Home > Student Loans > Why Privatization Won’t Solve the Student Loan Problem

Comments 0 Comments

The cost of financing higher education has long been a sticking point among lawmakers. In fact, the unnecessary fight over the continuation of the government’s subsidized Stafford Loan program rates spilled onto the campaign trail this summer, culminating in pledges of support from both candidates and a 12-month extension.

Earlier this month, Christopher Maag published an article on Credit.com in which he highlighted several important differences between the Obama and Romney campaigns regarding the delivery and financing of higher education. In particular, whether to reinstate private lenders as intermediaries for the government’s loan programs, encourage more non-government lending, continue the solutions the Obama administration has implemented to deal with mounting student loan defaults, and embrace what the Romney campaign describes as the “innovation” and “competition” the for-profit colleges bring to the higher education marketplace.

What separates Democrats and Republicans on the matter of the student debt crisis is a chicken or egg debate about low-cost, lightly credit-underwritten government financing and grant-giving, and the unsustainably high tuition prices charged by the schools. However, that argument is disingenuously selective because the private lenders have been no less accommodating when it comes to making easy money available to a relatively unsophisticated population of borrowers. In fact, their pricing and defaulted-loan servicing practices have only made matters worse.

Starting with the rates, the government offers subsidized and unsubsidized, fixed-rate Stafford loans at 3.4% and 6.8%, respectively. In contrast, private lenders offer fixed-rate loans that range in price between 5.75% at the low-end for the “best” of credits (likely supported by a co-signing, high-FICO-scoring parent) to just under 13% for everyone else.

Therefore, in a worst case scenario, for every dollar borrowed at, say, 12.8%, it would be as if the student borrowed 29% more money at 6.8% and 51% more at 3.4%. The students and alums I’ve counseled over the past several semesters are paying between 11% and 14% for their private debt, so this example is quite real.

As for the manner in which the troubled loans are being addressed, consider a few more facts:

At the end of August, the Federal Reserve Bank of New York released its Quarterly Report on Household Debt and Credit for the period ending June 30, 2012. It highlights the rate of student loan debt growth since 2008 (up $303 billion) and the continued increase in the rate of past-due loan payments (to 8.9% from 8.7%).

What’s more, the Professional Risk Managers’ International Association just released its U.S. Consumer Credit Risk Trends and Expectations survey for the quarter ending September 30, 2012. In it, the PRMIA reports that nearly two-thirds of financial services risk professionals (the people who track and analyze loan delinquencies and defaults) expect the problem of late student loan payments to worsen in the months ahead.

Also consider the National Consumer Law Center’s May 2012 report, which determined, “…The Department (of Education) has created financial incentives for its contractors that encourage high collections at the expense of borrower rights.” The government paid out more than $1 billion to its nearly two-dozen loan-servicing subcontractors in 2011, some of whom were responsible for originating many of these loans in the first place and, according to the Consumer Financial Protection Bureau’s 2012 Annual Report, culpable for the frustrating “runarounds” and “dead-ends” student loan borrowers are experiencing today.

Furthermore, 2005 changes to the bankruptcy law granted private lenders protections equal to those enjoyed by the federal government. Perhaps this explains why private education loan balances nearly tripled in value between 2005 and 2011, according to another CFPB report.

The conclusions are obvious: the government has done a poor job managing its loan servicing policies and practices, the private sector (including lenders and contractors) has reaped outsized rewards, and a generation of poorly prepared borrowers is stuck with a trillion dollars-worth of debts they may never be able to repay in full.

As for the political debate over the quality, efficacy and cost of delivery of postsecondary education, think of higher education in terms of two-year and four-year schools that fall into one of three institutional categories: public, private non-profit and private for-profit.

According to a CollegeMeasures.org performance analysis of 1,575, four-year schools, the completion and progression rates for public colleges stands at 55.9% versus 64.7% for private non-profit institutions and 12.6% for private for-profit schools, and an American Institutes for Research paper reports the one-year dropout rate for community college students stands at 11.1%.

Apart from the negative financial consequences facing indebted students who leave school early, there is also the issue of the level of public funding that was consumed along the way. The Romney campaign’s position paper calls into question the appropriateness of government-sponsored programs that were put into place for college students with financial needs as having inspired the high tuition prices that plague us today. But let’s take a closer look at where these dollars are actually ending up.

According to the National Center for Educational Statistics, 19.4 million students were enrolled in postsecondary educational institutions during the 2007-2008 academic year, of which 9.3% were enrolled in private for-profit schools. And yet according to a CollegeBoard Advocacy and Policy Center report, the for-profit schools consumed 24% of all Pell Grants, 25% of all subsidized Stafford Loans and 28% of all unsubsidized Stafford Loans—this with an outcome rate of just 12.6%. Moreover, the Department of Education reports that the three-year student loan default rate stands at 13.4% nationally, with the for-profit schools leading the pack at a staggering 22.7%.

It’s hard (if not impossible) to justify the value the private for-profit schools bring to the higher education party, particularly when their costs and outcomes compare so unfavorably with those of the two- and four-year public colleges. That said, the state schools have had their own cost-management issues.

The CollegeBoard also reports that tuition and fees increased by more than 8% for both two- and four-year public postsecondaries, no doubt the consequences of state budgetary constraints coupled with increased demand. And while prices at the private non-profit institutions increased by only 4.5%, it’s still hard to defend the nearly $20,000 per year tuition and fee differential with their public education counterparts.

Clearly, the problems we’re facing are serious and complicated. They didn’t happen overnight and contrary to what the two political parties may believe or say, there is enough blame to go around.

Ultimately, whichever administration is installed in the coming year will need to do more. The same goes for the private sector, which shares abundant responsibility for this mess. The schools will also have some hard choices to make—whether to move into a more cost-effective and productive direction on their own, in partnership with some of their competitors, or to take themselves out of play altogether. And, as far as future college students and their families are concerned, it’ll be up to them to do the research, weigh the alternatives and vote with their wallets.

Image: Nazareth College, via Flickr

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other sponsored content on Credit.com are Partners with Credit.com. Credit.com receives compensation if our users apply for and ultimately sign up for any financial products or cards offered.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team