Private Student Loans

Student loan debt has been in the news a lot these days. In the last week, a number of news outlets wrote about mounting student loan debt and the delaying of life events by their borrowers (see ABC News, the Chronicle of Higher Education, CNN Money, the NY Times [here and here], and the Wall Street Journal, to name a few). The article in the NY Times provides a great example of this, "Consider Shane Gill, a 33-year-old high-school teacher in New York City. He does not have a car. He does not own a home. He is not married. And he is no anomaly: like hundreds of thousands of others in his generation, he has put off such major purchases or decisions in part because of his debts."

EXECUTIVE SUMMARY

The federal financial aid system is no longer up to today’s demands. Built in a different era, its haphazard evolution over the decades has made it inefficient, poorly targeted, and overly complicated. With the need for higher education never greater and college growing increasingly unaffordable, students deserve a streamlined aid system that is more understandable, effective, and fair.

[The New America Foundation’s Education Policy Program on Tuesday released a comprehensive package of policy proposals that would provide an overhaul of federal financial aid. The report, Rebalancing Resources and Incentives in Federal Student Aid, calls for specific changes to grants, loans, tax benefits, college outreach programs and federal regulations to provide more direct aid to the lowest-income students, while strengthening accountability for institutions of higher education to ensure that more students are able to earn affordable, high-quality credentials. Yesterday, we explained why student aid reform is needed. In today's post, we provide an overview of our proposals.]

In Rebalancing Resources and Incentives in Federal Student Aid, we offer more than 30 specific policy recommenda­tions that are designed to create a streamlined federal student aid system that is more understandable, effective, and fair. Taken together, the package of proposals in our report is budget neutral over the 10-year period from federal fiscal years 2013-2022.

Pell Grants

The Pell Grant program is the cornerstone of federal stu­dent aid. In 1972, when the program was created, a Pell Grant covered most if not all college costs for large num­bers of low-income students. But as college prices have soared over the years, the system has become less and less effective. Moreover, the program is now facing a major “funding cliff” in the 2014 fiscal year and each year there­after.

Now that President Obama has been reelected, and he has more time to sit back and read Higher Ed Watch, we are presenting our wish list for his second term. [And Mr. President, while you're at it, we're sure you'll enjoy our posts from last week highlighting your first term's biggest higher education hits and misses!]

Among other things, we (the authors of this post) would like to see the Obama administration do the following:

• Hold college accountable for reigning in college costs and improving student outcomes. The administration must be willing to take on the entrenched and powerful institutional interests of traditional colleges.

• Develop long-term solutions for revamping the federal financial aid programs, rather than continuing to scramble to come up with stop-gap measures to shore up funding for these programs in the heat of high-stakes budget battles.

• Finalize the financial aid shopping sheet and scorecard—and make them mandatory. Students and families need clear, consistent, useable information at key points in their decision-making process. Given that many institutions currently benefit from the lack of this information, voluntary adoption of these efforts will accomplish very little.

With the presidential election only days away, we thought it would be a good time to take a closer look at President Obama’s higher education record. In this post, we highlight the administration’s five greatest hits. Tomorrow, we will examine the administration’s five biggest misses.

So without further ado, here are the Obama administration's most significant higher ed accomplishments:

1. Reforming Student Loans: President Obama achieved his single most significant higher education victory in March 2010 when he signed into law legislation ending the wasteful practice of subsidizing private lenders to make federal student loans. Overcoming the fierce opposition of the student loan industry, the Obama administration and Democratic Congressional leaders eliminated the Federal Family Education Loan program, which had long been racked by corruption, and shifted to 100 percent direct lending, which delivered the same federal loans to students at a much lower cost for taxpayers and without all the scandals. And despite dire warnings from the industry and its allies in Congress about the risks of moving thousands of colleges out of FFEL and into direct lending, the U.S. Department of Education pulled off the transition without disturbing even a single student’s access to federal student loans.

A slew of recent reports dealing with student debt make crystal clear that students need to be better informed about the financial aid packages that colleges are offering them. Too often, colleges are not upfront about the amount of debt they are asking students to take on – leaving these individuals without even a basic understanding of how much they will be on the hook for once they leave school.

This argument is made most explicitly in a report released this month entitled “Lost Without a Map: A Survey About Students’ Experiences Navigating the Financial Aid Process.” The firm NERA Economic Consulting and the advocacy group Young Invincibles surveyed 13,000 students and recent graduates with an average debt of more than $75,000, and found that about a quarter of respondents with federal loans and nearly half of those with private loans felt that they had not received accurate information about their financial aid from their schools. As a result of the lack of adequate guidance, many students who take on extremely high levels of debt “do not have a clear idea about the consequences of the loans they take out, with many experiencing misunderstanding or surprise regarding repayment terms and interest rates,” the report states.

Those surveyed clearly believe that colleges have a responsibility to ensure that students understand their student aid options. In fact, more than 90 percent of the respondents agreed that the financial aid award letters that most colleges send out each spring need to be standardized to make the forms easier to understand and compare – with “common definitions and clear terms” to describe the schools’ student aid offerings.

The Asset Building Program hosted an event Wednesday, July 11 to release the July/August issue of the Washington Monthly. The issue focuses on the importance and applicability of the asset building agenda in the lives of all Americans. Utilizing the magazine's focus as a frame for the event, our panelists tackled critical themes such as savings as a path to higher education, the importance of life-long savings mechanisms, the role of federal policies in promoting prosperity, and a growing political divide between young and old Americans.

Career college lobbyists may come to rue the day that the U.S. District Court for the District of Columbia struck down the Obama administration’s Gainful Employment (GE) regulations. Because judging by the GE data that the U.S. Department of Education released late last month, the rules actually make even the worst performing for-profit higher education corporations look pretty good.

Take Corinthian Colleges, for example. The company had 44 programs that failed the Education Department’s Gainful Employment tests -- the most of any chain of for-profit schools. Yet, Corinthian College officials were able to boast to shareholders about the company’s performance. “93% of the Company’s programs comply with GE regulations for the time period measured,” the company reported to investors. “During this same period, the programs accounted for 95% of our graduates.”

This is not just good spin. It’s entirely accurate under the rules that the Education Department put in place last year. Responding to a massive lobbying campaign from the for-profit higher education industry, the administration watered down their proposed regulations to such an extent that only programs that flunk all three of the Department’s low-bar Gainful Employment tests are considered to be out of compliance. That means that only programs at which fewer than 35 percent of former students are repaying their loans and where the typical graduates have annual student loan payments that exceed 12 percent of their total earnings and 30 percent of their discretionary income would have eventually been in jeopardy of losing access to federal financial aid.

So at first glance, Corinthian Colleges doesn’t look so bad – 93 percent is an A-minus after all. But a deeper dig into the GE data provides a much more alarming picture of how the company’s students fare.

The Wall Street investment firm BMO Capital Markets conducted such an analysis and found that on the whole, Corinthian Colleges flunked two of the Education Department’s tests: the repayment rate and the debt-to-discretionary-income ratio. Only about one-quarter of the corporation’s former students who entered repayment in the 2007 and 2008 fiscal years have made payments on their federal loans -- a fact that is not surprising given that its typical graduate’s annual loan payment accounts for over a third of his or her discretionary income. In comparison, Devry University had a loan repayment rate of about 42 percent and a debt-to-discretionary income ratio of 11 percent.

Meanwhile, the average earnings for recent Corinthian College graduates is just $20,741, according to BMO’s analysis. That’s the lowest of all of the publicly traded for-profit college companies. Graduates of Devry, in contrast, had an average income of $36,517.

The dismal numbers were driven mostly by Corinthian’s Everest College brand, which primarily trains students for jobs in the healthcare industry. BMO found that only about one-fifth of the schools’ former students have made payments on their debt, meaning that about four-fifths have not paid it down by even one dollar. Again, this is not surprising considering that their annual loan payments account for a whopping 44 percent of their discretionary income.

As Higher Ed Watch has reported in the past, a high proportion of Everest College students take out private institutional loans on top of their federal debt. This is particularly worrisome since the average income of its recent graduates is only $19,629, according to BMO’s analysis. No wonder the company projects that more than half of these private loan dollars will end up in default.

Crunching the data further, I found that an incredible 95 percent of Everest College’s 297 eligible programs flunked at least one of the minimal Gainful Employment tests. [A company’s programs were included in the calculations if all of the required data was submitted on time, and they enrolled at least 30 students.] Of these programs, 254 had repayment rates of less than 35 percent, BMO reported.

The Gainful Employment regulations are supposed to expose those for-profit college programs that are putting students in harm’s way, buried in debt and without the training they need to get jobs that will help repay their loans. But the final rules are so weak that they may have instead given even the industry’s worse players cover.

This is a lesson that Obama administration officials should keep in mind as they revise the regulations. Although the federal judge’s decision was a blow to the Department, it now has the opportunity to craft better regulations -- one that won’t allow Corinthian’s shockingly poor performance get a passing grade.

As President Obama reminded us yet again in a speech from the White House today, time is quickly running out for Congress to extend the current 3.4 percent interest rates for subsidized Stafford loans. Without action (cue scary music or slow-jam here), interest rates will double to 6.8 percent on July 1st. Members on both sides have lined up to support an extension, and are now fighting over to how to pay for this one-year fix. But this one-year “fix” does nothing to help address the real problems—the skyrocketing costs of college and students drowning in debt.

We’re not likely to see any long-term solutions to rein in college costs in an election year. But as the interest rate debate demonstrates, there is the political will to respond to constituent anxiety about student debt and the specter of a lifetime of indentured servitude. Rather than focus on an expensive, one-year solution that will only affect a small portion of new loans and borrowers, why not do something that could help the most distressed borrowers now? Congress should allow private student loan debt to be treated like it used to be—like most other consumer loans and dischargeable in bankruptcy.

Did Sallie Mae officials engage in an elaborate scheme to hide the rapidly deteriorating state of the company’s private student loan portfolio from Wall Street at a time when they were trying to complete a buy-out deal that would have brought them great riches? Were they systematically pushing subprime private loan borrowers at for-profit colleges into forbearance to mask the amount of risk they were taking on by making such high-cost loans to this vulnerable group of borrowers?

Unfortunately, we’ll probably never know the answers to these questions, which are at the center of a class action lawsuit that a group of investors have brought against the company (click here for part 1 of the suit and here for part 2). That’s because a federal district court judge in Manhattan – William H. Pauley of the Federal District Court in Southern New York – has preliminarily approved a $35 million settlement agreement between the parties that would not require Sallie Mae to admit to any wrongdoing. A final ruling on the settlement is expected in August.

While the shareholders will make out well from this deal, the real victims of Sallie Mae’s apparent scheme – the low-income and working-class students who never should have been steered to these risky loans in the first place – will not even get the satisfaction of seeing this case get its day in court. Sallie Mae will essentially get off scot-free ($35 million is hardly even a wrist slap for a company that holds nearly $140 billion of federally guaranteed student loans), many of these borrowers will be stuck with this debt hanging over them for the rest of their lives.

At a time when there is so much concern about a potential student debt bubble, the allegations made in this lawsuit should be getting more attention. With that in mind, I am re-posting a piece I wrote for Higher Ed Watch in October 2010 that lays out the investors’ case and shows why it is so regrettable that the questions posed at the top of this post may never be answered.