Tag: student loans

How the CFPB Distorts the Facts about College Loans

By
Neal McCluskey

Last month, the Consumer Financial Protection Bureau – a rogue creation of Dodd-Frank – released the first annual report from its private student loan “ombudsman.” And boy, does the report illustrate how far off the rails government has gotten.

Start with the focus: private student loans. These and for-profit colleges have gotten huge, damning attention from Washington – and much of the higher ed commentariat – over the last few years. But even if they were true devil’s spawn, private loans are absolutely not the main problems in higher ed.

Even at their very brief peak in 2007-08, private student loans constituted only 12.5 percent of total student aid. In 2011-12 they were just 2.6 percent. The vast majority of funds have always come from other sources, first and foremost the federal government. Yes, it is primarily “aid” from Washington that lets colleges raise their prices with impunity, and enables students to take on substantial debt for often less-than-substantial studies.

Government, not private lending, is the Lex Luthor here. But to be fair, private lending is the CFPB’s bailiwick, so you can’t blame the agency for putting out the report. You can sure as heck, though, blame politicians for creating a bureau whose job seems simply to be pointing fingers at private companies.

You can also blame the CFPB for the content of its report, which is simply a summary of complaints the bureau has received from disgruntled borrowers. Fairly early on it even states that “the report does not attempt to present a statistically significant picture of issues faced by borrowers” (as if its findings are empirical at all). Unfortunately, it goes on to say that the report “can help to illustrate where there is a mismatch between borrower expectations and actual service delivered.”

Actually, no it can’t. At least not reliably. All it can tell you is what people complained to the CFPB about. It can’t tell you if the complaints had bases in fact. It can’t tell you if complaint-lodgers were really just motivated by a desire not to pay. And it can’t tell you what the lenders’ sides of the stories are.

Okay, it probably could do the last thing, but it seems the ombudsman chose not to. There is not an ounce of response from any lender to the anecdotes that essentially are this report. In other words, the report seems to be doing exactly what the bureau’s opponents feared CFPB would do: functioning as an unaccountable propaganda machine against private companies. And don’t be surprised to hear this report invoked repeatedly by Sen. Tom Harkin (D-IA) and other profit-haranguers as damning proof that private student lenders are out of control.

Sadly, the prominent role of government in student lending is ignored even when it is obvious from data on private lending. As one table shows, 46 percent of complaints received were about loans connected to Sallie Mae, and 12 percent about loans from American Education Services, an offshoot of the Pennsylvania Higher Education Assistance Agency (PHEAA).

Sallie Mae, of course, is the student-loan cousin of Fannie Mae and Freddie Mac, the federal creations at the heart of bad mortgage lending. And PHEAA? “Created in 1963 by the Pennsylvania General Assembly, PHEAA has evolved into one of the nation’s leading student aid organizations.”

Yup, more than half of the complaints about ostensibly private lending were really about government-created lenders. But don’t expect to find even a footnote in the report hinting that government might be the real problem.

It’s hard not to conclude that the major goal of the CFPB is to bash private companies, and in so doing justify more and more government control of the economy. If that’s the case, and if this report is any indication, then the CFPB is doing its job. Too bad that job serves the public so poorly.

Cross-posted from SeeThruEdu.com

Topics: 
Education and Child Policy, Finance, Banking & Monetary Policy, Regulatory Studies

Federal Irony Alert!

By
Neal McCluskey

The nation’s biggest subprime student lender–your federal government!—has just called out private “subprime” lenders.

This morning the Consumer Financial Protection Bureau and U.S. Department of Education released a report examining private student loans. It concludes that private lenders were out of control, just like all of Wall Street, before the “Great Recession” hit, a fact largely evidenced by high default rates. It was, the report argues, a part of the overall subprime lending debacle and it hurt innocent students.

“Subprime-style lending went to college and now students are paying the price,” said U.S. Education Secretary Arne Duncan in a release accompanying the report.

What’s the report’s solution to the problem? Push people into federal loans to the maximum extent possible. After all, those loans have low, taxpayer-backed interest rates; generous repayment terms, including speedy forgiveness for anyone going into “public service”; and essentially no requirement that borrowers offer evidence of creditworthiness.

Wait—essentially no evidence of creditworthiness? Isn’t that subprime lending in its very purest form? Indeed it is, which is perhaps why the report offers no comparison of default rates on private and federal loans.

Basically, the report is pushing for even greater subprime lending, only with taxpayers on the hook rather than voluntary investors.

The report tries to further portray the fate of private lending as part of an exclusively Wall Street-driven recession by arguing  that a big drop in private lending between the 2007-08 and 2008-09 academic years was  entirely the result of private lenders suffering from the collapse of credit markets. No doubt that had a significant role, but the report somehow manages to not discuss numerous changes to federal law in the 2007-2010 time frame that pushed private lenders out of the way, including:

  • The College Cost Reduction and Access Act (2007), which set federal subsidized-loan interest rates on their halving path from 6.8 percent to the current 3.4 percent.
  • The Ensuring Continued Access to Student Loans Act (2008), which increased unsubsidized loan maximums, reduced eligiblity criteria for PLUS loans (the only loans requiring some demonstration of creditworthiness), and offered federal money when guaranteed lending participants couldn’t get it through capital markets.
  • The reauthorized Higher Education Act (2008), which increased Pell Grant maximums, authorized forgiveness of up to $10,000 in debt for anyone working in an area of “national need,” and added new regulations for private lending.
  • The Student Aid and Fiscal Responsibility Act (2010), which ended federal guaranteed lending in favor of federal lending directly from the U.S. Treasury

Fully private lending probably was reined in thanks to the recession, which is a good thing, with private lenders taking less risk when it didn’t pay off. But it is no doubt also important that Washington enacted many laws that made it much harder for private lenders to compete. The fact is the Feds can subprime-lend without any major concern about losing big bucks. It’s only taxpayer money, after all, and there’s always more of that! Plus the political dividends are sizable, enabling politicians to heartily and repeatedly congratulate themselves for “making sure everyone can go to college!”

That gets us to the next critical point: In addition to reinforcing the utterly discredited notion that the recession was all the fault of “greedy Wall Street fat cats,” a report focusing on private lending is just a distraction from the 800-pound gorilla in higher education: the federal government. At their peak in 2007-08, private loan originations were less than one-third the size of federal loans, and about one-fifth the size of all federal aid. Today they are slightly more than one-20th the size of federal loans, and about one-30th the size of all federal aid.

In other words, private loans are but bit players in a student-aid show dominated by Washington. It is super-abundant federal aid, not private lending, that signficantly fuels tuition inflation, enables dreadful college completion rates, and fosters a glut of degree holders. Yet it’s those same federal lenders who dare scold private companies and warn us about their subprime failures.

Oh, the irony!

Topics: 
Education and Child Policy, Finance, Banking & Monetary Policy

What, Us Worry about Paying for College?

By
Neal McCluskey

Listen to the media and you might think every American is scared silly about paying for college, and  public aid is stretched micron thin to help just the neediest of students. A new report analyzing what and how Americans paid for higher education last year, however, puts the lie to that image.

How America Pays for College: 2012, from Sallie Mae and Ipsos Public Affairs, offers an interesting breakdown of who pays what and how for college, and furnishes some welcome contextual data. I’m not sure there is a unifying message in the numbers – other than people seem to be economizing a bit since the 2009-10 academic year – but some of the potential lessons are striking.

The first lesson is don’t believe that government aid is just for the poor. Families making $100,000 or more used federal loans, tax-incentivized savings programs, and federal, state, and school-based grants – which do not include scholarships – to cover 27 percent of their total cost of attendance.

Next, don’t get caught up in the overblown controversy over private student loans. It’s a diversion from the much bigger impact of government aid. Only 1 percent of the total cost of attendance last year was covered by private loans, versus 4 percent by federal Parent PLUS loans, 13 percent by other federal loans, 1 percent by federal work-study, and 16 percent by federal, state, or school-based grants. And don’t forget: much of the cost of public institutions is borne by taxpayers before the tuition bills even go out.

Perhaps most interesting, it appears that even though the sticker price of college has risen at astronomical rates, most people aren’t sufficiently concerned that they plan ahead for how they’ll pay. 50 percent of respondents either “somewhat” or “strongly” disagreed with the statement that “before my child/I enrolled, our family created a plan for paying for all years of college.” Only 39 percent somewhat or strongly agreed with the statement.

What does this tell us? Potentially many things, but one might be that many people assume someone, no matter what, will ensure that they or their child will be able to go to college. Unfortunately, that “someone” often ends up being the American taxpayer.

Topics: 
Education and Child Policy, Finance, Banking & Monetary Policy, General

Panderer Throwdown!

By
Neal McCluskey

There is a case study being written right now about the absurdity of government. Basically, both parties are trying to outdo each other politically in order to pass a bit of pandering that they actually agree on: freezing at rock-bottom levels interest rates on subsidized federal student loans.

Republicans, at least, are taking some political risk by trying to pay for the lost revenue a freeze would create by digging into a fund that sure seems pretty slushy, but which nonetheless opens them to the accusation that they don’t care about Americans’ health. It’s a small risk – at the very least, what they’re doing likely plays well to their base – but a risk nonetheless.

The Democrats, for their part, are driving home their theme that the rich don’t pay “their fair share” by proposing that taxes be raised on “S corporations,” a legal designation few Americans likely know anything about. Of course, that makes it easier to say such corporations are really just rich people (apparently, these corporations really are people) who, well, don’t pay their fair share.

The really crazy part, though, is that all this political bickering is occurring ultimately to do something that will do no short-term good but real long-term harm.

In the short term, a rate freeze will help no student. The rate will only apply to people taking out subsidized loans next year, and probably only save the average recipient about $7 per month over the life of the loan. And those savings won’t start  for at least a year-and-a-half for most students (next year’s college seniors, who also get a six-month repayment grace period after graduation, will be the first). So let’s not hear about this being necessary given the current economy.

The far bigger problem, however, is the long term effect of cheap federal aid. Both overwhelming evidence and logic make it clear that the main effects of federal aid are rampant tuition inflation and millions of people taking on debt for schooling they either cannot handle or aren’t all that motivated to complete. In other words, huge, self-defeating waste.

If members of either party were to take the time to look at the evidence and make policy based on it, we wouldn’t be debating how to pay for a rate freeze at all. We’d be seeing both sides rush legislation to the floor to phase out federal student aid and help return college prices – and consumption – to much more rational levels. But that’s just not how pandering works.

Topics: 
Education and Child Policy, Finance, Banking & Monetary Policy, Government and Politics

If Only Politicians Were More Like Good Parents

By
Neal McCluskey

Sometimes I wish politicians were more like good parents. I know that doesn’t sound very libertarian – the last thing we want is for politicians to become humanity’s moms and dads – but there’s at least one thing good parents do that most politicians constantly avoid: saying “no.”

When kids want their food pyramids to have a base of candy, center of ice cream, and peak of ice cream with candy sprinkles, good parents say “no.”

When young ‘uns want to show off their mumblety-peg skills with the Bowie knife they found in dad’s old camping gear, good parents say “no.”

And when the children want to borrow the family sedan for a little off-road speed competition, good parents say “no.”

Of course, saying no all the time doesn’t make life with the kiddos easy or fun. The kids get angry. Mom and dad fume. “I hate you” may even be uttered. But refusing to help the children seriously endanger their arteries, digits, or worse – even if it makes the parents’ life tougher – is what good parenting is all about.

If only our politicians would exercise the same restraint. But they don’t, with the latest case-in-point being the drive to keep interest rates on subsidized federal student loans at super-low levels.  It will be the centerpiece of a three-state presidential tour beginning today.

Currently, interest rates on subsidized loans – loans on which Washington pays the interest while a borrower is in school and for a six-month period after graduation – are at 3.4 percent, a surface-skimming level reached after the College Cost Reduction and Access Act of 2007 cut rates in half over a five year period. Rates are scheduled to return to 6.8 percent in July.

The argument proffered for keeping the rates at 3.4 percent is that interest rates generally are at historic lows, and 6.8 percent would simply be too high. Much more important, though, seems to be the political reality: President Obama appears intent on currying favor with both college students and, frankly, any voters looking at exorbitant college prices and asking “how the heck am I going to pay for that?”

But it’s not just the current president who appears to be playing politics. Mitt Romney, the presumptive GOP challenger to Mr. Obama, yesterday also urged Congress to freeze the rate at 3.4 percent.

This certainly looks like election-year politics, and no doubt the unusual focus on student loan rates – not exactly a political thriller – stems from that. But the reality is that policymakers have been lavishing cheap money on students for decades because it helps keep relations cordial with the kiddos. The ultimate result, however, hasn’t been greater college affordability, but damage inflicted on millions of Americans.

First and foremost, all the cheap aid has enabled colleges to raise their prices at breakneck speeds, rendering the aid largely self-defeating and college pricing insane.

Second, giving dirt-cheap ducats to wannabe students – no matter how poorly prepared they are, or how little they actually want to tackle college work – has resulted in massive overconsumption and noncompletion of postsecondary education, and left millions without the earnings-upping degrees they need to pay their college debts. At four-year institutions more than 40 percent of first-time, full-time students fail to complete their studies within six-years, and in community colleges almost 80 percent don’t finish in three years. Most not done in those time frames will never finish.

Finally, there’s the cost to taxpayers. Overall, federal student loans originated in just 2010-11 involved $104 billion in taxpayer money, and if those loans don’t get paid back, or interest rates are slashed, it is taxpayers who will take the hit. That, of course, seems unfair at any time, but making it even worse is that the nation is facing a nearly $16 trillion debt. But good luck getting the politicians to pin down the cuts that will offset the billions of bucks that will be lost if student loan rates are kept at 3.4 percent. Sure, you’ll get uber-confident promises that the move won’t cost taxpayers “one nickle,” but you sure won’t find anything concrete in the legislation that would keep rates low.

Federal student aid is, frankly, a classic example of garbage parenting. No matter how much damage the policies inflict, the politicians do anything they can to stay best friends with the kids.

Topics: 
Education and Child Policy, Finance, Banking & Monetary Policy, General

College Scholars, Mindless Borrowers?

By
Neal McCluskey

A few days ago Rep. Virginia Foxx (R-NC), chairwoman of the House higher education subcommittee, had the audacity to say in a radio interview that she didn’t have a lot of sympathy for students who racked up $80,000 to $200,000 in college debt. Opportunists have leapt at the chance to attack her, branding her as either mean, or out of touch because what led to her discussion of college debt was retelling how she grew up poor and paid her way through school.

Now let’s be clear: Foxx wasn’t deriding bachelor’s grads holding average debt – about $25,000 for the two-thirds of students with debt – but people with big multiples of that. You know, the ones seemingly featured in every news story or congressional hearing dealing with higher education. And it is, often, very hard to sympathize with such people if you are able to track down crucial information about them such as what they’ve studied, where they’ve chosen to go to school, and what they spend their money on. This CBS News piece is a classic of the Woe-is-Huge-Student-Debtor genre, which Radley Balko and I took apart at the time of its airing.

There’s no question that the price of higher education has been rising at breathtaking rates, and profit-maximizing schools – and politicians who fuel the maximization – bear a good chunk of the blame. But is it really beyond the pale to suggest that maybe some students, who seem to accumulate debt without a care in the world until payment comes due, bear some responsibility for their predicament? Indeed, aren’t these supposed to be pretty smart people – you know, “college material” – who should at a minimum be capable of estimating costs, loan burdens, and potential earnings? Of course, but try bringing that up in the higher education cost debate. You’ll instantly become the Dean Wormer of the group, reviled for killing all the fun of poverty-crying students.

And here’s the thing: Giving the impression that students face an even greater burden than they do – which is exactly the effect of repeatedly focusing on fringe debtors – only encourages Washington politicians to pour even more money into student aid, letting schools raise prices even faster.

The vitriolic response to Rep. Foxx is exactly why so little progress is made in politics generally, and higher ed specifically. There are just some things you can’t talk about, no matter how important than may be, and if you dare bring them up you can expect anything but an honest discussion. You can  expect only cheap shots and smears.

Topics: 
Education and Child Policy, General

Stop Ignoring Higher Ed Reality

By
Neal McCluskey

Like most political discussions, the student aid debate is driven far more by sentiment than reasoned analysis. If we used the latter, we’d be demanding big aid cuts for the sake of students and taxpayers alike.

As I testified to a Senate panel earlier this week, the evidence is powerful that there is massive overconsumption of higher education, and cheap federal aid ultimately fuels the college price skyrocket while encouraging students to tackle programs and debt they often can’t handle.

I won’t go into all the evidence here—you can get much of it in my testimony, and even more in this report—but here are a few of the big points that plead for us to stop the rhetoric and attack the waste:

  • Aid and prices have both increased at breakneck speeds over the last several decades. Growing empirical research shows that this is not an accident—colleges raise their prices to capture the aid—though there is a limit to what research can prove. Fortunately, logic can fill in the rest: People who work at colleges are normal human beings and will take every dollar they can get their hands on. They always have something good—either personally or professionally—they think they can do with it.
  • Inflation is not explained just by state and local budget cuts. Both public and private colleges have seen decades of rampant inflation; total state and local funding to colleges has not dropped during that time; and on a per-pupil basis public schools have raised tuition revenue by roughly $2 for every $1 lost in appropriations.
  • Only 57 percent of first-time, full-time students at four-year colleges finish their programs within six years. Huge numbers of the students we encourage to go to college, including with federal grants and loans, languish there and likely never finish.
  • Roughly one-third of people with bachelor’s degrees are in jobs that don’t require them.
  • Most of the jobs expected to have the biggest growth in the coming decades will not require college attendance, but on-the-job training.

The list could go on, but the point is unmistakable: Talk all you want about the power of education or the future economy; the public dollars we lavish on higher education—including federal student loans with generous terms and interest rates—are largely being squandered, even if with good intentions. Add all this to the nation’s staggering debt, and it is well past time that we stop all the talk and start dealing with reality.

C/P from the National Journal’s “Education Experts” blog.

Topics: 
Education and Child Policy, Finance, Banking & Monetary Policy

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