The dollar amount of unpaid student loans in the United States has risen steadily in the past decade. It now stands at nearly $1.2 trillion, according to the New York Federal Reserve Bank’s “Student Loan Borrowing and Repayment Trends, 2015.” From 2004 to 2014, the number of borrowers increased 89%. Now 43.3 million borrowers owe an average of nearly $27,000 each, reflecting both the rising costs of higher education and the increased number of students in debt. Past-due payments and defaulted loan amounts also continue to rise.
Two-thirds of student loan balances are held by borrowers older than 30. While there’s a significant difference in the amounts owed by individuals, the mean balance is $26,700, and 4.2% of borrowers owe more than $100,000. Student debt is now the largest nonmortgage type of borrowing. It’s also unique because it isn’t routinely eliminated through bankruptcy.
The annual default rate on student loans (i.e., those more than nine months past due) increased from 2.4% in 2004 to 3.6% in 2012 before declining to 3.2% in 2014. Currently, 6% of borrowers are delinquent, and 11% are in default. Only 37% of borrowers are actively paying down their balance, with the remaining 46% not in repayment. While borrowers from higher-income areas have made significant progress in paying down their loan balance, those from lower-income areas are unable to repay their loans: They have paid only 3% of their total loan balance since they left school.
FAILING INSTITUTIONS
At least part of the reason why students are unwilling or unable to repay their loans is because of the substandard education provided by some for-profit colleges. In “Do For-Profit Colleges Deserve Taxpayer Support?” (Strategic Finance, April 2011), I noted that some colleges use unethical means to actively recruit students with the promise of a well-paying job after graduation, even though that promise commonly went unfulfilled.
The education quality issue came to a head in March 2015 when Newsweek’s “Student Debt Strike Targets For-Profit College” reported 15 students had formed a debtors’ union in an attempt to force creditors to negotiate loan forgiveness. The students targeted one of Corinthian College’s institutions. With more than 100,000 students, Corinthian was one of the largest for-profit college chains in 2010, but it filed Chapter 11 bankruptcy in May 2015. Earlier in 2015, the U.S. Consumer Protection Agency and the attorneys general of Massachusetts and California sued Corinthian, alleging unethical marketing practices, such as distorting job placement rates, pressuring students to take on large loans, and requesting that students begin repayments before graduation.
The furor caused by the student strike and legal actions resulted in a June 8, 2015, announcement from the U.S. Department of Education, which said it would “ensure that students who have been defrauded by their college, or because their school closed down, receive every penny of the debt relief they are entitled to, as efficiently and easily as possible.” The statement provides instructions for Corinthian students to receive loan forgiveness, but it generalizes that “too many of America’s large ‘career colleges’ are failing to live up to the name. Rather than providing students with the opportunity for a solid education that leads to a good job, some of these institutions—often run by for-profit companies—have left students with lots of debt and few job prospects, putting both students and taxpayers at risk.”
THE ACCREDITORS
Other gatekeepers that have contributed to the student loan repayment crisis are the organizations that accredit colleges. These bodies are tasked with independently vouching for the quality of the educational products and processes of post-secondary institutions. Federal aid is available to accredited colleges only. On June 18, 2015, The Wall Street Journal published “Education Watchdogs Rarely Bite,” which showed that 350 four-year accredited colleges have lower graduation rates or higher rates of student loan default than the average of the schools that lost their accreditation since 2000.
The article reported that taxpayers paid $16 billion last year to finance students at four-year accredited colleges that graduated less than one-third of their students within six years. This represents nearly 20% of the total loans and grants made to students in all four-year institutions. “It’s a national scandal that we’re pouring huge sums of money into schools with very, very low graduation rates,” says Richard Vedder, an economist at Ohio University and director of the Center for College Affordability and Productivity, a think tank.
A SOLUTION IS NEEDED
Work is needed in both the for-profit and not-for-profit arenas. An investigation of for-profit colleges by the Senate Committee on Health, Education, Labor, and Pensions found that 15 of the largest for-profit colleges received 86% of their revenue from federal programs to help students and spent almost one-quarter of their revenue on marketing and recruitment while investing very little in the types of services that are known to help students graduate. And as for not-for-profit schools, administrative positions at colleges and universities grew by 60% between 1993 and 2009, according to the Department of Education—10 times the growth rate of tenured faculty. Skyrocketing administrative costs are a big factor driving up the cost of tuition substantially.
Qualified students deserve the opportunity to attend professional institutions of real higher learning where they’ll be able to graduate and repay their loans. Accrediting agencies, state regulators, and the Departments of Education and Veterans Affairs need to work together to aggressively raise and enforce standards for colleges that want to receive government support. Taxpayers have a right to this accountability.
September 2015
