Earlier this month, another report on the high rate of student loan defaults once again triggered a great deal of discussion.
Bloomberg followed this up with an article that parses the problem: defaults by borrowers who failed to complete their studies versus those who did, where the rate of default for the dropouts is many times that for recent graduates.
The article also describes the heightened emphasis that the Education Department is placing on borrowers who are struggling to repay their debts and the remedial efforts the ED expects its subcontracted loan administrators to pursue aggressively in this regard.
A few days later, Thirdway.org, a think tank that describes itself as a “centrist counterweight to the forces of polarization and ideological rigidity,” published a white paper in which it uses data gleaned from the ED’s College Scorecard to call out the abysmal outcome (graduation) rate for public higher educational institutions: less than half of first-time, full-time students graduate within six years. Thirdway goes on to assert that if these schools were part of the K-12 system, they would be designated as dropout factories under the recently reauthorized Elementary and Secondary Education Act (ESEA).
The white paper culminates in a call to “broaden the policy debate in higher education from one that focuses solely on refinancing student loans or providing debt-free college to one that improves data transparency for students and holds colleges accountable for outcomes.”
Although it’s hard to argue with the unmistakable link between the academic and the economic — where students who do not complete their studies are more likely to end up earning less than their graduating counterparts and are therefore less likely to be able to meet their financial obligations — I’m troubled by the seeming unrelenting focus on effect versus root cause.
Specifically, to what extent are relaxed institutional admissions policies responsible for this mess, where unready or aptitudinally deficient students are admitted nonetheless? This isn’t hypothesis. I have struggled to teach students who are clearly unprepared for college-level work.
Higher education is a business that, like any other commercial enterprise, is revenue driven. And because those revenues are mostly derived from students, it stands to reason that when the price of tuition is increasingly being discounted and applications are dwindling, there’s a strong incentive for some schools to admit as many as there are chairs and dorms to accommodate. The federal government, states and a host of private lenders continue to help this along with readily available, low-price, no-strings-attached financing that is virtually impossible to discharge in bankruptcy.
However, now that the default rate has climbed to roughly double that of residential mortgages at the height of the Great Recession, many are coming to realize how ill-conceived this scheme truly is.
So the ED and others are turning their attention to outcome rates because, they reason, higher completion rates equal higher loan-repayment rates. But what if schools attempt to improve academic peristalsis by relaxing curricular requirements in tandem with admission standards? The net result may well be graduates who are no more prepared, competent or economically successful than their secondary educational counterparts.
Therefore, as important as it is to deal with the effect that we are stuck with at this moment — high payment delinquency and default rates that demand portfolio-wide loan restructuring — we must simultaneously address the underlying reason so that we are not forever dealing with the same problem.
It’s of little value to “hold the schools accountable” after the fact, if doing so means that they end up on some sort of list of shame for graduating too few students and/or run the risk of undermining their future eligibility for federal student aid. That’s a rear-view mirror approach to a head-on collision.
These schools must be compelled to return the checks they cashed in exchange for an education that wasn’t worth the price.
A good starting point for determining how that might work is to compare the average level of per capita student loan debt (approximately $35,000) versus average first-year earnings for recent college graduates (approximately $51,000). Monthly installment payments on a $35,000, 10-year loan equate to a very manageable 8% of the pretax monthly paycheck for someone earning $51,000 per year — a total debt to total income ratio of 70%.
Institutions could then be held to financial account, on a pro rata basis, for students who leave school — for any reason — with aggregate education-related loans that exceed 70% of their first year earnings.
For this to work, the bankruptcy code must also be revised to permit the discharge of education-related debts, for two reasons: First, to foster an appropriately rigorous and credit-curtailing underwriting process for these uncollateralized loans. Second, to encourage lenders to more promptly offer meaningful assistance to their financially distressed borrowers — assistance without which these lenders’ contracts would otherwise be fully charged-off in Chapter 7 bankruptcy.
There is, of course, a secondary by-product to all this: diminished revenues, which, hopefully, will inspire the schools to do what other enterprises in other industries have done when faced with the dual challenges of dwindling market share and declining profitability: merge.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.