Tuition costs at public and private colleges were, are and have been rising faster than just about anything in American society – health care, energy, even housing. Between 1950 and 1970, sending a kid to a public university cost about four percent of an American family's annual income. Forty years later, in 2010, it accounted for 11 percent. Moody's released statistics showing tuition and fees rising 300 percent versus the Consumer Price Index between 1990 and 2011.
After the mortgage crash of 2008, for instance, many states pushed through deep cuts to their higher-education systems, but all that did was motivate schools to raise tuition prices and seek to recoup lost state subsidies in the form of more federal-loan money. The one thing they didn't do was cut costs. "College spending has been going up at the same time as prices have been going up," says Kevin Carey of the nonpartisan New America Foundation.
This is why the issue of student-loan interest rates pales in comparison with the larger problem of how anyone can repay such a huge debt – the average student now leaves school owing $27,000 – by entering an economy sluggishly jogging uphill at a fraction of the speed of climbing education costs. "It's the unending, gratuitous, punitive increase in prices that is driving all of this," says Carey.
As Collinge worked to figure out the cause of those cost increases, he became focused on several highly disturbing, little-discussed quirks in the student-lending industry. For instance: A 2005 Wall Street Journal story by John Hechinger showed that the Department of Education was projecting it would actually make money on students who defaulted on loans, and would collect on average 100 percent of the principal, plus an additional 20 percent in fees and payments.
Hechinger's reporting would continue over the years to be borne out in official documents. In 2010, for instance, the Obama White House projected the default recovery rate for all forms of federal Stafford loans (one of the most common federally backed loans for undergraduates and graduates) to be above 122 percent. The most recent White House projection was slightly less aggressive, predicting a recovery rate of between 104 percent and 109 percent for Stafford loans.
When Rolling Stone reached out to the DOE to ask for an explanation of those numbers, we got no answer. In the past, however, the federal government has responded to such criticisms by insisting that it doesn't make a profit on defaults, arguing that the government incurs costs farming out negligent accounts to collectors, and also loses even more thanks to the opportunity cost of lost time. For instance, the government claimed its projected recovery rate for one type of defaulted Stafford loans in 2013 to be 109.8 percent, but after factoring in collection costs, that number drops to 95.7 percent. Factor in the additional cost of lost time, and the "net" projected recovery rate for these Stafford loans is 81.8 percent.
Still, those recovery numbers are extremely high, compared with, say, credit-card debt, where recovery rates of 15 percent are not uncommon. Whether the recovery rate is 110 percent or 80 percent, it seems doubtful that losses from defaults come close to impacting the government's bottom line, since the state continues to project massive earnings from its student-loan program. After the latest compromise, the 10-year revenue projection for the DOE's lending programs is $184,715,000,000, or $715 million higher than the old projection – underscoring the fact that the latest deal, while perhaps rescuing students this coming year from high rates, still expects to ding them hard down the road.
But the main question is, how is the idea that the government might make profits on defaulted loans even up for debate? The answer lies in the uniquely blood-draining legal framework in which federal student loans are issued. First of all, a high percentage of student borrowers enter into their loans having no idea that they're signing up for a relationship as unbreakable as herpes. Not only has Congress almost completely stripped students of their right to disgorge their debts through bankruptcy (amazing, when one considers that even gamblers can declare bankruptcy!), it has also restricted the students' ability to refinance loans. Even Truth in Lending Act requirements – which normally require lenders to fully disclose future costs to would-be customers – don't cover certain student loans. That student lenders can escape from such requirements is especially pernicious, given that their pool of borrowers are typically one step removed from being children, but the law goes further than that and tacitly permits lenders to deceive their teenage clients.
Not all student borrowers have access to the same information. A 2008 federal education law forced private lenders to disclose the Annual Percentage Rate (APR) to prospective borrowers; APR is a more complex number that often includes fees and other charges. But lenders of federally backed student loans do not have to make the same disclosures.
"Only a small minority of those who've been to college have been told very simple things, like what their interest rate was," says Collinge. "A lot of straight-up lies have been foisted on students."
Talk to any of the 38 million Americans who have outstanding student-loan debt, and he or she is likely to tell you a story about how a single moment in a financial-aid office at the age of 18 or 19 – an age when most people can barely do a load of laundry without help – ended up ruining his or her life. "I was 19 years old," says 24-year-old Lyndsay Green, a graduate of the University of Alabama, in a typical story. "I didn't understand what was going on, but my mother was there. She had signed, and now it was my turn. So I did." Six years later, she says, "I am nearly $45,000 in debt. . . . If I had known what I was doing, I would never have gone to college."
"Nobody sits down and explains to you what it all means," says 24-year-old Andrew Geliebter, who took out loans to get what he calls "a degree in bullshit"; he entered a public-relations program at Temple University. His loan payments are now 50 percent of his gross income, leaving only about $100 a week for groceries for his family of four.
Another debtor, a 38-year-old attorney who suffered a pulmonary embolism and went into default as a result, is now more than $100,000 in debt. Bedridden and fully disabled, he accepts he will likely be in debt until his death. He asked that his name be withheld because he doesn't want to incur the wrath of the government by disclosing the awful punch line to his story: After he qualified for federal disability payments in 2009, the Department of Education quickly began garnishing $170 a month from his disability check.
"Student-loan debt collectors have power that would make a mobster envious" is how Sen. Elizabeth Warren put it. Collectors can garnish everything from wages to tax returns to Social Security payments to, yes, disability checks. Debtors can also be barred from the military, lose professional licenses and suffer other consequences no private lender could possibly throw at a borrower.
The upshot of all this is that the government can essentially lend without fear, because its strong-arm collection powers dictate that one way or another, the money will come back. Even a very high default rate may not dissuade the government from continuing to make mountains of credit available to naive young people.
"If the DOE had any skin in the game," says Collinge, "if they actually saw significant loss from defaulted loans, they would years ago have said, 'Whoa, we need to freeze lending,' or, 'We need to kick 100 schools out of the lending program.'"
Turning down the credit spigot would force schools to compete by bringing prices down. It would help to weed out crappy schools that hawked worthless "degrees in bullshit." It would also force prospective students to meet higher standards – not just anyone would get student loans, which is maybe the way it should be.
But that's not how it is. For one thing, the check on crappy schools and sleazy "diploma mill" institutions is essentially broken thanks to a corrupt dynamic similar to the way credit-rating agencies have failed in the finance world. Schools must be accredited institutions to receive tuition via federal student loans, but the accrediting agencies are nongovernmental captives of the education industry. "The government has outsourced its responsibilities for ensuring quality to weak, nonprofit organizations that are essentially owned and run by existing colleges," says Carey.
Fly-by-night, for-profit schools can be some of the most aggressive in lobbying for the raising of federal-loan limits. The reason is simple – some of them subsist almost entirely on federal loans. There's actually a law prohibiting these schools from having more than 90 percent of their tuition income come from federally backed loans. It would seem to amaze that any school would come even close to depending that much on taxpayers, but Carey notes with disdain that some schools use loopholes to go beyond the limit (for instance, loans to servicemen are technically issued through the Department of Defense, so they don't count toward the 90 percent figure).
Bottomless credit equals inflated prices equals more money for colleges and universities, more hidden taxes for the government to collect and, perhaps most important, a bigger and more dangerous debt bomb on the backs of the adult working population.
The stats on the latter are now undeniable. Having passed credit cards to became the largest pile of owed money in America outside of the real-estate market, outstanding student debt topped $1 trillion by the end of 2011. Last November, the New York Fed reported an amazing statistic: During just the third quarter of 2012, non-real-estate household debt rose nationally by 2.3 percent, or a staggering $62 billion. And an equally staggering $42 billion of that was student-loan debt.
The exploding-debt scenario is such a conspicuous problem that the Federal Advisory Council – a group of bankers who advise the Federal Reserve Board of Governors – has compared it to the mortgage crash, warning that "recent growth in student-loan debt . . . has parallels to the housing crisis." Agreeing with activists like Collinge, it cited a "significant growth of subsidized lending" as a major factor in the student-debt mess.
One final, eerie similarity to the mortgage crisis is that while analysts on both the left and the right agree that the ballooning student-debt mess can be blamed on too much easy credit, there is sharp disagreement about the reason for the existence of that easy credit. Many finance-sector analysts see the problem as being founded in ill-considered social engineering, an unrealistic desire to put as many kids into college as possible that mirrors the state's home-ownership goals that many conservatives still believe fueled the mortgage crisis. "These problems are the result of government officials pushing a social good – i.e., broader college attendance" is how libertarian writer Steven Greenhut put it.
Others, however, view the easy money as the massive subsidy for an education industry, which spent between $88 million and $110 million lobbying government in each of the past six years, and historically has spent recklessly no matter who happened to be footing the bill – parents, states, the federal government, young people, whomever.
Carey talks about how colleges spend a lot of energy on what he calls "gilding" – pouring money into superficial symbols of prestige, everything from new buildings to celebrity professors, as part of a "never-ending race for positional status."
"What you see is that spending on education hasn't really gone up all that much," he says. "It's spending on things like buildings and administration. . . . Lots and lots of people getting paid $200,000, $300,000 a year to do . . . something."
Once upon a time, when the economy was healthier, it was parents who paid for these excesses. "But eventually those people ran out of money," Carey says, "so they had to start borrowing."
If federal loan programs aren't being swallowed up by greedy schools for expensive and useless gilding, they're being manipulated by the federal government itself. The massive earnings the government gets on student-loan programs amount to a crude backdoor tax increase disguised by cynical legislators (who hesitate to ask constituents with more powerful lobbies to help cut the deficit) as an investment in America's youth.
"It's basically a $185 billion tax hike on middle-income and low-income citizens and their families," says Warren Gunnels, senior policy adviser for Vermont's Sen. Bernie Sanders, one of the few legislators critical of the recent congressional student-loan compromise.
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