January 25, 2017

GUEST ROOM | Student Debt Crisis and Policy Solutions

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The student debt crisis is eminent and equal to the mortgage crisis in 2007. In “Condemning Students to Debt,” by Richard Fossey, “Generation Debt” and “DIY U,” by Anya Katamentz, and “Is College Worth it?” by Secretary William Bennet, the authors investigate the market failures regarding the student debt crisis.  Federal legislation must eliminate imperfect information, fix the principal-agent problem, establish greater accountability, utilize massive open online courseware, invest in public libraries, reestablish bankruptcy for student loans, lower interest rates and strengthen student success.

National Student Loan Data System reports $1.3 trillion dollars in Federal student debt outstanding, and the Consumer Finance Protection Bureau reports more than 150 billion dollars in private student debt outstanding. Federal Reserve Bank of New York Consumer Credit Panel reports 43.3 million people have student debt with an on average loan balance of $26,700. National Center of Education Statistics reports 39.8 percent of students graduate within four years from a 4-year postsecondary institution. The Federal Reserve Bank of New York reports recent graduates (age 22-27) are 45.1 percent underemployed, and 5 percent unemployed and Department of Labor reports the U.S. employment to population ratio is 59.8 percent. Bloomberg and The Wall Street Journal report 43 percent of 22 million student borrowers are not paying federal loans; 3.6 million are in default, three million are delinquent, three million are in postponement, 12.5 million are current on loan payments and the Department of Education’s “Digest of Education Statistics” reports 20 million students are enrolled in postsecondary intuitions. At the end of 2010, the Secretary of Education had purchased a total of $110 billion in federal student loans from private sector lenders due to the turmoil in the credit markets.

Currently, law S.256 Bankruptcy Abuse Act of 2005 section 220 prohibits discharge of federal and private student loans in bankruptcy. The Higher Education Act of 1965 under section 455(o) establishes zero interest federal loan repayments for service members for up to 60 months. The HEA under section 435(a) prohibits federal loan eligibility of institutions that report default rates above 30 percent spanning three years. The HEA under section 123(b) prevents, identifies and prosecutes diploma mills. Accordingly, the White House has created a college scorecard to evaluate universities cost value and quality.

Education is both a public good and a private investment, which is associated with better health, lower crime, greater civic engagement, higher tax revenue and economic development. College education is expected to establish an appreciation of learning, a certification of practical skills, a certification of critical thinking and a social network. Congress appropriates tax revenues to generate federal student loans and sets the interest rate. Students, universities, lobbyists, accreditation agencies, tax payers, banks, government agencies, elected officials and employers are the key players in the cost of attendance–tuition and fees, books and supplies, room and board, transportation and food allowance.

The cost of attendance has risen for many reasons. First, in 1971, the United States completely abandoned the gold standard, accelerating inflation. Tuition has grown four times faster than consumer price index and faster than stagnant median income.

Second, the economic recession reduced tax revenues, which caused federal and state subsidies for public state colleges to decline and caused public colleges to raise tuition rather than cut costs.

Third, the federal loan availability has substituted federal grants and created a moral hazard, principal agent problem- the student is the principal, the university the agent that sets the price of “cost of attendance.” Sec. Bennett’s hypothesis highlights that when the federal government offers unlimited borrowing for student loans, the university sets price to capture the maximum value from available loans by having students borrow the maximum amount to pay for cost of attendance. The student does not have perfect information regarding cost, quality and accessibility of education, and further the university may not utilize the full federal upfront payment for guaranteeing student education completion. In 1950 there were almost no federal loans, federal loans accounted 20 percent of all aid in 1963, 17 percent of all aid in 1975 and 55 percent of all aid in 1995.

Fourth, the administrative cost is bloated and inefficiently high. In 1970, 446,840 full time faculty, 102,465 administrators and 166,487 other professionals reported working in universities. In 2005, 675,624 full time faculty, 190,078 administrators, 566,405 other professionals reported, and in 2014, 731,828 full time faculty, 837,379 part-time faculty reported from the 2014 pool of 2,535,342 full time and 1,592,012 part time individuals working in universities. In 1970, full time faculty earned $12,700 salary, in 2014, public college president earned 400,000 dollars, full time faculty earned 78,600 dollars and adjuncts earned $2,700 per course taught in a semester, about $25,000 salary. The dozens of executive administrators, vice presidents and vice provosts are superfluous, and in the “Fall of the Faculty,” Benjamin Ginsberg argues “administrative shirking,” “administrative squandering,” “corruption,” “insider deals,” “fraud” and “administrative theft” have cost universities billions of dollars.

Fifth, amenities such as new stadiums, dormitories, dining hall, laboratories, a fitness facility featuring thirty-five foot rock climbing wall, luxury resort recreational facilities cost hundreds of millions of dollars, which do not necessarily improve the quality of education completion yet saddle universities with debt and cause tuition increases.

Sixth, the accreditation system, which consists of state licensing, recognition from non-government national or regional accreditation agencies and Federal reaffirmation of certification and eligibility is failing. States determine whether a college may open or close in accordance to law. Accreditation agencies inspect college academic standards, and determine college eligibility to receive federal aid, federal loan and grant payments. Accreditation agencies evaluates a post secondary institution once every five to ten years, using peer universities administrative staff for peer review and the university faculty’s self study, the evaluation is unable to cover all standards during one site visit, and agencies do not have uniform evaluation language and most do not publicize the evaluations. The accreditation structuring, which includes universities as being the revenue source for accreditation services, heightens the principal agent problem by allowing the agent, the university, to self govern the accreditation process. The Wall Street Journal reports 350 colleges’ default rates are greater than graduation rates and major credit agencies are reclassifying student loan asset-backed-securities ratings as junk.

Seventh, the university ranking system is flawed and reinforces high cost of attendance and increased admissions selectivity. The US News offers some qualitative ranking of colleges by measuring graduation and retention rates, academic reputation based on peer assessment, faculty resources based on class size and faculty salary, student selectivity based on standardized tests, financial resources, alumni contributions, however, is constrained by available data, and is not able to provide comparative basis to measure outcomes or learning or student engagement or what is going on the in classroom. The White House Score Card and many magazines, newspapers, websites, governments and academics evaluate colleges based on employment outcomes and student debt status; however, like US News they do not satisfactorily account for quality of education metrics, and offer conflicting rankings.

Eighth, imperfect information – the students are under informed. Many students think financial aid is free money, not loans to be repaid. Lendedu surveyed 477 undergraduate and graduate students of which six percent were aware of the loan repayment terms. The Brookings Institute surveyed 599 students, of which 52 percent of students were aware of the cost of attendance and 38 percent  of students were aware of the dollar amount of loans borrowed. Bloomberg cites the Federal Reserve Bank of New York survey of 1,029 people, of which only 28 percent of student debtors were aware the government can garnish earnings, social security payments and tax refunds to repay unpaid student debt.

Ninth, there is a culture of reinforcing high school students to attend college. New York City high schools are offering free SAT examinations during the scheduled school day for high school students, rather than investing in improving Regents state standardized test scores in American History, World History, Math, English and Sciences. High schools utilize college matriculation as a measure of student achievement. The National Center for Education Statistics reports 2.868 million high school students graduate each year, of which 68.4 percent enrolled in post-secondary education institutions, 24.6 in four year institutions and 43.7  in two year institutions.

Tenth, supply and demand, oligopoly and monopolistic competition have increased the price. The National Center of Education Statistics reports that in 1970, there were 2,525 post secondary institution and 8,581,000 students enrolled, and currently there are 7,200 post secondary institutions and 20 million students enrolled. The six regional accreditation agencies are an oligopoly of reputable accreditation. Post-secondary institutions are business firms in a monopolistic competition, setting and raising price in the interim. The Free Application for Financial Student Aid provides universities with students’ information that allows the university to price discriminate like a monopoly.

Eleventh, the bankruptcy laws are unfair and enhance the principal agent problem by strengthening the universities’ and government’s abilities to collect payments. In 1976, student loans were dischargeable in bankruptcy; in 1979 the bankruptcy code was amended to include a five year payment period prior to discharge and introduced the “undue hardship” language for discharge eligibility, currently no student loans are dischargeable unless qualified as undue hardship, and government can garnish earnings and social security benefits. Students must experience education to evaluate the value of education, and bankruptcy served as a measure of student perspective on the quality and value of education.

Twelfth, Richard Fossey mentioned Harvard University made a decision to raise tuition rather than have professors teach one additional course during the academic year. Professors teach one course a semester for one hour, three days a week, and many have student teacher assistants grade the tests and assignments. In stark contrast, teachers at Benjamin Cardozo High School teach Monday through Friday from 7 a.m. to 5 p.m., are involved in administrative tasks, participate in extra-curricular activitie, and grade each student’s tests and assignments.

Thirteenth, there is a lack of incentives, carrots or sticks to lower the cost of attendance. Creating incentives may involve experimentation and looking at universities with low cost of attendance as paradigms to emulate.

The documentary “Ivory Tower” highlights Cooper Union, a private college that offered free cost of attendance to all students to study Arts, Architecture or Engineering in Manhattan from 1859 until 2014 by deriving revenue from an endowment consisting in part of rent collected from the Chrysler building, an endowment that Peter Cooper established in his mission to make education as free as air and water. In 2006, the University and president George Cambell borrowed $175 million dollars to build a new engineering building, however the administration utilized a portion of the borrowed principal to invest in hedge funds to strengthen the endowment (which during the economic recession was mismanaged by the administration). In 2014, the university began charging $20,000 for tuition, despite the president earning $700,000 salary.

BYU-Idaho is a private, religious, four -year liberal arts college enrolling 16,000 students and 20,000 online students while maintaining tuition price of $1,915 per semester and total cost of attendance of $4,510 per semester. BYU-Idaho utilizes a 12-month three-semester calendar allowing professors to teach twelve classes a year to maximize student attendance and utilization of facilities, rolling admissions, hires faculty focused on teaching, and offers 20 percent of academic credit as online courses.

The work college consortium consists of seven different liberal arts colleges that educate students holistically while employing students for 10-15 hours a week in various tasks involving the day to day operations of the university in exchange for free tuition- 95 percent of “Hard Work U” students graduate debt free.

Since 2001, Princeton University has a no loan policy for all students, offers free cost of attendance to students with family earnings less than $60,000, and free tuition for family earnings less than $120,000. Princeton University precedent inspired the “no loan” schools, which includes the Ivy League. Universities with similar endowments should consider shifting to no loan policy for all students.

My swift proposal includes redistributing a portion of the $150 billion taxpayer dollars generating federal loans and investing in libraries, massive online courseware and employing adjunct teachers with seniors donating their time as administrators. Students can learn any study by accessing open courseware in a library, surrounded by and collaborating with peers learning similar material with help from adjunct teachers serving as librarians under the oversight of senior citizens; allowing elder seniors who have retired to take a role and help organize the group. For example, a student seeking to learn medicine can study at the New York Academy of Medicine Library, which is a library accessible to the public, using open courseware, with help of adjunct teachers. The model emulates the states that do not require a law degree to practice law- learn the material, take the licensing exam, complete an accredited apprenticeship in the field. Massive Open Online Courseware offered by Massachusetts Institute of Technology allows students to evaluate the quality of the education, learn the knowledge and see what is going on in the classroom. The government should offer grants to encourage universities to publicize open courseware, otherwise the government must demand that all student courses paid by federal loans be made available as open courseware to better evaluate the quality of education. This will offer students an alternative, increase competition and lower the cost of attendance.

Secondly, changing the evaluation and ranking system of universities. Building on existing metrics, relevant agencies should consider evaluating critical thinking by published work of students, evaluating quality of education using peer assessment and focus group assessment of open courseware, more emphasis on outcome measures such as default rates, no loans on graduation, but also ability of students to participate in civil engagement, perform community service, employer satisfaction with school graduates, passage rates on state certification examinations and post graduation reflection by student’s parents. This will improve the information available to families regarding education.

Third, establish the State Post Secondary Review Entity in each state, which the House of Representatives derailed by eliminating the $20 million dollars in funding for the program. This will create public oversight of the accreditation of post secondary institutions, and assist in fixing the principal agent problem. The SPRE related legislation described in “Condemning Students to Debt,” can change the education system.

Fourth, changing the bankruptcy code to allow students to discharge their student loan debt, without qualifying for “undue hardship”, and defining all legal terms more leniently. There are 155,000 elderly Americans who have their Social Security checks garnished because of student debt, and millions of young Americans are defaulting. In addition, income based repayment programs must be capped at eight years of repayments. Using the HEA legislation precedent of zero percent interest rates, students loans interest rates should be lowered to zero percent for 60 months, or using the precedent of the bailout of the big banks’ interest rates, student loan interest rates should be lowered to less than one percent or should be automatically reduced to less than four percent.

The accreditation requirements and standards should not tolerate cohort default rates above 15 percent, and default rates cannot be higher than graduation rates for universities to attain federal aid money. The government must audit high cost of attendance colleges that expend more than two thirds of the federal financial aid funds, and audit colleges where federal loan default rate is greater than graduation rate. The government should tax alumni donations and tax endowments for high cost of attendance universities where default rate is greater than graduation rates and whose rates of tuition increase are unjustified. Accordingly, universities must take responsibility of student loans by having to pay a fee for every one who defaults on a student loan and pay a portion of the accrued interest on postponed student loans. This will incentivize universities to help students repay student loans while lowering the student loan burden, thus improving the probability of student success and lowering the cost of attendance.

Notwithstanding, incentives must be created to reduce the cost of attendance. For example, utilizing the PBS stations to air a detailed documentary regarding costs of education prior to the college application cycle, mentioning every post secondary institution by name that offers high quality and no debt education, forwarding this information directly to all attendees at parent teacher events in high schools. When cost of attendance reaches long-term price equilibrium, the government should increase grants and provide financial incentives to keep price constant. However, mandating cost reductions may be a better solution. I like to end by saying to the universities, the federal government, and millions of people in debt, “these things will change. Can you feel it now?”

Haris Bhatti graduated Cornell in 2010 and was a candidate in New York’s 6th District congressional election in 2016. 

5 thoughts on “GUEST ROOM | Student Debt Crisis and Policy Solutions

  1. Where is the credit given to Democratic President Bill Clinton for his Amendment in 1998 that is the one that disallowed Student Debt Discharge in bankruptcy? It was a gift to the bankers, as was the repeal of Glass Steagal the same year.. and that’s why they had to be so behind Hillary for President. Bought and sold.

    https://www2.ed.gov/policy/highered/leg/hea98/sec971.html

    ” It is unlikely that you are eligible to have your loan discharged through bankruptcy. If you filed for bankruptcy after October 7, 1998, your loan cannot automatically be discharged.”

    1998, not 2005 like this bias writer suggested. Let’s not write him off entirely, he made a good effort I can tell.

    https://studentaid.ed.gov/sa/repay-loans/disputes

    Trump plan will fix this.

    But as of now, this is a massive crisis. 65% of college grads can’t find jobs in the field they studied making their educations worthless. They become indoctrinated into believing in man made climate change when the real driving force behind climate change is the cycles of the sun.

    Trump will end that indoctrination too with cutting the funds to support that invalid thesis.

    Bottom line is socialist gov’t policies got in the way of the cost of your education.

    Thank God for Trump. You guys are so lucky Hillary wasn’t elected.

    This guy doesn’t even mention Trumps plan to fix this debt problem.

    Just google it. And Thank a Trump Voter!!!

    • Agree completely. Really, it was the 1998 amendments to the HEA that did the most damage. The 2005 legislation was really just an afterthought (it only applied to private student loans).

  2. Ironic that while we have an ever increasing pie of federal aid, tax breaks including property tax breaks, tax breaks on donations to universities, tax breaks on 529 plans, tax breaks on endowments, and outright federal funding to the universities, tuition and college costs continue to skyrocket. Instead of going to fund a decrease in tuition, all this funding is instead going to an ever increasing number of overpaid and under-worked administrators, as well as other entities looking to profit off of the “for the children” dollars, such as student unions. That large bundle of money going to our education system should be used to decrease tuition costs for everyone, not justify skyrocketing tuition and college costs that effect the lives and careers of students. And any administrator or other entity profiting off of that bundle should either be removed or have their salary cut to a reasonable level.

  3. Agree totally with this post. The democrats should be listening to this policy prescription. So should the republicans. What is not mentioned here is that the Department of Education not only is profiting well over $50 Billion per year on the federal student loan program it also is making a PROFIT, not a loss, on DEFAULTED STUDENT LOANS!!

    This is a defining hallmark of a predatory lending system, and the fact that the federal government is at the top of this is what is most disturbing, and significant.

    I hope people concerned about this and interested in getting standard consumer protections like bankruptcy rights returned to student loans will come to http://www.studentloanjustice.org . The citizens are banding together on this.

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