How To Really Fix Our Student Debt Crisis

How To Really Fix Our Student Debt Crisis

One of my favorite statistics that nobody knows is that the federal government already spends enough on higher education in grants and tax breaks — about $66.7 billion — to cover the cost of tuition at all public colleges and universities. 

This wouldn’t make college completely free — students still would have to pay for room and board and supplies (perhaps states, who currently fund much of higher education, could defray those costs for students in need) — but it would create a “public option” at drastically reduced rates, which private colleges would have to keep up with to stay competitive, lowering costs throughout the system. 

Related: The North Dakota Oil Boom Now Pays for College 

Germany already does this, abolishing tuition at its public universities. Adopting the model would give real meaning to the idea that, in America, anybody with talent and skill can go to college to prepare themselves for the future, regardless of their family’s financial situation. 

Most people agree that investing in education reaps tons of benefits for advanced economies, but we don’t invest smartly enough with our inefficient, incongruous approach. Most of the tax-based financial aid goes to students from wealthy families. Benefits leak out to private universities with huge endowments, which habitually pay administrators huge salaries and spend big on amenities that have little to do with learning. State cutbacks have made public college tuitions unaffordable, increasing demand for student loans. There are few incentives to lower costs anywhere in the system. As a result, we have a rising barrier to entry for college and escalating student debt, a drag on household formation and the broader economy. 

The For-Profit Problem
The Obama administration has talked about taking this on in various increments, starting with the for-profit college system. These corporations target low- and moderate-income students with the promise of career training. In reality, these “diploma mills” offer high-cost degrees of dubious quality, and when graduates cannot find work, they find it difficult to pay back their student loans. For-profit colleges account for 44 percent of all student debt defaults despite enrolling only 12 percent of all students. 

Related: 10 States Where Families Are Living on the Financial Edge

The for-profit business model is simple: Get government revenue through student loan payouts (86 percent of all funding for for-profit colleges comes from taxpayer-supported programs), and give students a cheap product. If the diplomas wind up worthless, who cares, the money’s already been counted. So this week, the Department of Education finalized the so-called “gainful employment” rule, which officials say will “protect students at career colleges from becoming burdened by student debt they cannot pay.” 

This represents a second attempt at reining in the for-profit sector. The 2011 gainful employment rule immediately faced a lawsuit from the for-profit industry. In July 2012, district court Judge Rudolph Contreras struck down one aspect of the rule: that at least 35 percent of any program’s former students pay back their loans. Because that provision was meant to work together with the rest of the rules, this invalidated the entire regulation, and the Education Department decided to rewrite the rule rather than appeal. 

After initially including a modified version of the default provision, the Department dropped it in writing the final rule. Now, in order to remain eligible for financial aid grants and federal student loans, career-training programs must graduate students whose loan payments do not exceed 30 percent of their discretionary income or 12 percent of their total earnings. The rules become effective next July. 

Related: New Evidence of How Unemployment Wrecks Families 

Under the draft rules, 1,900 programs were expected to fail to meet the standards. Under the final version, the Education Department estimates that number to fall to 1,400, and 928 of those programs would fall in a “warning zone” between passing and failing. Those programs, whose graduates’ debt-to-income ratios land between 8 to 12 percent of earnings or 20 to 30 percent of discretionary income, would have four years to get below the eligibility level before losing aid. (For its part, the Education Department says that under the 2011 rule, only 200 programs would fail, so the new rules are stronger.) 

The default provision was the sticking point for the courts, so the Department likely believes this will make it easier for the rule to survive judicial scrutiny. But it was correct in saying that the rules worked in concert. The final rule only deals with debt-to-income ratios for graduates. The majority of students drop out of for-profit colleges, and under the rules, they do not count. 

Diploma-Denial Mills
This gives for-profit colleges every incentive to deny degrees to reach the standard. Diploma mills could become diploma-denial mills, shuttling students in and out of the college without a degree, and continuing to profit from taxpayer largesse. As long as they work to limit the debt of the graduates, they’d have nothing to fear. Education policy analyst Barmak Nassirian told Politico that the rule would let for-profit colleges “defraud students with impunity, so long as they make sure they don’t graduate.” 

Related: The 10 Best Cities for 2014 College Grads 

The Education Department responded that removing the default provision streamlines the rules, and that it would still post completion rates so that prospective students could know whether the programs were successful. But disclosure is hardly a substitute for threatening the profit model. And anyway, the for-profit college industry still plans to sue, so it’s not like they’ve been satisfied by the weakened regulations. 

Cleaning Up the Industry
There are other more effective ways to protect students from predatory for-profit colleges. Enforcement agencies have actually put significant pressure on the sector. Investigation from 16 state Attorneys General, the Justice Department, the Consumer Financial Protection Bureau and the Securities and Exchange Commission ultimately put Corinthian Colleges, one of the largest for-profits, out of business.  CFPB has lawsuits against other for-profit colleges for predatory lending, and the state Attorney General probe remains active. There are enough statutes on the books with criminal and civil penalties to help clean up the industry. 

Ultimately, however, switching to a model of a “public option” with free tuition, leaving private colleges and universities without taxpayer-funded support, would solve this problem on its own. For-profit colleges depend on the federal dole for virtually all their profits. Channel that money to eliminating tuition at community colleges and state universities, and for-profits are unlikely to be able to compete. 

Until that time, half-measures and watered-down rules will not stop those looking to pillage young people who are merely trying to acquire life skills. The system of how we finance education needs an overhaul, not tinkering around the margins. 

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