Should Colleges be Held Accountable for Student Loan Burdens?

Your Dream Job Is Just Four Years Away!

How many times have you seen “announcements” like the one below?

The University of Eat, Drink and Be Awesome is pleased to announce the introduction of a new four-year degree program in Fast Food Menu Development. This new program has been specially designed to meet the growing needs of the fast food industry, one of the most promising sectors of employment in our economy. If you’re a creative personality who wants to learn more about this highly coveted degree program, contact a UEDBA admissions officer today. A wealth of opportunities await! Financial aid is available.

Of course, there is no UEDBA or Fast Food Menu Development program. At least, I hope there’s not – if there is, that would be a bit eerie. But, I can’t even count the number of advertisements I’ve seen for “innovative new degree programs” that promise to pave the way to success in some future career. The sad part is that many of these ads are placed by reputable schools – or ones with reputable-sounding names. And, the degrees themselves often sound challenging, exciting and… lucrative. The real lure is in that last line: Financial aid is available.

I’ll Gladly Pay You Tuesday for a Hamburger Today

In recent years, the Federal Student Aid program has been quite generous when approving and distributing student loans. Speaking in general terms, I don’t necessarily think that’s a bad thing. After all, the whole concept of student loans sounds great on paper – an economic equalizer that lets you apply for and receive funds to pursue a degree at the college of your choice. It’s a chance to rise out of the poverty cycle that has stricken so many American families. It’s an opportunity to push forward and be judged on the merits of your own hard work, rather than be held back by your current financial status.

Yes, in an ideal world, there are no losers in a student loan program. Low-income students wouldn’t have to worry about paying back the loans until they had finished their degree and acquired a good-paying job. Colleges and universities would benefit, too. They would be able to broaden their student base and use the in-flowing funds to support more innovative and challenging educational pursuits.

It wouldn’t be that bad of a deal for the taxpayers either. Sure, there would be expenses involved with managing the program and the interest rates might not be quite high enough to keep up with inflation. Still, the loans wouldn’t exactly be a government handout – the bulk of the money would be repaid when a graduate started working and that money could then be loaned out to new students.

To top things off, it would be good for the entire world when these fresh new crops of graduates left their ivory towers and started channeling their thoughts and ideas toward solving the problems that plague us today as well as the ones that are lurking around the corner, getting ready to jump out at us tomorrow.

We could go on with the ideal world scenario all day long. But, as with so many things, plans that sound good on paper don’t always translate well when applied to reality.

Counting the Dollars

According to the Federal Reserve Bank of New York (FRBNY), outstanding student loan debt continues to climb, and reached $914 billion in the second quarter of 2012. As a nation, we owe more money on student loans than we do on credit card or auto loan balances. In fact, since the third quarter of 2008, the amount of student loan debt has increased by more than $303 billion while the combined total of all other forms of debt has decreased by $1.6 trillion.

Even though this amount is a huge number, it might not be so bad if it were holding steady instead of increasing – and if the same could be said about repayment rates. However, as the FRBNY reports, “The percent of student loan balances 90 or more days delinquent increased to 8.9% from 8.7% during the second quarter of 2012.” The FRBNY further states that this percentage is most likely understated, because it doesn’t take into account the fact that many of these loans are currently in deferment. A deeper analysis of these numbers can be found in the FRBNY blog post, Grading Student Loans.

So, when it comes to student loans, we keep borrowing more and more money, and we’re having a tougher time paying it back. Where did the whole situation go wrong?

Some blame a sluggish economy and high unemployment rates. Others blame students for borrowing more than they could ever hope to pay back. Still others point to the Department of Education and claim the Federal Financial Aid program has been mismanaged. Many more believe that our nation’s institutions of higher learning played a big role in the escalation of this situation.

An Erosion of Trust

To be fair, there’s more than enough blame to go around, and blindly pointing accusatory fingers isn’t going to fix the problem – but there is at least one issue here that definitely needs to be addressed. Has the compact of trust that exists between the American public and our institutions of higher learning been sorely damaged, or even broken?

As a society, we’ve been brought up to respect and treasure the value of an education – and to trust those who provide that gift. Have those administrators who run our colleges and universities taken advantage of this trust by inflating tuition costs because they know the federal government will float us money to cover those fees? Instead of being concerned about how to realistically prepare us for future careers, have they become more focused on how to rake in as much cash as possible?

Those last two questions are somewhat unfair, because they’re painting the picture with too broad of a brush. There are definitely many schools that haven’t gone down this path, but how can we distinguish between them and others in the crowd?

One answer is to make all postsecondary schools more accountable for the returns they give on student loan investments. In this day and age, it’s not that hard at all to track student loan delinquency rates, graduation ratios, employment placements and other metrics by individual school. Not only should this information be made available to potential students, but it could also be used to determine reasonable loan limits for those who are considering that funding method.

Many will argue that our schools should be “offering an education, not selling a job” and I’ll be one of the first ones to agree. But, the cold truth is that we need the jobs, too – especially if want to pay back the loans we took out to get that education.

If you're planning on continuing your education or you're the parent of a future student, what type of information would you like to know about a school before accepting an admission offer? How concerned are you that four years will pass and all you'll have to show for your efforts is a worthless diploma and a mountain of debt?

References

[1] “Quarterly Report on Household Debt and Credit.” Federal Reserve Bank of New York Research and Statistics Group. August 2012. Retrieved September 20, 2012 from http://www.newyorkfed.org/research/national_economy/householdcredit/DistrictReport_Q22012.pdf.

[2] Meta Brown, Andrew Haughwout, Donghoon Lee, Maricar Mabutas, and Wilbert van der Klaauw. “Grading Student Loans.” Federal Reserve Bank of New York. March 5, 2013. Retrieved September 23, 2012 from http://libertystreeteconomics.newyorkfed.org/2012/03/grading-student-loans.html/.

[3] U.S. Department of Education. “Federal Student Aid.” Retrieved September 23, 2012 from http://studentaid.ed.gov/.