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How to Fix the Student Debt Crisis

eye on the news

How to Fix the Student Debt Crisis

Stop loaning money to students; loan it to colleges instead. November 30, 2015
Education
Economy, finance, and budgets

Each of the Democratic presidential candidates has come out in favor of some version of a plan to make college “free.” This staggeringly bad idea would cost a half-trillion dollars per year. Things that seem to “cost nothing” can often wind up being worth nothing. College is no different. Students need to have some “skin in the game.” They will make more considered choices—about where they go to school, how much debt they take on, how hard they party, and how diligent they are in their studies—if they’re paying something.

That’s not to say that growing student debt isn’t a problem—for both students and for the nation—or that college costs aren’t a real concern. The price tag for attending college has risen 1,275 percent since 1978. That’s almost double the inflationary pace of health care, which rose a mere 634 percent in the same period. The cost of a private college can easily exceed $250,000 for a standard four-year degree. Attending many state universities can top $150,000. And that’s assuming a student graduates in four years—which is becoming the exception, not the rule. Today, the average time to graduate is 5.6 years.

Why is college so expensive? Three main reasons. First, because colleges, with enthusiastic support from politicians of all stripes, have convinced Americans that higher education is the ticket to success. While a college degree is no longer a badge of the upper class, it is still viewed as a luxury good and is priced accordingly. Second, colleges have joyfully suffered from what Andy Rosen, CEO of the testing and online-education company Kaplan, has called “an edifice complex.” Colleges, including lots of state schools, continue to build luxury dorms, gourmet dining rooms, and lavish athletic centers to attract students—almost as if academics were an afterthought. Staffs have become bloated, too, not with more professors, but with administrators. Third, colleges have been playing with other people’s money. Washington has pumped trillions into financial aid programs. Low-income families get outright grants; everyone else qualifies for easy-to-obtain loans.

Interestingly, none of the Democrat candidates has mentioned why costs have gone up so much or suggested how they might be contained. The higher-education lobby, among the most effective in Washington, is partly to blame. This year, PACs and individuals affiliated with higher-education institutions contributed more than $233 million to members of Congress—with three times as much going to Democrats as to Republicans. Another $57 million has been spent on the lobbyists themselves.

Congress has also fueled the soaring cost of college through the irrational and unrealistic “Expected Family Contribution” (EFC) calculation, a formula that (supposedly) takes into consideration a family’s size, income, and assets, and then spits out what it thinks the family should contribute to a child’s college education. The EFC must have been created by proponents of legalized marijuana: the formula generates fantastical, almost delusional figures that few middle-income families can afford. For example, the EFC for a family of four earning $100,000, with $50,000 in assets and one child about to go off to college, is $17,375—every year.

What that means for colleges is that they don’t have to dip into their own financial-aid reserves until the family comes up with their EFC portion. Families, faced with the choice of depleting their savings—not many families can tighten their belts by the 21 percent that the EFC requires—are forced to borrow more easy money from the government. No wonder some call this predatory lending.

Thus, candidates who promise free college get enthusiastic receptions. Never mind how the government will pay for all this. Even Bernie Sanders can only tax Wall Street so many times.

Is there a way out of this death spiral of college costs and mounting student debt? Maybe. First, Congress would have to scrap the EFC. It’s an artificial price support that serves no purpose other than to give colleges cover for not providing more financial aid. Second, the president and Congress would have to agree to change how financial aid flows. Instead of lending money to students and their families, Congress should lend money to colleges and universities. In turn, the schools would lend it to students and parents, with repayment going back to the school. In this way, colleges would have an incentive to limit tuition hikes—and thus how much students needed to borrow. Colleges might think twice before increasing tuition with this debt overhang and its credit-rating implications.

Today, the most popular loan programs have repayment plans pegged to a percentage of what graduates earn. Recent initiatives cap the repayment at 10 percent of a graduate’s paycheck, which is reducing defaults. Lending money to the colleges themselves will foster a host of creative repayment options. Just as students need to have skin in the game in order to take college seriously, colleges must have something at stake to get costs under control.

Photo by Trollness

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