New Reports on Student Lending

Last Monday I wrote about how increased tuition and student debt have drastically lowered the return on investment of college degrees. In the last week two new reports have been published specifically dealing with student loans and the resulting debt burden.

The first report was produced by Education Sector, entitled Drowning in Debt: The Emerging Student Loan Crisis.

Students are taking on more of the riskiest debt: unregulated private student loans. Here, students have the least protection and pay the highest rates. For-profit colleges are leading the way in this trend, and minority college students appear to be borrowing a disproportionate share. If this continues, the consequences will be severe: reduced access to higher education, diminished life choices, and increasing rates of catastrophic loan default.

There are many culprits to this emerging student loan crisis: out-of-control tuition increases, lack of commitment to need-based financial aid, and states and universities increasingly spending scarce financial aid dollars on wealthy students. President Obama recently proposed reforming the federal student loan program by having all students borrow directly from the government. The money saved from this change would go to making Pell grants, which are targeted to the neediest students, an entitlement. The new plan would also tie annual increases in Pell grants to inflation. This is a good start to solving the problem of rapidly growing student debt, but much more needs to be done—from reforming state and institutional aid policies to creating better incentives for colleges to restrain prices.

Inside Higher Ed has a write-up of the report, where they quote Patricia Steele from the College Board:

Patricia Steele, a research associate at the College Board, said that "nowhere in the report" do the authors point out that half of all students don't borrow for college at all, and that that and other oversights contribute to the report's overall "sense of hype."

"It's important to point out because it scares the hell out of low-income students, who are nervous enough about whether they can afford college," Steele said. "They might read about this and think everybody's out there borrowing $35,000, and that's just not true.... This does not represent the core of what's happening in student debt."

Steele's line of argument just pisses me off. If the unemployment rate was at 50%, would we say that concern about it is overblown because half the country has jobs? What about health insurance? Just because 50% of college students are fortunate enough to not need to take out loans (most because of family wealth) it does not mean that the other 50% are not worth being concerned about. Not to mention that the 50% figure does not include those potential students that chose not to attend college in the first place because of the price tag.

I am not impressed by her concern trolling, either. Low-income students are nervous about whether they can afford college because it is expensive, not because people are reporting on the problem. Steele's solution is to just not talk about the student debt burden because it is an unpleasant and scary reality. The real solution is to lower the cost of higher education.

The New America Foundation released their new report today on the student loan industry infrastructure. Rethinking the Middleman: Federal Student Loan Guaranty Agencies goes into the history of these guaranty agencies and explain why the dated system is hurting both taxpayers and students. The report is definitely worth a read, but here are some of the recommendations:

• Eliminate the Guaranty Agency Insurance Role
• Prohibit Guaranty Agency and Lender Partnerships
• Eliminate Guaranty Agencies' FFEL Program Oversight Role
• Balance Incentives for Borrower Assistance versus Loan Collection
• Improve the Default Aversion Role
• Make the U.S. Department of Education the Lender of Last Resort
• Demand Accountability and Results for Other Activities

If you are unsure what some of these recommendations mean, their blog post about the report does an excellent job explaining them.

It is clear that there is a problem with our student lending system, and these reports do an excellent job of showing why and what must be done. Changes need to be made if we are going to preserve the opportunity of higher education.