The student loan mill
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Last week, the Obama administration rolled out new regulations targeting low-performing colleges: the ones whose graduates have high default rates and huge debt levels relative to their incomes. Using those two data points, the government will start cutting off low-performing schools — many of which are of the for-profit variety — from federal loan and grant money in the next 2-3 years. The government is also investigating ITT Tech for pressuring students to take out loans they couldn’t afford.
James Hamilton calls the new regulations “long overdue”, pointing out that since 2006, the student debt burden has grown from under 4% to more than 7% of GDP. For-profit colleges account for only 13% of higher ed students, he says, but make up a third of all student loans and half of all defaults. And, writes Hamilton, in 2012 student loans surpassed credit card debt as the fastest growing source of problem debt, with more than 10% of loans 90 or more days delinquent.
For-profit colleges saw huge enrollment bumps in the wake of the Great Recession, particularly from students older than 25. A recent New York Fed report suggested many displaced workers turned to for-profit institutions that both cost more and have fewer financial aid options. Students take on more debt, and yet “graduates of for-profits are more likely to earn less, default more, and experience unemployment more than their counterparts at public and non-profit institutions”.
The Obama administration isn’t alone in being worried about student loan debt, which has climbed to $1.2 trillion from just $240 billion in 2003 (check out our posts on this here and here). Two weeks ago, a coalition of progressive groups launched a campaign, “Higher Ed, Not Debt”. At the launch event, Elizabeth Warren said she’s co-sponsoring new legislation that would require institutions with high default rates to pay the government back some of the money they receive from federal loans.
Republicans are also worried. Marco Rubio released a proposal last month advocating that income-based repayment — which is already available, though borrowers have to apply and prove financial hardship — become the default system for paying off loans. Under the system, monthly payments would be capped at a certain percentage of a person’s salary (the proposal uses 4% as an example, but doesn’t call for anything specific). Wisconsin congressman Tom Petri has a similar plan that goes one step further, deducting the payments from borrower’s paychecks.
There are problems with income-based repayment, writes Bloomberg View. For one thing, income-based repayment systems can mean borrowers take longer to pay off their loans and end up paying more in interest. However, the bipartisan commitment to finding a solution is a good thing, they say. — Shane Ferro
On to today’s links:
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