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Tallahassee Democrat: Student-loan issues, government-created problems

Monday, October 06, 2014

Here’s a big number: 650,000. This is the next milestone number to be reached of students who have left colleges and graduate schools since 2011 and who have defaulted on their federal student loans. This is more than 1 out of every 8 borrowers, or 13.7 percent of the total.

There are about 4.8 million federal loan borrowers, a number which increased dramatically over the last decade due to two primary factors, exacerbated by variables within these factors. First were the actions that essentially created a federally dominated loan system, with private and secondary lenders being pushed from the market. There remain other lenders but they are miniscule in comparison to the federal loan business. Second is the rise and growth of for profit post-secondary education entities, assisted in large part by the technical advances in on-line education.

Truly scary is the fact that 13.7 percent of the 4.8 million who have either graduated or left schools since 2011 have failed to make a payment for nine months or more. This is the case even with the extensive flexible payment options created by the feds — options that are not market driven, but more of an incorrect band-aid placed on a gaping wound. If the intent is to drive graduates into ‘public service jobs’ and to push them away from the private sector then this plan is great. If it isn’t then the not so invisible hand of government intervention is dabbling in a marketplace better left to its own devices. Further complicating this issue are artificially created avenues for loan forgiveness; meaning the taxpayers will pay for part of these loans, no matter how un-frugal the borrower may have been, if the borrower chooses to work in an approved not for profit setting.

Here are a couple of examples of this absurdity. If a graduate chooses to work for a nonprofit 501C(3) they would qualify for the program, but not if they choose to work for a not for profit 501C(6). Or let’s say you just graduated from medical school and have finished your residency and are looking for a position with a hospital. Using Tallahassee as an example, you would qualify for a modified repayment program with a substantial amount of your loans forgiven if you chose Tallahassee memorial Hospital as your employer. But if you choose Capital Regional Medical Center as your employer, and you do the same kind of work there you would have done at TMH, you do not have the same benefits according to the government. Apparently to Congress and the President, for profit work is not as worthy, even if the job title and tasks are the same.

The U.S. Department of Education has threatened to stop making loans to students attending 21 colleges across the country. These are schools with the highest number of students either graduating or dropping out who are in default on borrowed federal monies. Twenty of the 21 facing ineligibility are for profit colleges which have either one year default rates of more than 40% or three year default rates of greater than 30 percent.

According to USDOE the default rates for non-profit private colleges is 7.2 percent, for public colleges it is 12.9 percent and at for profit colleges it is 19.1 percent on average. Recent reports show The University of Phoenix, an example of a for profit institution, accounting for 45,000 of the 650,000 defaulters, which is 19 percent of their borrowers. As a percentage this is lower than the 22 percent default rate of ITT Technical Institute.

The growing federal loan portfolio, one from which they profit handsomely by charging rates to students that are much higher than the federal costs of borrowing the same money, is problematic due in large part to these collection problems. One can never discharge student loan debt- it will be re-paid someday, except of course for the multitude who will seek employment in public service work and be forgiven. On any standard balance sheet this portfolio is feeding the federal hunger for money.

Yet, the taxpayers suffer two ways from these programs. First, too many loans are being made to high risk borrowers attending high risk institutions with weak track records for both graduation and re-payment. Second, according to the Wall Street Journal there are “an unexpectedly large number of borrowers participating in Washington’s income based repayment plans”, where borrowers can pay as low as 10% of their discretionary income regardless of the loan balances. Add to this the loan forgiveness program borrowers “who work somewhere other than a for profit seeking business” and there is a cadre gaining free graduate school educations at the taxpayer’s expense.

Once again the federal government does a poor job of manipulating the marketplace.

Ed Moore is president and CEO of the Independent Colleges & Universities of Florida.

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