Student Loan Forgiveness

by Peter Bredlau on January 8th at 2:07 pm EST

It used to be that if you wanted to avoid student loans or have your student loan debt forgiven you had to be able to throw a 35 yard out route, teach in a bad school, or join the Army. You had to do something. It might soon come to pass that you can get student loan forgiveness just for being patient.

President Obama has suggested that college loan debts might be retired after 20 years of dedicated payments, or after 10 years under circumstances such as teaching in a difficult school setting. The plan is a nice gesture, but it is short sighted, and misses the real point of the student loan debt crisis– that it is not really about student loan debt. The problem is that college cost that has risen at nearly twice the rate of inflation over the past generation. When that happens, more loans are necessary, and debt increases.

There are a number of factors that have contributed to the meteoric rise in college and university tuition rates. Consider just these few…

Federal earmarks were banned last year, which made a strong impact on colleges. Earmarks paid for research equipment, residence halls, and much more at colleges around the country. Without those earmarks, colleges have had to find the money elsewhere – from private endowment and foundation grantors, generous donors, and sales of college-related property and memorabilia. What that income doesn’t materialize, student costs increase.

Despite billions of dollars total in endowments are the country, colleges are surprisingly stingy with the distribution of their endowment money. Most colleges release only about 5% of endowment income each year, far less than what is needed to bring down costs and lighten the loan burden. Endowment money is received tax free, grows tax free, and is distributed tax free. Iowa Senator Chuck Grassley thinks that this is a scandal. He advocates colleges doing the right thing and lowering student cost by releasing more endowment income for scholarships, grants, and operating costs.

Supply and demand is alive and well in higher education. It has always been understood that a college education is an important step in a successful career and life. It is said that a college graduate will make $1 million more over their career than someone without a degree. Today, a college degree is considered the first step, an advanced degree is preferable. Colleges have what you need – a degree – so they can call the price, without negotiation. Like it or not, tuition will go up, so long as the diploma is valued and desired, and that increase makes for more loans and more debt.

The loudest voices being heard about college cost and student loan debt are those directly affected - students and parents. Unfortunately, they are blind to one of the primary contributing factors in cost inflation, a factor that they have created – the desire for increased luxuries on campus. If you have paid any attention to college campuses over the past twenty years you’ve noticed is that they have become “fancier”. This is because of an increasing demand by students and parents to have top notch amenities in every aspect of the college. Double rooms have given way to singles, gymnasiums have health club-style workout facilities, dining rooms look like food courts, and 100% wireless coverage is a given. All of this raises costs, and, ironically, students and families are demanding exactly the items that make price inflation necessary, and so the need for loans goes up.

Mr. President, if you want to address the student loan crisis, there are solutions. Consider these:

·      Demand that colleges use more of their endowment to reduce costs to students, including grants, direct loans, and program subsidies in the spirit of the Grassley plan. Confront college resistance with the offer to tax endowments to generate income for student loans.

·      Tell it straight to American families that they are complicit in rising costs when they demand luxury facilities and don’t expect tuition to rise. Be clear that their desires, increasing costs, and growing loan debt are directly related. Austerity isn’t popular, but neither is loan default.

·      Abandon your plan of loan forgiveness and avoid sending the “buy now, pay never” message of the housing crisis and the Wall Street bailout. Instead, hold Americans to their promises – to pay back the loans that they willingly signed on to.

·      Offer more options for repayment. If not with cash, with sweat equity in places like Habitat for Humanity, AmeriCorps, or something like the old Civilian Conservation Corps. If the Federal Government is going to give away money, you might as well get something back.

The student loan crisis is at least as troubling as the housing crisis, with one addition. When houses foreclose, there is an asset that can recover some of the money owed. Banks lose something, but not everything. In the case of student loans, when there is default, there is nothing to recover and re-sell – you can’t repossess an education, or a mind. President Obama is trying to prevent a mess like the mortgage crisis, and his plan could be of some help. However, a generous repayment and forgiveness plan won’t go far enough. It will take students, families, trustees, and colleges to radically change their behaviors to bring down costs or the problem will only worsen.