Tag: student loans

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

Little Student Loan Relief, and Never for Taxpayers

By
Neal McCluskey

Today’s big news is that the Obama administration – thanks to those crisis-ignorin’ creeps in Congress – is going off on its own to reduce purportedly devastating student loan burdens. Well, that’s the message. The reality is that the proposals just tinker around the edges, meaning debtors are getting little relief while the notion that it’s okay to stick taxpayers with other people’s obligations is advanced.

What would the administration’s proposals do? There are several little wrinkles, but basically this: New, income-based repayment rules will be hurried a bit so that borrowers’ payments are capped at 10 percent of discretionary income (likely meaning income above 150 percent of the poverty line) rather than 15 percent, and remaining debt would be forgiven after 20 years rather than 25. In addition, borrowers with loans from both the now-defunct guaranteed loan program – loans through banks that are almost completely backed with federal money – and loans that come directly from Uncle Sam can consolidate those loans and get an interest rate reduction. In point of fact they could do the same thing before, only the administration is offering a .25 point interest reduction in addition to the .25 points that were previously offered.

Here, though, is the really miraculous part: According to the U.S. Department of Education, “these changes carry no additional cost to taxpayers.” Don’t ask how that can be – they don’t say – just rest assured!

For what it’s worth, these changes probably won’t cost taxpayers a whole lot, at least in Washington spending terms. Many borrowers don’t have both guaranteed and direct loans, and a normal federal loan has a ten-year term, meaning most borrowers probably aren’t still paying back twenty years down the line. Finally, while college prices are without question out of control, the average debt for a student graduating with any debt is still only around $27,000. That’s a heck of a lot closer to a car loan than a mortgage.

That said, the idea that any of this won’t cost taxpayers is bunk. They ultimately back all federal student loans, so unless Washington intends to send in the 82nd Airborne to force lenders with remaining guaranteed loans to write them off – which maybe I shouldn’t put past the feds – lenders will get paid. And any direct loans that get less money returned are immediate taxpayer losses. And yes, direct loans probably do make money for the federal government, but those receipts were pledged to Obamacare and deficit reduction when the Student Aid and Fiscal Responsibility Act was rolled into the health care bill to make the CBO numbers come out right. Change the revenue, and it means you’ve saddled taxpayers  with more health care costs, or less supposed deficit reduction, than had been promised with Obamacare. And don’t even get me started on how any reduction or forgiveness of debt encourages students to borrow more and pay even higher tuition prices.

In light of all this, it looks like everyone is being sold a bill of goods by the administration: borrowers won’t get much relief, and taxpayers will indeed get saddled with additional costs.

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

As You’ll See, Student Loans Hurt Us All

By
Neal McCluskey

Suddenly, student loans are nearing the top of the nation’s public policy debate. Indeed, President Obama is expected to make a big speech about them on Wednesday. Why the sudden ascendance? Probably because the burden of student loans is one of the few things OWSers are clearly angry about, and that has raised questions ranging from whether such loans should be dischargable in bankruptcy, to whether they help fuel the Saturn V rocket of college price inflation. And last Sunday GOP presidential contender Ron Paul jumped into the fray, suggesting we eliminate the federal student loan program entirely.

Paul is right about phasing out federal student loans. Unfortunately, that’s likely the last thing President Obama will propose.

The first reaction to hearing such a proposal is that it’s Grinch-level heartlessness, stealing a better future from low-income kids. That is almost certainly what the president would say, and such a reaction would likely poll well. That’s why he’s expected to propose lowering interest rates, easing repayment, and other borrower-friendly measures. But as I lay out in a Cato Policy Analysis to be released imminently, by most indications federal student aid and other taxpayer-fueled subsidies aren’t good for anyone. (Well, anyone not employed by a college or university, the ultimate receiving end of all the forced largesse). By artificially—and hugely—boosting consumption, they ultimately lead to massive tuition inflation, encourage millions of unprepared people to take on studies they never finish, and pour H2O into already watered-down degrees. In other words, student aid—including federal lending—is likely a net loss to both students and society.

But I’ve already said too much. If you want to get a lot more on this—and more on the many unintended evils of federal college policies—stand by for the release of my study. And if you’re in DC, come to Capitol Hill Thursday for a briefing on the subject with me and Rep. Virginia Foxx (R-NC). It should give OWSers, libertarians, conservatives, liberals, and anyone else lots to think about.

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

Oh, to Be Politically Favored!

By
Neal McCluskey

Yesterday, the U.S. Department of Education released the latest student-loan default data, and along with it offered some good ol’ fashioned profit-bashing. Meanwhile, politically favored schools got off with nary a negative word.

The FY 2008 default rates certainly aren’t good. Overall, 7 percent of borrowers whose first payments were due between October 1, 2007, and September 30, 2008, had defaulted by September 30, 2009. And yes, for-profit schools had the highest rate out of non-profit private, public, and for-profit schools, which came in at 4 percent, 6 percent, and 11.6 percent, respectively.

To what did Secretary of Education Arne Duncan attribute these results? The overall default rate, he suggested, was but the sad consequence of ”many students…struggling to pay back their student loans during very difficult economic times.” The for-profit rate, however, had a very different cause: “[F]or-profit schools have profited and prospered thanks to federal dollars” and many have saddled “students with debt they cannot afford in exchange for degrees and certificates they cannot use.”

Already, you can see that for-profits are largely just an easy political target: All defaulting borrowers are portrayed as victims; wasteful, money-hoarding, non-profit institutions get no mention; and for-profits are painted as predators.

Of course, for-profits do have higher default rates, so maybe they really are predators.  But there’s more from yesterday…

At roughly the same time Duncan was dumping on for-profit schools, his boss was feting another subset of higher education: historically black colleges and universities (HBCUs). Indeed, he was kicking off National HBCU Week, and lauding the schools’ work. But guess what? While the Education Department doesn’t release default rates for HBCUs as a group, quickly pulling those schools’ data together and averaging their default rates indicates a rate even higher than for-profit schools:  almost 12 percent. Moreover, for four-year, private, non-profit HBCUs – which like for-profit colleges don’t get big state subsidies to help keep tuition artificially low – the default rate is nearly 13 percent.

So why no criticism by Duncan of HBCUs? Heck, why was his boss celebrating them?

Because they are politically favored, that’s why. Of course, this is in part because of their very important historical mission to furnish higher education to long-oppressed African Americans. It is also, though, because like all “non-profit” colleges and universities, HBCUs act as if their employees have no interest in higher salaries, nicer facilities, easier workloads – all the rewards that the people in not-for-profit schools give themselves instead of paying profits out to shareholders.  But there’s no evidence that people in HBCUs or other non-profit schools are any less self-interested than people working or investing in for-profit institutions. 

Why do I point this out? Not to pick on HBCUs, but to further illustrate the point that the attack on for-profit schools isn’t really about saving taxpayer dollars or protecting students, but going after the easiest target to demagogue – people honest about trying to benefit themselves as much as “the students.” It is also to illustrate, once again, that when we let government fund something, it is political calculus – not educational benefits, economic effectiveness, or what’s best for taxpayers – that ultimately drives the policies. Which is why government needs to get out of the higher ed business that it has made both bloated and, ultimately, a net drain on the economy.

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

Federal Employees and College Costs

By
Neal McCluskey

For a long time now I’ve been writing about how student aid fuels explosive college costs, while Chris Edwards and Tad DeHaven have been highlighting the ever-cushier compensation of federal workers. Well, I’m pleased to have finally discovered a direct linkage between these topics: A new U.S. Office of Personnel  Management report on student loan repayment programs for federal workers.

According to the report, in calendar year 2009 “36 Federal agencies provided 8,454 employees with a total of more than $61.8 million in student loan repayment benefits.”

Now, 8,454 employees is a small chunk of the entire, roughly 2-million-person federal workforce. Still, $61.8 million isn’t anything to sniff at, and loan forgiveness is one more perk that needs to be considered when thinking of federal worker compensation. And then there’s the trajectory of forgiveness: According to the report, spending on student-loan forgiveness by federal agencies in 2009 was “more than 19 times” bigger than it was in 2002. Were things to continue at that rate, in 2017 the cost would be almost $1.2 billion, and then you’d almost be talking real money!

The important point from a student-aid perspective is to emphasize something that must never be forgotten: While many analyses of student aid will only count grants – because they don’t ever have to be paid back – as “aid,” the reality is that that hugely under counts the true cost of federal aid to taxpayers. In addition to grants, taxpayers fund all federal student loans (and eat them when they aren’t repaid), help finance work-study, and pay for federal expenses that people taking federal education tax credits don’t pay for. So when you look just at federal grants, the bill for taxpayers in the 2008-09 school year was about $24.8 billion (see table 1). Add in loans, credits, and work-study, however, and the bill suddenly balloons to nearly $116.8 billion.

“But wait,” will say the only-grants-are-aid crowd, “isn’t a lot of that $116.8 billion loan money that will be paid back?” Yup – it’s just that at least $61.8 million of that repayment is coming, once again, from beleaguered federal taxpayers. And that, to be sure, is just the tip of the federal loan-forgiveness iceberg.

Topics: 
Education and Child Policy, Tax and Budget Policy

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