program are young people who attended for-profit colleges. As the Hamilton Project pointed out, people under 21 years of age have the highest loan default rates of any age group, and we know from many sources that people who attended for-profit colleges have the highest student-loan default rates.

The Hamilton Project's proposal is likely to put a lot of young, low-income people into long-term repayment plans they will never pay off.  And many of these long-term debtors--perhaps most of them-will be people who attended expensive for-profit colleges.

We simply must shut down the for-profit colleges.  Otherwise, the Hamilton Project's proposal for putting student-loan debtors in 25-year repayment plans will likely created a 21st century version of indentured servants--people who attended for-profit colleges that were too expensive and who will spend the majority of their working lives paying for college experiences that did not enable them to earn a salary large enough to quickly pay off their student loans.

References

Susan Dynarski and Daniel Kreisman. Loans for Equal Opportunity: Making Borrowing Work for Today's Students. Hamilton Project, Brookings Institution, October 2013. Accessible at: http://www.brookings.edu/~/media/research/files/papers/2013/10/21%20student%20loans%20dynarski/thp_dynarskidiscpaper_final.pdf

An Exercise in Cynicism: The Obama Administration Mucks Around in Louisiana's School Voucher Program

Let's try to put ourselves inside the mind of Attorney General Eric Holder as he tried to decide whether the federal government should intervene in Louisiana's school voucher program.



With friends like Eric Holder, Louisiana school children don't need enemies.

"Let's see," Mr. Holder might have said to himself, "if I impede Louisiana's voucher program, I will please the teacher unions, because they hate all school vouchers."  Since the teacher unions are a core constituency of the Democratic Party, interfering with Louisiana's voucher program would be a big plus for President Obama.

"Second," Mr. Holder might have mused, "if I harass the Louisiana voucher plan, the federal government will make it more difficult for poor children to attend religious schools." So, that would be another big plus.

"Finally," Holder may have thought to himself, "sidetracking a Republican governor's school reform initiative is never a bad thing to do."  So that would be another plus in favor of federal intervention in Louisiana's voucher program.

Hey, what's not to like? 

And so the Obama administration has intervened in an old school-desegregation lawsuit, seeking to persuade a federal judge that a federal court must decide whether children residing in districts covered by desegregation orders may participate in Louisiana's school voucher program for poor children.

I have to agree with Governor Bobby Jindal on this one.  What Eric Holder and the Obama administration has done is shameful.  As Governor Jindal put it, Obama and Holder "are trying to keep kids trapped in failing public schools against the wishes of their parents."

Let me be clear. I am not an uncritical cheerleader for all of Governor Jindal's school reform initiatives. I think the tenure reforms he rammed through the Louisiana legislature are deeply flawed. And Governor Jindal's school voucher program is not perfect either.

But at least Louisiana is trying to improve its failing school systems, and I think it is making some progress.  I remember visiting New Orleans schools during the mid-1990s, before Hurricane Katrina came and basically wiped the New Orleans school system off the map.  The New Orleans schools were terrible during the pre-Katrina years; and no one--liberal or conservative, Democrat or Republican, white person or black--would want Louisiana's then largest school system to return to those days.

Today, more New Orleans students attend charter schools than public schools, and most New Orleans schools are slowly getting better.  Are they perfect? No they are not.  But Eric Holder's attempt to impede Louisiana's school voucher program won't help a single impoverished school child get a better education. 

If the Obama administration truly wants to do something to improve education in this country, it should take on the for-profit colleges that have exploited millions of Americans who just wanted to get a good education--including a lot of low-income and minority young people. 

But that would be too hard.  It is much easier to launch senseless and expensive litigation against a Southern state's efforts to improve its education system.  Louisiana's Education Superintendent John White called the litigation "deeply cynical:" and off course, he's right.

References

Michelle Millhollon. Jindal rebukes Fed voucher stance. The (Baton Rouge) Advocate, August 25, 2013, p. IB.

Why President Obama's Proposal for Controlling College Costs is a Nonstarter

In politics as in life, there are problem solvers and there are problem managers.

President Obama is a problem manager.  Before he was elected president, he saw Guantanamo as a problem to be solved, and he promised to close it. Five years into his term of office, Guantanamo is still open; it is being managed.

Ma'am, I don't solve problems; I manage them.

Likewise with the student loan crisis. Fifty Million Americans now hold $1.2 trillion in student loan debt.  About 6.5 million people have formally defaulted, and another 9 million are not making payments because they have been granted deferments or forbearances. 

For-profit colleges account for almost half of all student loan defaults.  The Department of Education reports that about 20 percent of student loans originating in the for-profit sector default within three years of entering repayment, but DOE estimates that almost half of all students who borrow money to attend a for-profit institution will eventually default.

Now that's a problem. Is the Obama administration trying to solve it? No it is not.

Last week, President Obama proposed the creation of a college rating system whereby the federal government will rank colleges and universities based on their costs, their graduation rates, the number of low-income students they enroll, and some other factors.  The President hopes to link this rating system to the federal student loan program, perhaps allowing students who attend high-ranking colleges to borrow money at a lower interest rate.

By introducing such a system, the President hopes to encourage colleges to keep their tuition prices down and stop the ever-increasing cost of attending college. In short, President Obama wants to manage the student loan crisis, not solve it.

Why is President Obama's college ranking system doomed to fail? Several reasons:

Colleges will just game the system. First as the New York Times pointed out in a recent editorial, colleges are very good at gaming the system when it comes to measuring college quality. We've seen how they've manipulated data to make themselves look better in the U.S. News & World Report rankings.  They will use the same tactics if the feds implement a college rating system. So why go through this charade?

DOE doesn't even give us useful information about student-loan default rates. Second, DOE has shown itself unable to provide the public with accurate information about one simple measurement--the student-loan default rate.  DOE only measures the number of people who default during the first three year of the repayment period--currently about 13 percent.  But the number of people who default over the lifetime of the repayment period is much higher--probably double DOE's posted rate.  And that''s the number the public really needs to know.

If DOE can't report an accurate and useful student loan default rate--a simple thing to do, what makes anyone think it can manage a much more complicated college ranking system?

Students and families won't choose a college based on the federal ranking system. Third, students and their families won't make college choices based on the federal government's rankings, so why set up a bureaucratic ranking system?  Texas high school graduate are not going choose between enrolling at the University of Texas or Texas A & M based on rankings reported by Secretary of Education Arne Duncan.  They choose their college based on a host of very personal factors, not the least of which involves the varsity football team's win-loss record.

The Clery Act, which Congress passed in 1990, demonstrates my point.  Congress passed the Clery Act in the wake of the rape and murder of Jeanne Clery, a freshman at Lehigh University, based on the belief that parents need more information about crime rates in and around the nation's colleges and universities.  The law requires all higher education institutions that receive federal funds to report crime activity in their campus communities on an annual basis.

Although the Clery Act has some useful features--colleges are required to notify the campus community of ongoing criminal activities--I have never met anyone who made a decision about where to go to college based on the Clery Act's crime reports.

If students and their parents aren't going to make college choices based on the Clery Act's crime statistics, they are not going to make them based on Secretary Duncan's rating system.  Does anyone disagree?

Why impose more federal regulations on a host of colleges that are doing a pretty good job? Finally, President Obama wants to impose another layer of bureaucratic measurements on colleges and universities that are already overly regulated.  And a lot of these institutions are doing a pretty good job.  College tuition has gone through the roof at the Ivy League colleges and other elite universities, but a college education is still fairly reasonable at the nation's community colleges and regional universities, like the one where I teach.

The growing level of student-loan debt is a big problem that gets bigger every day, and there is no simple solution. Nevertheless, it is clear that the rapacious for-profit college industry is the source of a lot of student indebtedness and about half of the student-loan defaults. 

We won't solve the student-loan crisis until we bring the for-profit colleges under control. Unfortunately, President Obama doesn't have the political courage to tackle that problem.  He would rather rank all colleges than put the bad apples out of business.

In short, President Obama doesn't want to solve the student-loan crisis, he wants to manage it--at last until his term of office expires.

References

Editorial. A Federal Prod to Lower College Costs. New York Times, August 22, 2013. Accessible at: http://www.nytimes.com/2013/08/23/opinion/a-federal-prod-to-lower-college-costs.html?_r=0

Michael Shear and Tamar Lewin. On Bus Tour, Obama Seeks to Shame Colleges Into Easing Costs. New York Times, August 22, 2013. Accessible at: http://www.nytimes.com/2013/08/23/us/politics/obama-vows-to-shame-colleges-into-keeping-costs-down.html?ref=opinion

Thanks, NY Times, for Another Tepid Editorial About the Student Loan Crisis

In The Big Lebowski, Bunny Lebowski tells the Dude that her boyfriend is a nihilist. "He doesn't care about anything," she explains.

The Dude, Donny and Walter:

"That must be exhausting," the Dude replies sympathetically.

This scene reminds me of the New York Times editorial writers. Every day, they go to work and pen editorials opining on all the world's problems: global warming, the crisis in the Middle East, the European Debt crisis, obsesity--it must be exhausting!

Of course, not all of the Times' editorial advice is useful.  Earlier this week, a Times editorial, entitled "College's True Cost," commended the Obama administration's efforts to get colleges to communicate more clearly with students about the cost of attending college. As the Times reported approvingly, "[t]he Obama administration is developing a standardized form" that all colleges can use to report on how much a year of college costs and estimating the monthly payments students will owe when paying off their student loans.

"Unfortunately," the Times concluded, "colleges are unlikely to embrace this forthright approach unless the federal government makes it mandatory." Right. More government regulations will solve all our problems.

Obviously, givng students more information about their student-loan obligations is a good thing. But giving students clearer information about their student-loan debt burden is not going to solve the student-loan crisis any more than telling people how many calories are in a Big Mac will solve the nation's obesity crisis. People are still going to buy those Big Macs and students are still going to take out college loans because most of them can't afford to attend college without borrowing a lot of money.

Solving the student-loan debt crisis is going to take more than the creation of a standardized form for colleges to give students when they dole out student-loan money. As I've said before, these things must be done:

• The Department of Education must stop hiding the true student-loan default rate and give the public more accurate reports on how many people have stopped paying on their student loans.
• Insolvent student-loan debtors must be given reasonable access to the bankruptcy courts.
• The Federal government must stop financing the for-profit schools and colleges, which have extraordinarily high student-loan default rates.
• Colleges must operate more efficiently and rein in their costs.

Unless these things are done, other reform tactics are just a cosmetic approach to a very serious national problem.

References

Editorial (2012, June 7). College's true cost. New York Times, p. A24.

The Federal Government Should Stop Bankrolling the For-Profit College Industry

Floyd Norris recently wrote a mild but provocative article in the New York Times that focused on ITT Educational Services, a for-profit corporation that offers post-secondary education programs in 48 states. Norris reported that ITT students pay an average cost of $48,000 in tuition and fees to receive a two-year associate's degree in business administration.

Of course students can obtain a two-year associate's degree from a public community college for a fraction of that cost. One would think the federal government would develop policies to encourage students to attend reasonably priced community colleges instead of supporting the for-profit college industry.

As has been widely reported, for-profit colleges enroll about 10 percent of all post-secondary students but get about 25 percent of the federal student-aid money. According to Norris, the federal government guaranteed nearly $24 billion in loans for students attending for-profit schools in 2010-2011 and  distributed nearly $9 billion in grants that went to for-profit institutions.

Without question, most of the for-profit colleges could not exist without federal student-aid money.  For example, in 2011, ITT received 89 percent of its revenues from the federal government in the form of student loans and grants. (Norris, 2012, p. B7)  Meanwhile, state and local-government are drastically cutting their financial support for public colleges and universities.

In my opinion, the federal government should stop funding the for-profit colleges altogether and redirect the money toward public community colleges.  Unfortunately, such a reform is not coming any time soon.  The for-profits pay highly effective lobbyists to protect their interests (Kirkham, 2012), and they make strategic political contributions to key legislators in Washington (Kirkham, 2011).

So this is the situation. Billions of federal dollars flow each year into the coffers of for-profit schools and colleges that educate about 10 percent of the nation's post-secondary students and account for about half of all the student-loan defaults (Kirkham, 2012). Until Congress stops subsidizing the for-profit colleges industry, we will never solve the student-loan crisis, which is growing worse with each passing year.

References
Kirkham, C. (2012, February 3). Auction 2012: For-profit colleges win when lobbying blitz weakens regs. Huffington Post.   http://www.huffingtonpost.com/2012/02/03/auction-2012-education-for-profit-colleges_n_1251072.html

Kirkham, C. (2011, July 29). John Boehner backed deregulation of online learning, leading to explosive growth at for-profit colleges. Huffington Post. http://www.huffingtonpost.com/2011/07/29/john-boehner-for-profit-colleges_n_909589.html

Norris, F. (2012, May 25). Colleges for profit are growing, with U.S. aid. New York Times, p. B1.

Today’s New York Times Editorial About Student Loans is Not Very Useful

Today’s lead editorial in the New York Times is entitled “Full Disclosure for Student Borrowers.” Basically, the Times says that “[c]olleges, lenders and Congress must ensure that students understand their debt burden.”

Pardon me, Mr. and Ms. New York Times editorial writers, but that advice is not very useful. It is true that a lot of student-loan borrowers did not understand the nature of their loan obligations. Some did not realize they had borrowed from private lenders instead of the federal student loan program, for example; and a great many made poor decisions with regard to what they chose to study. People who borrowed a $100,000 or more to pursue degrees in religious studies, sociology, or some other non-remunerative field did not make smart decisions.

But the fact that many students took out college loans without understanding the consequences is only part of the problem. A bigger part of the program is this: The student loan program has spawned a rapacious for-profit college industry, which Congress refuses to regulate. As a whole, this industry has very high student-loan default rates; and many of them are much more expensive than public-college alternatives. Today, the for-profit institutions enroll about 10 percent of all the post-secondary loan borrowers but they receive about 25 percent of the Federal student aid money.

Another problem is the private student-loan market, which generally charges students higher interest rates than the federal student-loan program and offers students fewer protections like economic hardship deferments. Congress passed legislation that makes it almost impossible for students to discharge their private student loans in bankruptcy, which is an outrage.

If the New York Times wishes to offer useful advice about solving the trillion-dollar student-loan mess, it needs to endorse the following actions:

More accurate reporting of student-loan default rates by the U.S. Department of Education, particularly the default rate for students enrolled in for-profit schools,

Repeal of the statutes making it nearly impossible for insolvent students to discharge their student loans in bankruptcy,

Passage of effective consumer-protection laws that will protect students from unscrupulous college recruiters and colleges’ misleading representations about job prospects for graduates of post-secondary programs,

Congressional or executive action to stop the federal government and the student-loan guarantee agencies from garnishing elderly defaulters’ Social Security checks.

Perhaps the New York Times has offered more useful information about the student-loan crisis in the past.  But the advice offered on today’s editorial page does not go nearly far enough toward solving a problem that is causing hardship and suffering for millions of people.

References

Editorial (2012, May 23). Full disclosure for student borrowers. New York Times, p. A20.