By Mitchell D. Weiss
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 percent and 6.8 percent, respectively. In contrast, private lenders offerfixed-rate loans that range in price between 5.75 percent at the low-end for the "best" of credits (likely supported by a co-signing, high-FICO-scoring parent) to just under 13 percent for everyone else.
Therefore, in a worst case scenario, for every dollar borrowed at, say, 12.8 percent, it would be as if the student borrowed 29 percent more money at 6.8 percent and 51 percent more at 3.4 percent. The students and alums I've counseled over the past several semesters are paying between 11 percent and 14 percent 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 Creditfor 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 percent from 8.7 percent ).
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 percent versus 64.7 percent for private non-profit institutions and 12.6% for private for-profit schools, and an American Institutes for Researchpaper reports the one-year dropout rate for community college students stands at 11.1 percent.
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 percent of all Pell Grants, 25 percent of all subsidized Stafford Loans and 28 percent of all unsubsidized Stafford Loans -- this with an outcome rate of just 12.6 percent. Moreover, the Department of Education reports that the three-year student loan default rate stands at 13.4 percent nationally, with the for-profit schools leading the pack at a staggering 22.7 percent.
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 percent 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 only4.5 percent, 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.
This article originally appeared on Credit.com. Mitchell D. Weiss is an experienced financial services industry executive, entrepreneur and adjunct professor of finance at the University of Hartford. He is also the author of the recently published College Happens: A Practical Handbook for Parents and Students and Life Happens: A Practical Guide to Personal Finance from College to Career-2nd Edition.