Tag Archives: student loans

What the Tax-Reform Law Could Do to Higher Education

Exceptional athletes are often called game changers, but the real game changers in sports are the committees that set the rules.  Changing the height of the pitcher’s mound changes the game.  So too with expenses in higher education.  The rules are changing. The House of Representatives has passed a tax reform bill that includes several provisions that the higher education establishment doesn’t like.  The Senate is working on its own version, which may include some of the same provisions and some others that are irksome to colleges and universities. The changes will matter.

The House plan reduces federal support for higher education via tax benefits to post-secondary students by $65 billion over the next ten years.  To put that into perspective, those tax benefits now amount to about $35 billion per year, so the cut is about 18.5 percent.

The consumer of higher education will definitely feel this.  The House bill eliminates a student loan interest deduction of $2,500, which is claimed by 12.4 million people, who will on average pay an additional $272 in taxes.

The Maelstrom

I’m among those whose eyes glaze over when an author starts sprinkling millions and billions and percentages into his paragraphs, like an overzealous waiter with a peppermill descending on an entrée.  The entrée, in this case, is the price of education—the price to parents and to students, but also to the nation as a whole. We are in deep educational trouble, much of which does not appear to be a matter of excessive tuitions or government programs. The erosion of intellectual standards, the rise of shout-downs and student-led censorship, the disappearance of regard for Constitutional rights and responsibilities are conspicuous evidence that something is amiss in our colleges and universities.  The price of education doesn’t all by itself explain this descent into the maelstrom, but it is a key factor that is often overlooked.  Let’s, for a change, consider it.

Why the Cuts Upset the Colleges

The House bill isn’t entirely about taking things off the table.  For example, the American Opportunity Tax Credit (AOTC) will remain.  AOTC offers a tax credit of up to $1,000 per year for four years of undergraduate education.  The House has apparently decided to reward the students who are too busy pursuing social justice crusades to attend class on a regular basis. The reward is extending AOTC to five years.  Of course, the new provision benefits hard-working but off-track students as well.

But mostly the House has aimed to cut and consolidate programs that use the tax code to lighten the burden to consumers of college expenses.  The legislation eliminates the Hope Scholarship (a $2,500 tax credit that was pumped up as part of the 2009 Stimulus).  And it takes away the Lifetime Learning Credit (which was a tax credit worth 20 percent of the first $10,000 of qualified education expenses.)

Don’t worry if these details don’t stick in your head.  You need to know them only in two circumstances: if you are trying to maximize your educational deductions (ideally with the help of an accountant) or if you are a college administrator who is calculating exactly how much you can squeeze out of tuition-paying parents.

Those administrators and the lobbyists they employ are the central opposition to these tax reforms.  From the standpoint of the family trying to meet educational expenses, the tax credits themselves are almost entirely smoke and mirrors.  The money the consumer supposedly saves has been taken into account already by the colleges and universities, which have set their tuition and fees accordingly.  To the families who are struggling to pay the bills, the federal tax credits must feel like relief, but that’s an illusion akin to drinking ocean water to quench your thirst.

Two Tricks

Tuitions have soared for the last thirty years primarily because colleges and universities have found ways to trick more and more people into borrowing more and more money to pay for their services.  College education hasn’t gotten better as the expenses soared. By most reckonings, the quality of a college education has deteriorated during that time. To sell a worse product at a higher price requires colleges and universities to play some sharp angles.

One of those angles is to convince parents that a “good education” is the key to lifetime success for their children. So, pay up or doom your children to second-rate lives.  For sure, the evidence is strong for the existence of a “lifetime premium” in earnings for having a college degree, though the size of the premium is much disputed, and the calculations seldom reckon with the students who go into debt for college and don’t graduate.  The lifetime earning conceit, however, is a powerful incentive for families to overspend on college education.  Removing some of the tax-credit grease that lubricates this rationale could slow the rate at which some families send their sons and daughters off to expensive colleges that have low “returns on investment.”

The other principal way that colleges and universities entice people to enroll at high prices for questionable academic programs is by dazzling families with “scholarship” (discounted tuition) and flashy explanations of how the costs can be covered by an array of federal loans and tax credits.  The House bill certainly won’t bring an end to Las Vegas-style flashing lights and upbeat tempos with jackpots every minute, but it will curtail some of it.  Taking $65 billion off the table is a start.

Congress has still more provisions in the works.  The House bill eliminates a provision which treats employer-paid tuition assistance of up to $5,250 as non-taxable income to the employee.

And in a blow to the super-wealthy colleges and universities, the House bill puts a 1.4 percent tax on the investment income of private colleges that have more than 500 students and assets of more than $100,000 per students,  This would apply to 140 colleges and produce $3 billion in new federal revenue over ten years.

Unsheltered

Most of the provisions in the House bill that I have mentioned primarily affect undergraduate students, but one other provision primarily hits graduate students.  It calls for taxing tuition waivers, which comprise a substantial portion of the financial aid that graduate students receive.  Some 145,000 graduate students and about 27,000 undergraduates receive such waivers—the undergraduates typically for serving as resident assistants.

Though this provision of the tax reform touches a small fraction of the number of students affected by the other provisions, it has aroused disproportionate fury within the world of higher education. That’s because it potentially disrupts the indentured-labor system through which universities cover a substantial portion of their instructional costs.  The graduate students who receive tuition remission are typically expected to serve as teaching assistants or in similar roles for which they receive no direct compensation.  It is an interesting arrangement, given that the university with one hand sets the rate of tuition, and with the other hand makes the tuition vanish, and the graduate student in gratitude for this generosity works for free.

Congress can spoil this magic act, however, by declaring that the tuition waivers are actual taxable income to the recipients.  That presumably will force universities to pay the graduate students more in the form of actual dollars so that they can pay their taxes.  And because this would increase the cost of graduate students to universities, it might well result in shrinking the number of graduate students who are admitted.  And that, in turn, would put pressure on the employment of faculty members who primarily teach graduate students.

In other words, taxing graduate tuition remission is a tender spot in the economics of American higher education.  The immediate brunt of the change would fall on the graduate students who would see a large increase in their taxes.  The Chronicle of Higher Education offered several illustrations, including this:

“At the Stony Brook University, in the SUNY system, teaching assistants earn a little more than $19,000 in stipends and have tuition waivers of nearly $11,000, according to information prepared by the dean of the graduate school. In this case, the student’s taxes would increase from less than $900 to nearly $2,200, the dean calculated. The increase is far greater for nonresident students, whose tuition waivers are worth more than $22,000, making it appear, for tax purposes, that their annual pay more than doubled.”

Of course, the students’ annual pay, in this case, wouldn’t actually double.  Rather, the portion sheltered behind the label “tuition remission” would simply be recognized as the income it, in fact, is.  I have some sympathy, however, for the graduate students who struggle with small stipends, large academic workloads, demanding advisors, and not much time to earn extra income on the side.

The small number of undergraduate students who benefit from tuition remission may not be quite so sympathetic.  “Resident assistants” tend to be frontline enforcers of political correctness on campus.   They often serve as snitches for Bias Emergency Response Teams and similar parts of the apparatus that sustains the suppression of intellectual freedom.  The University of Oregon, for example, awards tuition remission packaged as “Diversity Excellence Scholarships” for “sharing their varied cultural perspectives” to “enhance the education of all UO students and the excellence of the University.”  Congress probably didn’t spend much time thinking this through, but the proposal to tax tuition remission may well cut away one of the many props that colleges and universities use to maintain progressive ideological conformity among students.

Old Man River

All of this comes at a time when American higher education is shouldering some other financial problems.  In the last decade, for example, colleges and universities have found a windfall by expanding the number of international students they enroll.  Over 1.08 million foreign students enroll, or about five percent of the total enrollment; they bring with them an estimated $39 billion per year in revenue.  Generally, these students pay full tuition and are eligible for none of the gimmicks that shield many Americans from the official “price.”  By windfall, I refer to the near doubling of foreign students (an 85 percent increase) since 2006.  But suddenly the wind has slowed down.  In fall 2017, seven percent fewer international students enrolled in U.S. institutions. The decline has hit some universities much harder than others.  The University of Central Missouri, for example, has seen a one-year drop in international students from 3,638 to 944.

That’s but one indicator that higher education is at the edge of a financial precipice.  Various observers from Kevin Carey, director of the Education Policy Program at the liberal New America Foundation, to Clayton Christensen at Harvard Business School have declared that American higher education is due for a massive “disruption,” brought about partly because of the rapid development of new technology.  Christensen now says that half of American colleges will be bankrupt in the next ten to fifteen years.

I am not ready to go all-in on the idea that online education will be the grim reaper of our over-priced and under-performing colleges and universities, but I do think the basic financial model of our higher education sector is profoundly flawed and therefore vulnerable.  The symbol of the moment is the giant pool at Louisiana State University, the “Lazy River” that allows students to drift in inner tubes along a 546-foot course that spells out “LSU.”  As the Chronicle of Higher Education pointed out, the Lazy River is part of an $85 million renovation to LSU’s recreation center, while the LSU library is literally falling apart.

American higher education, in general, embarked on its own Lazy River a few decades ago.  Congress’s decision to start cutting the subsidies is what happens at the end of the river.

Are 3-Year Bachelors Programs Worth It?

Three-year bachelor’s degrees are back in the news mostly because colleges and universities are coming under heavy pressure to make higher education more affordable.

Last month New York University, one of the most expensive schools, launched its “NYU Accelerate,” which officials called “a new program that outlines pathways to make it easier for some students to graduate in less than four years.” Some 20 percent of NYU students are already on the three-year plan.

Three-year bachelor’s programs are far from new.  Harvard created one in the early 1900’s.  Bates College has run a continuous three-year bachelor’s program since the 1960’s But the question lingers, is the apparent resurgence of three-year BA degree programs part of the solution or a symptom of an intractable problem?

True, three-year degree BA programs attempt to reduce the average time to graduation with various institutional reforms that make fast-track education more feasible. But institutions may well discover that their three-year degree programs, however well-intended, will barely touch the underlying constraints that hinder many students from staying in college and graduating in a timely fashion.

Tantalizing Payoffs

The potential payoffs of three-year bachelor’s programs are tantalizing. Less time to a degree means students and families would pay less tuition, fees, and other costs of attendance.  In turn, colleges’ total spending per student would be substantially reduced, allowing institutions to educate more students for a given amount of spending on teachers, staff, administrators, and so on.

What’s more, such productivity gains would also enable states and the federal government to advance long-held educational policy agendas, focused primarily on producing more college graduates while lessening cost pressures on government-sponsored financial aid programs.

Daniel J. Hurley and Thomas L. Harnisch concluded in a 2012 report by the American Association of State Colleges and Universities (AASCU) that such programs “can help students by lowering opportunity costs, reducing tuition costs, encouraging better utilization of high school, expediting the path to graduate school, and providing a predictable, structured degree program.” While the theoretical benefits of the three-year solution are widely touted, most accounts of the trend are anecdotal, and actual economic data on the trend is scarce.

Since 2009, when the National Association of Independent Colleges and Universities started tracking the trend, roughly two dozen of its members had launched three-year degree tracks. Also, many public universities have created or plan to launch three-year programs, including the University of California system, the University of Wisconsin campuses, and the University of Texas.

Consider Wisconsin. The Wisconsin Legislative Fiscal Bureau estimated that a student at the Madison campus would save more than $6,400 graduating in three years instead of four.

The AASCU study cites the University of Houston-Victoria’s Degree in Three, which “can save students $1,400 on tuition.”  At the University of North Carolina Greensboro (UNCG), students   in its accelerated program “can realize up to $9,000 in tuition savings.”

At the University of California, officials suggest that its accelerated bachelor’s program will enhance system-wide efficiency. If 5 percent to 10 percent of students to graduate just one term earlier, that alone would open scarce admissions slots to an additional 2,000 to 4,000 students.

Who’s graduation problem?      

But for three-year degree programs to realize these promised efficiencies and savings, students actually have to graduate in – surprise, surprise – three years.  According to the most recent full-cohort data from the National Center for Education Statistics, just 41 percent undergraduates who began college in 2007-08, earned a bachelor’s degree in four years or less; 45.9 percent took up to 10 years to graduate; and 13.1 percent took 10 years or more to complete a bachelor’s degree.

Those are just averages.  The actual time it takes individuals to earn a bachelor’s degree depends on various demographic, economic, and individual characteristics.

For example, parent income plays an outsized role on one’s ability to complete college in a timely fashion, according to data provided by the 2008-2012 Baccalaureate and Beyond Longitudinal Study.  Fully 63 percent of students whose parents were among the top fifth of income earners graduated in four years or less. By contrast, just 34 percent of students from families in the middle-income tier graduated within four years.

Total financial aid from all private and public sources is also a prominent predictor of the time students take to graduate. More than 65 percent of students receiving aid totaling  $17,800 or higher earned degrees in four years, while just a third of students receiving $10,399 or less in total financial aid graduated in four years.

Research has also shown that timely graduation depends a lot on one’s intensity of attendance.  Stopping college for a single term just once can add significantly to the time one takes to complete a bachelor’s degree and stopping more than once vastly reduces the chances of earning a degree at all.

It should come as no surprise, then, that the college-completion problem in the United States rarely applies to top-tier schools and the students who attend such schools.  Most all the determinants of timely completion of a bachelor’s degree are in ample supply at colleges with big endowments and wealthier students.

Given the extraordinarily large student subsidies at wealthy institutions and their ability to meet most if not all student financial need, students at top-tier schools have little financial incentive to accelerate their time at college.  Of course, that’s unless students want to enter the job market after three years instead of four years, but few such students are so financially strapped that early entry into the labor market seems desirable.

In fact, for students at top-tier schools, absorbing the opportunity costs of remaining in school can lead to substantial economic returns in the long run with the added social capital that comes from a traditional college experience.

Red Herring?

That picture is far different for less advantaged students at schools with modest endowments and far lower student subsidies. Clearly, the three-year solution would be of great benefit to students who now take more than four years to complete a bachelor’s degree.  But if too many students have a hard time graduating in four or five years now, then what’s the magic bullet that helps them graduate in even less time?

Indeed, the very reasons poorer students stop going to school or take five years or longer to finish school are often related to financial pressures and the ever-pressing opportunity costs of staying in school.

For many financially strapped students, it seems rational to drop college for a relatively good-paying job now — that doesn’t require a four-year-degree — instead of adding onto personal debt by staying in school.  Although such students are statistically likely to earn far more over a lifetime having the four-year degree than not having it, an individual student can never take that probable outcome for granted.

“For populations that most need to increase college success—such as older adults, lower-income and minority students—the three-year degree can be arguably construed as largely a nonstarter due to financial realities, college preparation issues and family obligations,” write Hurley and Harnisch.

So a three-year bachelor’s program might sound like found money.  But don’t look to this particular non-innovation innovation as a meaningful answer to making college more affordable to the very students who can least afford it.  For many students, institutions’ touting of accelerated bachelor’s degrees as a solution to the affordability problem amounts to little more than the marketing hype.

That’s why the Washington Square News, NYU’s student newspaper, called the university’s newly minted three-year bachelor’s program not a program at all, but “a gimmicky slap in the face,” by putting a fancy label on efforts students already are making to graduate in less than four years.

Noting that some 20 percent of cash-strapped undergrads already have maneuvered in the system to graduate early, the paper’s editorial board said, “the proposal is taking an unfortunate reality of NYU’s unaffordability crisis and passing it off as a solution.”

How Federal Student Loans Increase Tuition and Decrease Aid

Conventional wisdom says that expansions in federal student aid will result in a more affordable and equitable post-secondary education system. While this belief has motivated massive expansions of federal aid in the recent past, rapidly increasing tuition and student loan default rates are raising questions about this approach.

In a new study, I review the basic statistics and recent research, and conclude that: 1) further increases in federal support for higher education are likely to be counter-productive because they lead to higher tuition for all students, and 2) the system of student loans should be reformed to mitigate the student debt problem.

Related: Default on Student Loans? Bad Idea

Average gross tuition and fees for undergraduate studies increased more than three-fold in constant dollars from 1980 through 2014—even faster than the rate of increase in health care prices. The increase is widespread across several types of higher education institutions: private non-profit, public two-year and four-year—although private for-profit institutions have recently seen a decrease.

At the same time, government support for higher education in the form of tax benefits, grants (veterans and Pell), and loans has exploded since 1994, and especially since 2000. Grants and loans totaled almost $170 billion in 2014 (constant dollars), up from just over $50 billion in 1994.

Whereas earlier studies showed mixed results, recent studies using refined data and techniques consistently find that increased federal support for higher education leads to a significant increase in tuition and decrease in institutional aid. In fact, there is some indication that state aid for higher education is itself negatively related to the extent and nature of federal government support.

Related: Making  a Bigger Mess of Student Loans

Increases in federal support for higher education have been focused on student loans, yet these increases are actually detrimental to the finances of many post-secondary students. One study found that students’ college decisions were almost as responsive to the offer of loans as to grants, even though they have to pay back loans.

Different measures of student loan default rates and repayment burdens uniformly show significant increases in recent years (as much as a doubling), across all types of institutions and students. Furthermore, the expanded use of deferment, forbearance, and, especially, income-related repayment plans hides an even larger increase in losses to taxpayers on these loans than the rising default rates would indicate.

Students from non-traditional backgrounds seem to have been harmed most by the increase in federal student loan amounts available. They have not seen increased incomes as workers, often have not completed their educations, and are much more likely to default on their loans, while missing out on job-related income and training while enrolled in college.

In addition, enrollment in higher education, as a percent of the young adult population, and in the supply of college-educated workers as a percent of the workforce, has steadily increased over the past four decades. Almost 70 percent of recent high school graduates are currently enrolled in some type of college. The increase is most notable for public two-year and for-profit colleges. Except at the top 10 percent of colleges and universities, average student quality in higher education institutions has declined.

The earnings premium for a college education over a high school education has held steady over the past 25 years. This contradicts the claim by some economists that the relative supply of college-educated workers has been dropping and the earnings premium increasing. It also debunks the claim as an explanation for increased income inequality or a justification for even more government support for higher education.

Further increases in federal support for higher education are not needed and indeed are likely to be counter-productive because they lead to higher tuition for all students. The resultant increases in tuition, decline in average student quality, stagnation in wages, and increases in student loan defaults should lead policy makers to question whether the massive increase in federal support for higher education is achieving its goals.

It is quite likely that reducing subsidized student loan availability to upper middle-income families could be beneficial to the system by leading to a general lowering of tuition and reducing the loan burden on future workers.

The entire system of student loans, especially repayment options, needs to be rationalized and redesigned; in particular, the salience of loan repayment to students needs to be strengthened and losses to taxpayers reduced.

There are many indications that a system of universal higher education, which is where we have been heading, is wasteful. This is particularly true if college completion is mainly a signal of perseverance and effort more than actual preparation. Rather, a robust parallel system of on-the-job training, apprenticeships, and youthful practical work experience is needed—supported by changes in federal laws and regulations, such as lowering the minimum wage for younger workers, to encourage its creation.

This article was published originally in Economics21, a website from the Manhattan Institute.

Obama Backs the Worst Colleges While Destroying For-Profit Schools

The federal government happily subsidizes inferior state colleges that graduate few if any of their students. That includes Chicago State University, which has a 12.8 percent six-year graduation rate.

The Obama administration has rewritten federal student loan rules in a way that encourages colleges to raise tuition and effectively subsidizes the worst colleges the most. The Federal Reserve Bank of New York found that each additional dollar in government financial aid results in a tuition hike of about 65 cents.

The federal government also subsidizes expensive, low-quality third-tier law schools whose graduates are often unemployed. It does so even though many of their graduates will never pay back their student loans because of their low graduating salaries, and the huge amount of money law students are allowed to borrow from the government.

While the government is indulgent towards wasteful state colleges, it has a very different, hostile attitude towards for-profit colleges. It will sometimes financially destroy them even without any proof of wrongdoing. The Washington Post editorial board gives the latest example of the Obama administration doing this, its destruction of ITT Technical Institutes:

Never mind that the higher education plans of tens of thousands of students will be disrupted. Or that 8,000 people will lose their jobs. Or that American taxpayers could be on the hook for hundreds of millions of dollars in forgiven student loans. What is apparently of most importance to the Obama administration is its ideological opposition to for-profit colleges and universities. That’s a harsh conclusion, but it is otherwise hard to explain why the Education Department has unabashedly used administrative muscle to destroy another company in the beleaguered industry.

ITT Technical Institutes, one of the nation’s largest for-profit educational chains, on Tuesday abruptly announced that after 50 years in business it was shutting down more than 100 campuses in 38 states. The announcement, displacing an estimated 40,000 students, follows last month’s decision by the Education Department barring the school from enrolling new students using federal student aid and upping its surety requirements. The department said it was acting to protect students and taxpayers, noting the school had been threatened with a loss of accreditation and that it was facing a number of ongoing investigations by both state and federal authorities.

What is so troubling about the department’s aggressive move — which experts presciently called a death sentence — is that not a single allegation of wrongdoing has been proven against the school. Maybe the government is right about ITT’s weaknesses, but its unilateral action without any semblance of due process is simply wrong. “Inappropriate and unconstitutional,” said ITT officials.

Such unfairness sadly is a hallmark of the Obama administration policy toward higher education’s for-profit sector. It has singled out the industry for stringent employment and student loan rules and stepped up enforcement with stiff sanctions that, as The Post’s Danielle Douglas-Gabriel reported, have some companies on the brink of ruin.

As the Cato Institute’s Neal McCluskey notes, ITT Tech produced better graduating salaries for its students than nearby public alternatives. But no one is suggesting that those lousy public colleges be shut down.

Why Not Use Endowments to Lower Tuition Costs?

Connecticut is going through the motions of trying to tax Yale’s $25.6 billion endowment to help relieve the state’s $266 million shortfall. That effort will fail, but public opinion is starting to question the appropriateness of government-conferred tax benefits for university endowment funds. At Harvard, alumni as politically diverse as conservative Ron Unz and progressive Ralph Nader are running for the Board of Overseers on a “make tuition free” platform.

What legitimate public purpose do endowments serve? The co-authors of this article spent several months exploring this question, looking at roughly 800 university endowment funds on which good data are available and concluding that, with some exceptions, endowments do little to make colleges cheaper and more accessible to students.  Suppose a wealthy donor gives a school funds to endow $100,000 annually in scholarships. Our research shows that probably on net $100,000 in endowment income leads to a student tuition fee decline of only about $13,000. As more endowed scholarship money flows in, universities typically either raise tuition fees more aggressively, or allocate less of their own resources to scholarships.

Related: Endowments Are Still Massive, So Spend

Princeton University had more than $2.8 million in endowment per student as of last June 30-enough to generate $112,000 in spending per student if four percent of the endowment were spent annually.  Princeton’s tuition fee for this year is $43,450. More typical schools have modest endowments generating at most $1,000 in per-student annual revenues.

Yet the more typical school likely has a sticker price at least $25,000 a year less than the highly endowed institutions. The average amount students actually pay after taking account of scholarships is only $3000 lower at the 20 highest endowment schools, compared with schools with more typical modest endowments. That is despite the fact that the high endowment schools have over $20,000 more endowment income per student.

If endowments only modestly make college more affordable, where does endowment income go? A goodly portion (we estimate about 37 percent) goes to support instruction, both by hiring lots more professors and by paying them a lot more. While there are about 12 professors for every 100 students at highly endowed schools, there are only half as many (6) at more typically endowed institutions. Similarly, while full professors at the poorer school average about $90,000 a year in salary, at the highly endowed schools, the figure is more than $155,000.

Related: Is an Endowment a Nest Egg or a Gambler’s Stake?

Some of this increased instructional money probably leads to smaller classes and more contact between students and professors, some of whom are both well-known scholars and fine teachers. Yet as any keen observer of higher education knows (one of us has been a professor for more than 50 years), the highly endowed school faculty mostly have very low teaching loads so they can write papers on often obscure academic specialties, and the more highly paid teachers not only live quite well (particularly when consulting and other income is considered), but often avoid undergraduate students like the plague. As Adam Smith said of professors 240 years ago after Oxford started paying them from endowments, they had “given up altogether the pretense of teaching.” Additionally, the statistical evidence also says about 25 percent of endowment income goes directly for research.

Not all schools behave the same way. Berea College, in relatively poor Appalachian Kentucky, uses its endowment to essentially make college free, foregoing high salaries and extremely low teaching loads to promote student access. A few other schools (College of the Ozarks in Missouri, and, historically, Cooper Union in New York City (now charging tuition) have done the same.

Do big endowments promote prestige and perceptions of high quality? Looking at the relationship between endowment size and rankings on the Forbes Best College list (which we help compile), we find some positive relationship between endowment size and rank, but it is not the dominant determinant.

Still, the five schools with the highest per student endowments (Princeton, Yale, Stanford, Pomona College and Harvard) are all very highly ranked.

Related: Another Bad Idea-Mandatory Endowment Spending

Universities argue endowment allocations are determined by the intent of thousands of donors, many of whom wish to promote things other than low tuition. Yet the Berea example demonstrates that colleges poorer than the Ivy League schools can use alumni support to make college free. Why hasn’t Harvard, Yale or Princeton ever mounted a capital campaign with a-goal of providing no-cost undergraduate education? A no-cost Harvard would set a powerful example and encourage other schools to forego the expensive university arms race in order to reduce financial burdens of attending college.

As tuition fees and student debt loads soar, and as doubts grow about the true return to students of a college education (total enrollments have actually fallen over the past four years), scrutiny of endowments is likely to grow. Pell Grant data reveals that highly endowed schools typically have a much smaller proportion of low-income students. Should they continue to be incentivized to strengthen their academic gated communities for the affluent by accumulating ever larger endowments, largely financed through special tax breaks to donors and capital gains tax exclusions? There are arguments for doing so, but our research suggests that if special tax privileges for endowments are curtailed by Washington policymakers, the colleges have only themselves to blame.

What Candidates Can Do For Higher Education Now

By Peter Wood

In 2014 Senator Marco Rubio lent his support to CASA, the Campus Accountability and Safety Act—the effort by Missouri Senator Claire McCaskill and New York Senator Kirsten Gillibrand to strip the due process rights of students accused of sexual assault.  The bill died that year but McCaskill and Gillibrand brought it back in 2015, and Senator Rubio renewed his support.

It is a terrible piece of legislation, and one that no reasonably informed observer of higher education who cares about the rule of law and individual rights on campus could support. Yet one of the mainstream GOP presidential candidates co-sponsored it, presumably because he calculates that it is “good politics” to be able to say he opposes “rape culture.”

Related: Gillibrand Revised—Still No Due Process

This one instance of many testifies to how little attention our leading candidates pay to higher education. Americans, however, have been shocked to see students at Dartmouth, Princeton, Yale, and other elite institutions protesting against free speech—and college presidents bowing down before little ripped-jeans, tuition-subsidized junior-league totalitarians.   Now would be a good time for some presidential candidates to come up with a real program for reform.

So far, the only candidates to propose anything noteworthy are Bernie Sanders and Hillary Clinton.  Sanders has floated a $47 billion proposal to eliminate undergraduate tuition at four-year public colleges and universities. Clinton has countered with a “New College Compact” that would spend $350 billion over ten years to eliminate student loans.

Making college an entitlement may appeal to some voters, but it would do nothing to end the open hostility to free inquiry that marks our campuses now. Here are some suggestions for how to take back the campus from those who are intent on making it a 24-7 taxpayer-subsidized indoctrination camp:

  1. Respect freedom of thought and expression. Colleges and universities should demonstrate commitment to these freedoms. They should, for example, establish independent standing committees on free expression. College leaders need to stand up against movements that try to turn academic freedom inside out by justifying mob action and intimidation as “free expression.” If they prefer instead to shelter students in “safe spaces,” they forfeit any claim to public respect—and public support.

Related: How Political Correctness Corrupted the Colleges

  1. Treat men and women equitably. Amend Title IX of the Higher Education Act, which was originally enacted to ensure that women in college had equal opportunities. It has been twisted over time by bad court decisions and radical feminist regulators to justify denying men due process, cutting men’s sports, and reducing men to a minority group on most campuses.

Curtail the Office for Civil Rights in the Department of Education which has, without Congressional approval, churned out regulations on the unwarranted premise that sexual assault is a form of “discrimination” covered by Title IX.  Sexual assault is a crime, best handled by the police and the courts, as Bernie Sanders has just said. Endorse the Safe Campus Act, which allows a college to conduct its own inquiry into a reported sexual assault only if the alleged victim consents to an investigation by law enforcement.

  1. End higher education’s destructive focus on race. Presidential candidates should join the majority of Americans who oppose racial preferences in hiring and college admissions. This may be a long fight. A good first step would be to expose the sheer extent of these preferences by passing legislation that requires colleges and universities to disclose them in detail by publishing admitted students’ standardized test scores and GPAs, broken down by race.
  1. Fix the student loan debacle. First, end the perverse incentives by which the government actively encourages students to take on unnecessary debt. Prompt students to think carefully about their college choices by favoring loans that go towards programs that meet national needs and that possess academic rigor. Cap each student’s total borrowing for tuition and other college expenses. Make colleges partly liable for student loan defaults.  Create federal incentives for three-year programs and the $10,000 B.A. pioneered by Texas.

Related: Making a Bigger Mess of Student Loans

  1. End federal cronyism in higher education. Bust the accrediting cartel, which impedes competition by hindering the creation of new colleges and online education. End the cozy relationship between the government and the College Board, a private monopoly that has compromised academic standards via its politically correct changes in the SATs and the Advanced Placement history courses.
  1. Restore the integrity of the sciences. Require the National Science Foundation and other federal funding bodies to spend research dollars on research, not public advocacy. End sycophantic science—the bribing of scientists to produce “findings” meant primarily to advance political causes. Pass the Secret Science Reform Act which would require universities to disclose the data and the manipulations behind publicly-funded research.  (The data behind Michael Mann’s infamous “hockey stick” graph, first published in April 1998, is still) Science that can’t be replicated isn’t science.
  1. Enhance the curriculum. Colleges should be free to decide what courses they offer and how these add up to a college degree, but our political leaders can reasonably exhort college leaders to set meaningful requirements and to offer students a coherent curriculum that includes core subjects such as Western civilization and American history.

Related: Emptying Content from College Courses

These steps would serve everyone, rich and poor, of every ethnicity, and would just as importantly serve America. We’ve allowed many of our colleges and universities to decline into little more than servants of progressive politics. But higher education should never be political indoctrination, welfare for special interests, or back scratching for politicians. It is time for a principled candidate to say “Enough!” and to take concrete steps to restore higher education to the nation’s colleges and universities.


 

Peter Wood is President of the National Association of Scholars.

 

The Liberal Arts Can’t Fix Higher Education

For the past two autumns the two leading academic reform organizations, the National Association of Scholars (NAS) and the American Council of Trustees and Alumni (ACTA), have held events offering high praise to the liberal arts as a means to improve students’ writing and to provide them with the classical culture that Mathew Arnold calls sweetness and light.

On September 30, 2014. NAS held a screening of Andrew Rossi’s CNN documentary Ivory Tower, which is about students’ inability to afford tuition in light of their poor record of achievement and poor job opportunities.  Following the screening, Professor Andrew Delbanco, who is featured in the film, together with his colleague Roosevelt Montas, Director of the Center for the Core Curriculum and Associate Dean of Academic Affairs at Columbia, spoke about the need to refocus American higher education so that all Americans get a liberal arts education.

This year, at its ATHENA roundtable, ACTA featured an impressive array of speakers, three of whom–ACTA’s president Anne Neal, education researcher Richard Arum, and popular  historian David McCullough—also advocated expansion of liberal arts, English, and history departments to strengthen students’ competencies, especially with respect to writing and history.

I disagree: The liberal arts cannot fix higher education. First, the American professoriate, including the liberal arts faculty, is not interested in teaching liberal arts.  In the late 1930s Robert Maynard Hutchins, president of the University of Chicago, argued, as do Delbanco and Montas,  that liberal arts should be the universal foundation for undergraduate education.  Hutchins reorganized the undergraduate program at Chicago along those lines, but Hutchins’s reforms foundered on the rocks of the German research university model, which Daniel Coit Gilman had introduced at Johns Hopkins in 1876 and which Chicago had adopted from its inception.

Today’s professoriate is specialized, research-oriented, politically correct, and narrowly focused.  In contrast, good liberal arts instruction is broad and integrates flashes of insight with competency building.  The cadre of faculty necessary to do a first-rate job of teaching liberal arts to American students hardly exists. Moreover, it is as likely to exist in departments outside the liberal arts as within it.

Second, the majority of students has no interest in and lacks the ability to benefit from liberal arts.  Charles Murray has written that only about 16 percent of the population has the IQ to benefit from college. According to the New York City Board of Education, 35 percent of 2015 New York City public high school graduates are college ready, but the college at which I work, which rejects half its applicants, accepts students with SAT scores of 1,000,  the 50th percentile.

In part because there has been a belief among progressive educationists that development of cognitive skills like writing and the multiplication tables is unimportant to basic education, high school preparation has been deficient. As well, political correctness influences the content of history courses at both the high school and college levels; further, English departments, which specialize in literature, often do not see teaching writing as part of their educational mission.

In their Academically Adrift Richard Arum and Josipa Roksa find that nearly half of all sophomores show no gain in their scores on the College Learning Assessment, an innovative measure of critical thinking, reasoning, and writing ability.  Nevertheless, in the 2015 ACTA panel Arum claimed that the same liberal arts departments that have failed to nurture students’ skills are the ones best equipped to address the skills gaps.

Via email, I suggested to Professors Delbanco and Montas that many of my students, who come from low socioeconomic status, inner city backgrounds, have not benefited from my college’s liberal arts requirements.  Despite fourteen years of education, the business student I quote lacks practical skills.  She will pay a penalty in the job market.

Professor Montas’s response was this:

[T]his student would most decidedly benefit from a rigorous liberal arts education…. I understand a liberal education as aimed at developing a student’s full humanity: the humanity of the welder as well as the humanity of the lawyer.  The aim of the liberal arts is not that you excel in the liberal arts, but that you excel as a human being in whatever individual form that takes.

The unconstrained vision of liberal arts as all things to all students, including students who lack ability and motivation, ignores costs. Students who cannot benefit will lose years of their lives and will spend tens of thousands of dollars—as will taxpayers–for pursuits in which they are not interested and from which they will not benefit. They will in the end fail to find the kind of jobs they seek.


Mitchell Langbert is an associate professor of business at Brooklyn College.  

A Close Look at Clinton’s Student Debt Plan

Nearly everyone recognizes that student debt has risen to a level that will be difficult to sustain in the future given the nation’s slow growing economy and the sagging incomes of too many college-educated Americans. Nearly 40 million Americans are carrying some form of student debt; more than 7 million are in default on their loans and many more have missed scheduled payments. Roughly 70 percent of all college students today are leaving school with debts owed to either the federal government or to private lenders, with the average debt per student now well in excess of $30,000. The total amount of outstanding student debt is estimated to be $1.2 trillion, with about two-thirds of this sum underwritten by the federal government.

It is not difficult to figure out the reasons for exploding student debt. On the one hand, high-school graduates and their parents understand that a college education is essential for entry into the narrowing world of high paying professional jobs. College and university enrollments increased by more than a third between 2000 and 2014, from 15 million to more than 21 million students. At the same time, college tuition and fees have been growing at more than three times the rate of inflation for three decades now and at more than twice the growth in the median family income over the same period. In 2015, the average tuition (plus fees) for in state students at public universities is in the neighborhood of $10,000 per year and over $40,000 per year for students attending private universities. A fair amount of careful research suggests that these soaring costs are partly attributable to the increasing availability of loans encouraged by federal policy.

Hillary Clinton’s new $350 billion (over ten years) proposal takes aim at this vast constituency of voters currently paying off student loans or worried about the costs of taking them on. She says that her proposal will enable most students to meet college expenses without taking on loans, a claim that is surely exaggerated in view of the scale and scope of her plan.  At best it is a proposal to mitigate the problem somewhat by permitting borrowers to reduce interest rates on current loans and to use the carrot of federal funds to force states to invest more public funds in higher education.

There are three major parts to her plan:

First, (borrowing an idea from Sen. Elizabeth Warren) she wants to allow borrowers locked into loans at high rates of interest to refinance those loans at current federal rates for student loans, much as people are allowed to refinance their home mortgages when interest rates fall.  Federally subsidized student loans are given at fixed rates (set by Congress), generally for a period of up to 25 years.  The current interest rate (as of 2014) on federal loans is about 3.9 percent, down from 6.8 percent charged a decade ago. That reduction would save a typical borrower carrying a loan of $20,000 or $30,000 between $500 and $1,000 per year.

It is hard to find fault with her proposal, at least in the abstract. Many Democrats and even some Republicans are sympathetic to it as a means of providing some relief for overburdened borrowers. Still, there is less here than meets the eye. Private lenders have long offered variable rate loans that move up and down with interest rates. In addition, borrowers have long been able to refinance their student loans through private lenders, which is already a common practice.

Mrs. Clinton’s plan would allow borrowers carrying federal loans to do so through the federal system rather than through private lenders. This may be a step in the right direction, but it is a very short step when one considers the options already available.  Further, her proposal carries an estimated cost of between $60 and $100 billion per year to the federal government, depending upon where interest rates happen to be and how many borrowers take advantage of the plan. This is one of the sticking points: Congress is reluctant to appropriate such funds in a time of deficits, rising entitlement costs, and generally tight budgets.

Second, she proposes to establish an income-based repayment system so that borrowers will never have to pay more than 10 percent of their income on student loans (the standard in the past was 15 percent) with the possibility of loan forgiveness after twenty years of faithful payments.

This is also a reasonable but modest proposal, and one that has been endorsed by other national leaders, including her fellow presidential candidate Republican Sen. Marco Rubio. One problem with it is that the Obama Administration, following the advice of a task force led by Vice President Biden, has already implemented most of it under a law that took effect in 2014. Under that law, borrowers choosing an income-based repayment plan will pay no more than 10 percent of their income toward student loans and those who faithfully repay their loans for twenty years are eligible to have the remainder of their debt forgiven (those who work in public service for ten years can have the remainder of their loans forgiven after ten years). Mrs. Clinton’s proposal “tweaks” current policy at the margins by consolidating existing income based repaying programs into a single plan, but it does not significantly add to it.

There is another problem with income-repayment schemes that is now beginning to emerge. The Financial Times reported last week that Moody’s Investors Service is reviewing the credit worthiness of some student-loan-backed bonds in response to falling repayment rates on loans.  Moody’s review was triggered by wider use of income-based repayment plans which allow borrowers to repay loans more slowly, creating the possibility that bonds may reach maturity before the underlying loans have been repaid.  This could lead to defaults, even if the debt is backed by a government guarantee.  Such concerns have led to a doubling of the yield on Triple-A rated bonds in recent months and to the possibility that Moody’s might downgrade its ratings on those bonds. As the FT reports in its article, “sharp downgrades could spur an exit from the sector by investors banned from buying low rated debt.” This would drive prices down and interest rates higher on those bonds, which in turn could lead to higher interest rates for new borrowers, and perhaps even to an exit from the sector by private lenders.

Third, Mrs. Clinton proposes to spend $175 billion over ten years to encourage (bribe) state governments to invest more resources in higher education so that tuition charges can be reduced at four-year institutions and eliminated entirely for two-year community colleges.  Under her plan, the Department of Education would make funds available to match state budget allocations for higher education and to reward states that keep a lid on tuition increases.  She would also expand work-study programs to permit more students to work off college expenses during their student years. The combined federal and state funds, perhaps as much as $35 billion per year across the country, she claims, would allow states to maintain tuition at affordable levels for students so that loans would be unnecessary. This is, as already noted, an exaggerated claim. An additional point worth emphasizing:  she is not making tuition “free,” but rather substituting taxpayer funds for student-paid tuition.

Total tuition charges at public institutions across the country in 2012-13 amounted to something like $300 billion, plus expenses for fees, books, room, and board. A mix of federal, state, and private scholarships subsidizes a significant portion of this sum. The federal government, for example, spends about $30 billion per year on Pell grants to support tuition and other expenses for more than 9 million students from lower-income families. Mrs. Clinton’s contribution of $17.5 billion in federal funds per annum would make a dent in this package but it is hard to see how it will ever allow reductions in tuition and fees to levels that would allow students to dispense with loans.

Appropriations for higher education in states across the country have fallen off by an average of 16 percent since the onset of the financial crisis in 2008.   Mrs. Clinton, along with the liberal think tanks associated with the Democratic Party, claims that this is a major cause of tuition increases at public universities and thus a major source of the student debt crisis.   This is another exaggerated claim:  student debt was accumulating for years and decades prior to the financial crisis due to rising college costs and the wide availability of federally subsidized loans.   The financial crisis made many problems worse across the country, including the student debt problem, because it provoked a budget crisis for state governments that extended to all publicly funded programs.

Mrs. Clinton and her advisors might ask themselves why so many states found it necessary to cut appropriations for higher education in the years following the financial crisis.  The major reason was that governors and legislators had other priorities, among them paying for public employee pensions, meeting federal mandates to pay for Medicaid, welfare, and K-12 education, and finding revenues to meet law enforcement and transportation budgets.  Medicaid for years has been the fastest growing item in state budgets, followed by spending on K-12 education. Together these two items now claim close to half of all state expenditures across the country.   In ramping up spending on these two items, governors and legislators have necessarily taken into account the carrots (matching funds) and sticks (mandates and court orders) of federal policy.   In view of federal policies and the hard-nosed politics in play in the states, it is not hard to understand why higher education has been squeezed out in the keen competition for state funds.

Mrs. Clinton would now hold out federal dollars to induce states to appropriate more funds for higher education, just as the federal government already does with Medicaid, welfare, K-12 education, and transportation projects. Her proposal would compel governors and legislators either to raise taxes to cover those added expenditures or to cut budgets in other areas — or, alternatively, to dispense with the federal funds altogether.  The federal government has contributed to the budget crises in the states through its mandates and matching programs, and Mrs. Clinton now proposes to address that problem by adding still another mandate and matching program.  This will only make a difficult problem worse, especially when the next recession intensifies the scramble among interest groups for scarce public funds.

Mrs. Clinton’s plan is undoubtedly one of the more inefficient ways through which we might address the student-debt problem.  The major problem in higher education today is one of cost and expense, and only secondarily who pays for it (students or governments).  American colleges and universities are highly inefficient enterprises that maintain scores of useless, duplicative, out-of-date, and politically correct programs for no other reason than that there are interest groups on campus that would protest if any of them were eliminated.  Too many universities maintain masters and doctoral programs in fields for which graduates have no hope of finding jobs.

This is also true of many undergraduate programs currently in place.  Most of those programs should be eliminated in the service both of long-run efficiency and educational integrity.  Ideally, this kind of streamlining should take place state-by-state and campus-by-campus as governors, legislators, and academic leaders grapple with priorities and limited resources.  It is a nagging problem that academic leaders, particularly in public institutions, should begin to address.  Yet Mrs. Clinton’s plan would encourage them to put off the day of reckoning in the hope that all programs can be maintained with still another infusion of federal funds.

Mrs. Clinton proposes to pay for this program by (no surprise here) eliminating tax breaks and loopholes for the wealthy. Her main target is the charitable deduction, which (like President Obama) she proposes to cap at 28 percent for taxpayers in the highest- income brackets (individuals earning more than $200,000 per year and couples more than $250,000). President Obama, who has included this proposal in his annual budget proposals for the past five years, estimates that such a measure would bring in an additional $320 billion to the U.S. Treasury over eight years (another dubious claim). Ironically, in proposing such a measure, Mrs. Clinton is likely to provoke opposition from academic leaders who rely upon generous contributions from wealthy donors to fund scholarships, new buildings, and important research programs.

Mrs. Clinton’s approach is a typical kind of Democratic plan that relies upon subsidies, higher taxes and more spending, and cost-shifting among participants in the higher-education industry.  It will do little or nothing to encourage restructuring or cost-cutting among institutions of higher learning.  It stands in contrast to the approach taken by Sen. Rubio, who proposes to overturn the accreditation system to allow more participants into the industry, thereby encouraging competition among providers and eventually lower costs to consumers. This is the kind of debate we should have over the future of higher education – between those who wish to prop up the current system and those who propose to introduce competition into the industry as a means to restructure and reorganize it. If it does any good, then Mrs. Clinton’s proposal may provoke such a debate.

Default on Student Loans? Bad Idea

Writing in The New York Times, Lee Siegel encourages students to follow his example and default on their student loans. The four biggest problems with his piece are:

  1. Siegel is the wrong case study

Even if you are of the opinion that college should be free and student debt is immoral, Siegel is the wrong poster child to make your case. As Jordan Weissmann at Slate writes, “Lee Siegel is an award-winning critic and an unrepentant leech. After pursuing not one, not two, but three degrees from an Ivy League university [Columbia University], he chose to default on his student loans at taxpayer expense, because he felt that paying them back would have hampered his ambitions of becoming a writer….”

Successful cultural critics that went to one of the most expensive schools on the planet for three degrees do not evoke much sympathy. Moreover, as Megan McArdle points out, “He offered not one good reason that he couldn’t pay his student loans; the best he could do was to say he didn’t want to pay them.”

  1. Siegel offers bad financial advice   

Defaulting on student loans is bad financial advice the vast majority of the time, particularly for current students. If you default, 15% of your pay can be garnished, whereas if you enroll in the new Income Based Repayment plan, your repayments are capped at 10% (and your credit isn’t ruined).

  1. Siegel is confused about predatory behavior

Siegel writes that the consequences of defaulting are overblown, as the “reliably predatory nature of American life guarantees that there will always be somebody to help you, from credit card companies charging stratospheric interest rates to subprime loans for houses and cars.”

So according to Siegel, when you are free to shop around among credit card companies and mortgage lenders and are not forced to accept any of their offers, those making the offers are predatory. But taking out a student loan with no intention of paying it back is just?  To me, if anyone is being predatory in this situation, it is Siegel.

  1. Siegel distracts attention from the good ideas to address college costs and debt

Perhaps the biggest problem with the op-ed is that it distracts from productive ideas. There are plenty of potentially good ideas for dealing with college costs and student loan debt. Just to name a few, Susan Dynarski, Matt Chingos, and I have all put forward ideas that would be much more productive than encouraging people to default on their student loans.

We Can End the Student Loan Mess

By Diana Furchtgott-RothJared Meyer

This month, as 1.8 million newly minted bachelor’s degrees are handed out, most graduates will be coming off the stage with much more than a fancy piece of paper. Seventy percent will take an average of $27,000 in student loan debt with them as they try to build their careers after college. Disinherited

This debt carries major consequences. One recent graduate, Annie Johnson, who is $70,000 in debt, told us this:

My student loan bills are nearly $900 a month. I see a quality-of-life difference between myself and my friends who do not have student loan debt. Saving is really hard when living expenses are added to my student loan payments. I know this is already setting me back in terms of retirement savings. My future options are limited since, in order to advance my career, I have to go back to school. But to go back to school, I would have to add to my debt.

This recent graduate is not alone. Almost 40 million people have student loan debt, which is the only category of household debt that continued to rise during the recession, and fifteen percent of borrowers default within the first three years. The 90-day delinquency rate on student loan debt is 11 percent. This is higher than the delinquency rate for residential real estate loans (3 percent) and the credit card delinquency rate (7 percent).

Since 2004, overall student loan debt increased by 325 percent, while all other categories of non-housing debt decreased by 5 percent. Over that time, the number of borrowers owing between $50,000 and $75,000 has doubled, and the number of borrowers owing more than $200,000 has tripled.

I Went to College for This?

The class of 2015 differs drastically from the class of 1993. In the early 1990s, fewer than half of students needed loans before they could walk across the stage to receive their diplomas. These loans averaged below $10,000 in constant dollars, which is about one-third of today’s average debt loan.

Student loan debt is much more difficult to repay when graduates cannot find jobs. Even though employment prospects for college graduates are better than those of non-graduates are, their futures are not always sunny. Over 8 percent of graduates younger than 25 are unemployed, compared with 3 percent of graduates older than 25. Before the Great Recession hit, only 6 percent of recent college graduates were unemployed. Back during the last year of the Clinton administration, this number was just 4 percent.

But the unemployment rate does not capture the full, bleak picture. Almost 44 percent of recent college graduates are underemployed, compared with 34 percent in 2001, according to the New York Federal Reserve. Now, over 115,000 janitors and a quarter of retail salespersons have college degrees. Is it any wonder that Wells Fargo found that one-fourth of millennials do not think college was worth the cost?

While some policymakers, including Senator Elizabeth Warren (D-MA), are pushing the government to forgive or refinance outstanding student loans, this would do nothing to stop the real driving force behind skyrocketing student loan debt—the increase in college tuition. College tuition has increased by 1,180 percent since records began in 1978—while food costs have risen only 240 percent over the same period.

Washington Increases the Cost of College

In our new book, Disinherited: How Washington Is Betraying America’s Young, we argue that outstanding student loan debt in excess of $1 trillion requires those in Washington to think beyond ordinary solutions and to put everything on the table—including the $165 billion that the federal government spends annually on its college grants, student loans and tax credits. Though well intentioned, instead of making college more affordable for low-income students, these programs create incentives for colleges to increase their costs.

The U.S. Treasury Department found that for every dollar provided in tax-based aid, scholarships fell a dollar. Automatically providing student loans through the government (as the system has worked since 2010) or offering loans at low interest rates subsidized by the government increases the demand for college education. These low rates allow schools to raise tuition costs exponentially—and they have been doing just that.

The federal loan program is best understood as an individually tailored subsidy for each school, because loans are awarded based on how much it costs to attend a given college. The more a college raises its tuition, the more loan money the government will make available to students for tuition. This is termed the “Bennett hypothesis,” after former Secretary of Education William Bennett.

Currently, all direct undergraduate federal loans carry the same interest rate of 4.66 percent—regardless of borrowers’ past academic performance, choice of school and field of study, and future career prospects. Varying the interest rate with a combination of these crucial indicators would provide an incentive for students to pick schools and majors that better fit their skills, potential and ability to repay.

Though Washington does not have a proven track record of correctly setting interest rates, reforms in this direction would help to reduce the amount of student debt, increase the number of graduates, and lead to higher repayment rates. Rates that vary based on possibility of repayment serve as important signals to perspective students—and as a way to hold colleges accountable for their students’ futures. The current one-size-fits-all interest rate coveys the same signal to each student, even though the right type of education differs drastically from person to person.

There’s a Way Out of This Mess

Some innovative private companies already realize this reality. Upstart and Pave, a new breed of lenders, provide a technological platform that allows those with available money to invest in young people and their human capital. With these lenders, investors are repaid through percentages of borrowers’ monthly salaries for a period of up to 10 years following graduation. To determine individual rates (usually between 4 percent and 7 percent of incomes above a certain threshold); companies calculate likely future earnings based on university, major, grades and professional experience.

With this business model, students have an economic incentive to choose degrees in high return, in-demand majors such as engineering or computer science, because it means their repayment will be a lower percentage of their future salary. Investors also have incentives to mentor those in whom they have a financial stake, which helps young people to succeed. If the loan recipients’ careers take off and their salaries increase, the investors’ returns rise.

Until the underlying reason for increases in college tuition is addressed, student loan burdens will only continue to grow. In a time of high under- and unemployment among college graduates, artificially increasing the costs of college though the current system of federal student aid programs leaves many graduates hopeless and suffocating under heavy debt.


Diana FurchtgottRoth is a senior fellow at the Manhattan Institute and a columnist for RealClearMarkets.com.Jared Meyer is a fellow at the Manhattan Institute.

Give Up Your Citizenship for $100,000 over Four Years?

By Gabriella Morrongiello

As recently as 2014, illegal immigrants in 22 states are eligible for lower-cost, in-state tuition at public colleges and universities.

While students residing legally or illegally in states such as California, Texas, Maryland, and Virginia are eligible for in-state tuition, legal immigrants, international students, and U.S. citizens from out of state continue to pay out-of-state tuition, often costing several thousand dollars more.

For instance, out-of-state tuition at the University of Virginia (UVA), a public institution in Charlottesville, Va., ranked second highest in the nation in 2013, according to Daily Progress. The annual cost of tuition for out-of-state students attending UVA is currently $36,720, more than double the in-state tuition rate of $10,016 offered to Virginia residents. Similarly, tuition at the University of Maryland (UMD), a public university in College Park, Md., costs out-of-state students $20,145 more annually.

Campus Reform asked out-of-state students attending UVA and UMD–both of which offer in-state tuition to illegal immigrants–whether they would consider renouncing their U.S. citizenship to become “undocumented students” eligible for in-state tuition.

WATCH: Students shred their social security cards, become “undocumented” for in-state tuition. 

This article was originally published in Campus Reform.

A Proposal to Let Bankruptcy Discharge Private Student Loans

A Wall Street Journal editorial today took a very negative view–rightly, in my opinion–of President Obama’s proposal to let student borrowers discharge private student loans through bankruptcy. By law, repayment of federally guaranteed loans cannot be avoided this way. But the Journal wrote: “If there’s not a great outcry over letting borrowers stiff private lenders, eventually you can expect the rollout of a similar policy for government loans.”

And here’s another point: Even students who take out federally-guaranteed student loans first often need private loans also when they reach the cap applied to Direct Loans and still need to borrow for college expenses.  By raising the possibility of discharging some of these loans through bankruptcy – unlikely though it is that Congress will go along – President Obama will drive up the interest-rate cost of private student loans.  Private lenders do not need additional risk of default through easier student bankruptcy. They would raise rates and thereby make college less affordable.  

National Review Fumbles on Student Loans

Over at NRO yesterday Jay Hallen proposed a few solutions to easing
the student-loan bubble. Though his impulses are
correct his recommendations fall flat.

Hallen first proposes that the Department of Education
move to a “risk-based pricing” system in which it would consider a
student’s high-school GPA or intended major in determining the loan price.
Students with lower GPAs would not receive favorable terms on their loans and
would thus choose to attend a trade school rather than college; this, in turn,
would help ease the growth of loans and college tuition. 

There are two problems
with this argument. One, given the grade inflation that pervades American
schools, high-school GPA is hardly determinative of future success. Likewise,
the major students choose before they enroll indicates neither the major that
student ultimately chooses nor, even if the student sticks with the major, his
future success. One could instead imagine using standardized scores as a
benchmark, but the well-documented racial disparities in SAT and ACT scores
would translate into less 
favourable terms overall for blacks and Hispanics–an
outcome the DOE will never accept, much less the Office of Civil Rights. 

Continue reading National Review Fumbles on Student Loans

Those Accountability Rules for Student Loans

This past Monday, the Department of Education proposed “gainful employment” rules that will regulate postsecondary vocational programs, primarily those offered by for-profit colleges, on the basis of their graduates’ ability to pay back their federal student loans. Proponents of higher education reform should welcome this move, but not because it targets unscrupulous actors in the for-profit sector. More importantly, the initiative makes a rhetorically significant shift: it places postsecondary institutions and the economic value of the education that they provide at the center of discussions about student loans and college costs. It also adds a new and necessary dimension to the outcome data that the federal government can link directly to individual institutions of higher education.
The problem is not, as some critics would have it, that the gainful employment regulations overreach, but that they do not reach far enough. The current proposal singles out one set of postsecondary institutions for intense scrutiny and leaves the rest to operate as they have, feeding on federal loan dollars without having to show much in return, other than keeping their two or three-year default rate under a certain threshold. For these institutions, students who carry excessive debt and/or default after a three-year window are mainly the government’s problem, not theirs. As a result, prospective students looking to choose a college do not have access to even the most basic facts about how their future income or debt burden may vary depending on the institution that they choose. To change that, federal and state governments should embark on a broader effort to link students’ post-graduation success to the institutions that they attend, to make that information public and accessible, and to attach institution-level sanctions and rewards to performance on these indicators.
In short, policymakers should take the pro-accountability ideas underlying “gainful employment” and super-size them. Extending the effort to cover all colleges and universities that receive federal student loans would provide consumers with much-needed information about institutional quality and return on investment. The question is whether the latest foray into “gainful employment” regulations will remain a shortsighted attempt to bring greater accountability to one small sector of the postsecondary world. If the past is a guide, it could prove to be the proverbial camel’s nose under the tent flap that accountability proponents have been looking for.

Continue reading Those Accountability Rules for Student Loans

Another Pitfall for Student Loans

In a recent article for Career College Central, I discuss the negative implications of the Department of Education’s (ED) proposal to alter the gainful employment rule to restrict the amount of money that a student could borrow by program of study and expected entry level occupational earnings. I identified three major flaws with the proposal. First, it would severely limit the ability of for-profit colleges to offer bachelor’s degree programs, and other non career-specific fields of study. Next, it fails to account for total compensation, regional variations in compensation, and the possibility that workers will receive a promotion or pay increase over time. Finally, the rule could result in a reduction of educational options and access for those most in need, and a shortage of qualified employees to meet the demands of the labor force.
I also analyzed the effect that the rule would have on 10 occupations that are expected to produce more than 2.6 million additional jobs by 2018, finding that for most of the occupations, students would have been able to borrow less (after adjusting for inflation) to pursue training in them in 2008 than in 2003. ED’s arbitrary gainful employment metric would hamper the ability of colleges to offer occupational training in fields that the market demands by exerting what amounts to government price controls. A better solution to protect the interests of both students and taxpayers would be to ensure that colleges provide prospective students with sufficient information (such as job and income data, and debt and default levels) to make wise education decisions, prior to their enrolling and paying a dime of tuition.

Those Disastrous Student Loans

Alan Michael Collinge is back in his gadfly role agitating against the student loan industry. Collinge is the author of last year’s The Student Loan Scam: The Most Oppressive Debt in U.S. History—and How We Can Fight Back (Beacon Press) and founder of the website studentloanjustice.org, dedicated to, among other things restoring the bankruptcy protection for student loans that Congress removed for all but the most hardship-hit borrowers in 2005. Writing for the New York Times blog “The Choice,” which deals with college admissions and financial aid, Collinge calls the federally guaranteed student-loan system “a predatory lending scheme” and argues that Congress should curb the Education Department’s power (also granted in a 2005 law) to “extort not just the original principal and interest from borrowers, but also a massive amount in penalties fees and collection costs.”
Collinge wrote his book from his own 20-odd years of disastrous experiences with student loans. He graduated from the University of Southern California in 1988 with three degrees in engineering and $38,000 in loan debt, an amount that ballooned to $100,000—still mostly unpaid two decades later—when he fell behind on monthly repayments after consolidating his loans with Sallie Mae (the nation’s leading buyer of student debt) and penalties, back interest, and collection fees began to accrue with lightening speed. Loan consolidation often (although not always) means that graduates can lock in lower interest rates than they might otherwise pay, but it can also entail stretching out the life of the loan to as long as 30 years (the tradeoff is lower monthly payments). Collinge’s New York Times blog dovetails with the Obama administration’s goal of eliminating private lenders (banks, credit unions, and Sallie Mae) from the federal student-loan system and requiring all student borrowing to come directly from the government itself.
It’s difficult to say whether Collinge, who, with his engineering degrees could expect decently paying employment, actually got a bad deal from the federally guaranteed system. For one thing, he took out his loans long before the 2005 law went into effect, although as early as 1976 Congress had placed some limits on using bankruptcy to get rid of student debt. One might also ask whether it was prudent for Collinge, if he was strapped for college money, to choose to attend an expensive private university such as USC rather than a cheaper state school where he would not incur so much debt. Furthermore, students who borrow from private financial institutions under the federally guaranteed system enjoy below-market interest rates (the Department of Education sets annual caps), a nine-month grace period after graduaton during which no payments are due, and an array of forgiveness and deferment arrangements if economic hardship forces borrowers to fall behind. For example, the going interest rate (according to Sallie Mae) on Stafford loans, products of one of the most widely used federal loan programs, is 6.8 percent, and the going rate for PLUS loans (products of another popular program) is 9 percent (the rates are even lower for students whose income qualifies them for a federal interest subsidy). Compare that to the 17.28 percent annual rate on credit-card debt, and the interest rate that Collinge agreed to pay on his consolidated loans (it’s currently capped at 8.25 percent) could hardly be considered “predatory.” It should be remembered, too, that student loans are unsecured loans (no mortgaged house, no car or other collateral) to unemployed or partially employed people who can be as young as 18. In other words, the loans are ipso facto risky, which is why government guarantees are an integral part of private student lending. A government guarantee means that taxpayers pick up the tab when a loan goes into default—so it is perhaps not surprising that Congress has made it difficult to cancel the loans in bankruptcy court.

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What Does ‘Sustainability’ Have to Do With Student Loans?

The student loan crisis – or near crisis; narrowly-averted crisis ; or postponed crisis – no one is sure – comes co-incidentally at a moment when many colleges and universities are once again repackaging their basic programs. The new buzzword, as John Leo has pointed out is “sustainability.” I also recently tried my hand at unpacking this polyvalent idea. “Sustainability” sounds to the uninitiated as though it is about environmentalism, but it is much more. As I wrote in Inside Higher Education, many of the advocates of “sustainability” see it as an encompassing concept. It includes science, economics, and the social structure. And for many in the movement, the focus on social order is the basis for far-reaching attempts to advance “social justice” policies.

I doubt this development has come into focus for many parents or people outside the campus. The campus left learned with its promotion of the concept of “diversity” the advantages of packaging hard-core ideology in bland, feel-good terminology. Sustainability is another venture in this direction. No one can really be against sustainability (definition 1) – prudent use of resources with the needs of future generations in mind. But while most of us hear the word in that sense, campus ideologues are busy rearranging the curriculum and student life around “sustainability” (definition 2) – a condition that arises when capitalism and hierarchy are abolished; individuals are made to see themselves as “citizens of the world;” and a new order materializes on the basis of eco-friendliness, social justice, and new forms of economic distribution.

Sustainability (2) is an amalgam of environmental extremism, shards of Marxism, romantic utopianism, and identity group politics. It doesn’t have a significant political following in America outside college campuses, and in that sense it is a fringe movement. But on campus it’s everywhere. Hundreds of campuses now have sustainability officers, courses that promote the ideology, and most ominously, “co-curricular” programs run through student life and residence halls that attempt to “educate” students about their mistaken “worldviews” and bring them aboard this new ideological ark.

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Student Loans – Sequel To The Mortgage Mess?

A few weeks ago, I alerted readers to the threat of a tightening of the student loan market . Banks have been bundling student loans, like home mortgages, and selling them as securities. First Marblehead Corporation in Boston has been the nation’s biggest player in “securitizing” student loans, and just like home mortgage-backed securities, the student loan-backed bonds issued by First Marblehead contain a lot of loans of doubtful value.

These aren’t the loans that are guaranteed by the Federal government’s Title IV Student Loan program. When students have borrowed all they can in Title IV loans, they frequently need to borrow still more to meet the extravagant costs of college. They often borrow at relatively high interest rates from banks and other private lenders. These banks and lenders, in turn, act just like the sub-prime mortgage lenders did: they sell the risk to someone else. First Marblehead takes loans from many banks and bundle them together to create its bond issues.

As I reported, First Marblehead appears to have hit a major snag in October, when investors declined to buy the company’s new $1 billion student loan-backed bond offering. First Marblehead’s stock plummeted and a chill went through the whole student loan industry.

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First Mortgages, Now Student Loans?

Last week, First Marblehead Corporation, a Boston-based company, saw its stock plummet after cutting its dividend. The problem? First Marblehead is in the business of “securitizing” student loans. A year ago, this would have required some explanation, but the sub-prime mortgage mess has taught Americans – and people all over the world – the meaning of “securitizing.” It is one of those words that means the opposite of what it sounds like. A company bundles together some high-grade debt, some middle-grade debt, and some really doubtful debt and sells it to investors, who only think they are making a secure investment. As we learned with the securitized mortgages, no one really knows what these chimeras are worth. And a little bit of bad debt, like a little bit of ptomaine, goes a long way to making the whole meal undigestible.

First Marblehead isn’t saying exactly what happened, but Matt Snowling, analyst with Friedman Billings Ramsey, told AP report Dan Seymour, that he believes First Marblehead “was trying to sell about $1 billion in bonds.” As Seymour explains, First Marblehead bundles student loans from numerous banks to put together its bond offerings. The deal usually specifies that First Marblehead has 180 days to sell the bonds, and failing that, has to buy the student loans itself.

Apparently, First Marblehead has been trying since October to sell $1.1 billion in these student loan-backed bonds – and found few takers. Meanwhile, banks keep issuing more student loans.

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