The Student Loan Questions Politicians Still Need to Answer

Lots of ideas about higher-education affordability are being scattered around the campaign trail.

For the most part, what we’ve heard so far isn’t all that new. Take for example Sen. Marco Rubio’s (R-Fla.) and former Governor Martin O’Malley’s calls for universal income-based repayment plans, Sen. Rand Paul’s (R-Ky.) advocacy for tax-deductible college tuition, Sen. Bernie Sanders’ (I-Vt.) desire to reduce interest rates on federal student loans and former Governor Jeb Bush’s enthusiasm for online courses and for-profit institutions.

Then there are certain concepts that some (probably) hope will be viewed as examples of their courage to think outside the box.

Senator Rubio is stumping for so-called human-capital contracts, where wealthy individuals “invest” in students whom they believe have promising futures (as determined by their choice of school, major areas of study, academic performance and so forth) in exchange for a percentage of their career earnings. Senator Sanders wants to institute a tax on specific Wall Street transactions to cover the cost of tuition for in-state public colleges, while former Governor O’Malley has in mind a forced price reduction as a starting point.

Certainly, higher-education affordability is a legitimately hot-button matter for just about everyone: the 20 million students who are enrolled in two- and four-year colleges and grad schools; those who are funding their own educations; those who are still paying off their loans after having left school; parents who are bankrolling or backstopping costs; and taxpayers who are left holding the bag when government-sponsored loans end up uncollectable.

The anxiety level for students is high.

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Ohio State University recently published a National Student Financial Wellness Study involving students from 52 public and private four- and two-year colleges and universities. Of the nearly 19,000 students who participated, 72% report feeling “stressed about [their] personal finances in general,” of which 60% are concerned about “having enough money to pay for school.” With good reason: 48% expect to owe more than the current national average of $30,000 upon graduation.

Student loans, however, aren’t their only worry. Fifty-seven percent of the survey’s respondents reported having one or more credit cards (presumably for other education-related expenses), of which less than half are willing or able to pay the monthly balance in full.

Now, some might say, “It’s their own damn fault,” because in the U.S., at least, higher education is a voluntary undertaking. But none of us come out of the box with fully formed credit-management skills. It’s a learned behavior. That is, provided it’s effectively taught.

Indeed, the Ohio State report goes on to cite an earlier American Savings Education Council survey, in which more than two-thirds of respondents said they had never attended personal-finance classes or workshops in high school; nearly three-quarters in college. As for receiving personalized guidance, two-thirds said they never had any of that, either.

Is It a Matter of Financial Education?

Although the ASEC survey was unclear about the extent to which these resources were readily available to the respondents at the time, the question is: Does enhanced financial-literacy education make a difference to those who really, really want a degree from a select school and are willing to pay the going rate for that?

In a recently published staff report, researchers at the Federal Reserve Bank of New York prove a direct correlation between increased federal financial aid (in the form of grants and loans) and higher tuition rates for students attending pricy mid-level private schools and out-of-state public institutions. Specifically, the researchers determined that 55 cents of every Pell Grant-dollar increased the sticker (gross) price of a given school’s tuition; 70 cents for subsidized federal loans and 30 cents for unsubsidized loans (note that subsidized and unsubsidized loans charge the same rate of interest, following the passage of the 2013 Bipartisan Student Loan Certainty Act).

What I find most troubling about all this is how the availability of credit has turned higher education’s fundamental value proposition on its head. It’s no longer how much a college degree is worth. Rather, it’s how much money you can borrow to pay for one.

Which brings me back to this politically inspired college-affordability one-upmanship.

Let’s Approach the Issue Differently

Whether the idea has to do with the venture capitalization of higher education (I could say indentured servitude, but I won’t), the impossibly complex matter of individually managing a trillion dollars’ worth of income-based repayment plans or enacting new taxes to pay for in-state attendance, all the candidates have talked about thus far is how to pay for however much the schools elect to charge. I’d much rather hear their views on the following four concepts:

How to encourage an orderly consolidation of this vastly overbuilt network of public and private education institutions to eliminate operational redundancies and reduce tuition prices.
The feasibility of reallocating the roughly $164 billion the government spends each year on grants and loans to covering the average annual cost of in-state tuition at the nation’s public colleges and universities.
How to hold all schools financially accountable for unacceptably low outcomes (nearly 50% of college students fail to complete their undergraduate studies within six years) and high cohort default rates. They took the money. It’s time to give it back.
How best to use that financial recovery to offset loans that are irretrievably defaulted, effect a pro rata reduction of existing obligations and cover the administrative cost of restructuring every single dollars’ worth of student loans that are currently on the books so the interest rate reflects that which is currently available, and repayment durations are extended so the monthly payment burden is reduced.

For those who crave an opportunity to demonstrate thought-leadership on this very pressing matter, here’s a chance to do just that.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.