Washington Post and Student Loan Interest: "Don't Punish Our Gravy Train"

The editorial board for Kaplan, Inc. the Washington Post is extremely concerned about the increase in student loan interest rates:

With the student debt crisis already hurting the economy and hobbling the young, the last thing the country needs is a federal policy that makes college even more costly. But that’s what the country got earlier this week when Congress allowed the interest rate on the subsidized federal loans to double from 3.4 percent to 6.8 percent.

When the Washington Post discusses government expenditure and subsidies, particularly anything it deems to fall into the category of the "entitlement", you typically get hand-wringing about how unaffordable that type of spending is, and how important it is to cut subsidies to make one program or another more affordable. It's difficult to look at the Post's complaints without wondering, why is its stance so far apart from its positions on other social spending programs, or coming up any answer but, "because of Kaplan."

The Post, not unreasonably, presents an argument that I guess we're not supposed to notice would also apply to programs like Medicare and Social Security:

Those who want to keep the rates affordable understand that college educations benefit the work force and the country as a whole. Those who would increase the burden on borrowers see a college education as an asset that benefits the individual alone. That’s a dangerous idea, at a time when this country is steadily losing ground to its increasingly better prepared competitors abroad.

But even if - perhaps especially if - you accept that education is necessary to sustain and build upon the success of a nation, and that it's thus important for college to be affordable and accessible, we should be having a larger conversation about funding.

• Are there better ways to subsidize higher education? Why loans, for example, and not increased direct subsidies to colleges? Why not grants?

• Do subsidies cause students to borrow more money than they need? College does not necessarily have to involve penury, but even the once relatively austere dorm life is increasingly turning into a luxury experience - with much of that money coming from loans. Easy borrowing contributes to the manner in which colleges compete to maintain and expand enrollment, driving up costs in a manner that does nothing to improve the quality of education they offer.

• Do easily obtained, subsidized loans, combined with a philosophy of "college for everyone" and the opportunity to postpone engagement with the adult world, encourage people to pursue college degrees that they have little interest in obtaining?

• Should student loans take into consideration probable future income? Should there be some form of wake-up call, "The typical graduate with your major earns approximately 1/3 of the salary you will need in order to comfortably repay your student loans"?

• Should we also revisit dischargeability of student loans in bankruptcy? Society already, in essence, bears the risk of default for much student borrowing by virtue of loan guarantees - so why do we privilege private lenders and maintain what can be crippling debt loads on students for whom the dream of college does not work out?

• Should we revisit how student loans are guaranteed, so that colleges bear some responsibility when their graduates have a higher-than-expected rate of default?

The traditional four year college is evolving into an institution that prepares students for graduate degrees. While there are four year programs that prepare students for a specific career field, the day is long gone where a business would look at a bachelor's degree as a meaningful job qualification. It may be among the minimum qualifications, but it doesn't distinguish one applicant from the many others who meet the minimum qualifications for the job. Unless your bachelor's degree is from one of a handful of "brand name" colleges, it seems to be less and less important to your job prospects that you have anything but the diploma, and even in the brand name context an undergraduate degree has diminished relevance.

I would not mind seeing some introspection from the Post, an acknowledgment of its ownership of Kaplan and an acknowledgment of the many shortcomings of for-profit education. Many students with high school diplomas need some form of education or certification before they're going to be able to compete for jobs that offer a career path. Many of those students lack the interest or aptitude for a bachelor's degree plus graduate school, or for a path like engineering, or would benefit from taking a bit of time between high school and college to determine their own wants and needs. How do we subsidize appropriate options for those students without creating a cash cow for diploma mills, or vocational training programs that (even if good) don't do a good job of aligning students with the realities or expectations of the job market?

The Post seems happy to conclude, "Keep interest rates highly subsidized during college, then raise them (up to a cap) after college",¹ a philosophy that doesn't actually address any of the issues facing students other than making it less visibly painful to borrow and spend while enrolled in school. That is probably a solution that works for Kaplan. I'm just not sure that it's the right answer for students or for the rest of society.
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1. The actual proposal they describe, and implicitly endorse,

The government could tie [student loan] rates to its borrowing costs, keeping the rate low while the student is in school. When the loan enters repayment, the rates could be allowed to rise by a set amount but would never exceed a cap, which would protect families from interest spikes.

Tying Student Loans to Graduates' Employment Records

Sam Petula suggests that if you explicitly tie student loans to how college graduates do in the employment market, you can put pressure on colleges to scale back or even eliminate certain academic programs:

Last week’s announcement of new rules to bear down on career colleges like the University of Phoenix, which offer degrees in programs like Health Administration and Criminal Justice Administration, weren’t designed to force those questions. These programs come under a different section in the Higher Education Act, excluding them from regulations for how much money their graduates make. But the new rules—the gainful employment rules, as they’re called—could push federal regulators to start peering under the hood of more traditional colleges majors, according to reporting by Inside Higher Ed.

I'm reminded of recent reports about the college degrees that pay the least, with the psychology major being held out as a prime example of a popular but low-paying major. I majored in psychology (although principally because I wanted to graduate - I could have graduated a semester later with a major in chemistry, general science or political science), so I can attest both that you won't find job ads seeking candidates with bachelor's degrees in psychology and that it doesn't matter, because a bachelor's degree in psychology is not designed to be a terminal degree. If you want to be a psychologist, you continue toward a Ph.D., and if you don't you get a graduate degree in whatever field you intend to pursue. The knowledge you gain from the study of psychology can be helpful in other fields, but does not qualify you to be a mental health professional.

To the extent that students entering college believe that "Chinese literature", "religious studies" or "women's studies" are terminal degrees, colleges should be educating them to the contrary. If a traditional college is being anywhere near as misleading toward people majoring in those fields as the for-profits often are in relation to the job opportunities and incomes they suggest can be achieved through their programs, those colleges deserve a similar consequence.

There's a degree of difficulty in comparing a two year certificate program from a private university, that does little to nothing for a graduate's job prospects, with a four year degree that is meant to be followed by a graduate education. The better comparison is to community colleges which typically offer similar degree or certification programs at a significantly lower cost, and without the false promises or exploitation of the federal student loans. It would have made no sense to tell me that I would not qualify for student loans based upon my major... well, first because I went to a then-inexpensive state college, worked a ridiculous number of hours, lived on a shoestring, and graduated from my undergraduate program with no student loan debt, but ignoring that for a moment... because I could have simply and very plausibly declared a different major in order to qualify for loans, and also because my plan was to continue to graduate school such that my nominal major didn't matter.

To the extent that the government's hand appears too heavy, it's not because the government is cracking down on private colleges to the extent truly necessary to correct abuses - most of the teeth have been pulled from the final regulations. I would rather the concept of colleges acquiring insurance for the student loan moneys that they distribute, such that they could do what they wanted but in the event that their graduates didn't find jobs would find the insurance coverage for their students' loans to become unavailable (or, if you prefer, increasingly expensive and, with no corrections, ultimately unaffordable). The "lack of value" in a particular non-terminal four-year degree would be mitigated by the fact that the majority of recipients would continue through graduate school, and thus should not play a significant role in a college's insurance premiums.

What's Wrong With Higher Education

I have a lot of sympathy for the arguments raised in this editorial by a recent Oxbridge¹ graduate:

Far too many young people are wasting precious years in a university system taken hostage by the cult of egalitarianism, when in fact they could be doing something useful with their brains. In so doing, they are draining increasingly scarce resources from those who genuinely should be in the academy. And the effect of targets such as that set by New Labour – 50 per cent of students to enter higher education – has been to push ever-more young people down a dead-end route, while stigmatising other wholly legitimate routes into employment, such as apprenticeships.

It necessarily follows that the wrong sort of people are going to university, and that the whole purpose of university has been bastardised to accommodate them. That line of argument doesn't go down well in metropolitan circles. Yet the failure to say it is causing a social catastrophe, and although it is the very height of political incorrectness to express it, the case for a drastic reduction in university numbers has to be made clear.

What is that case? The first half is practical. Although most middle-class parents are loath to admit it, for a growing number of undergraduates, university is a phenomenally expensive waste of time. Unless their parents are upper-middle class, the average student can expect to come out of university with a debt of £27,000. That is disregarding, of course, the earnings that they might have made in those years when they were rolling spliffs and pursuing freshers in the student union. Even if they didn't earn the national median income of £26,000, had they worked for three years they might still have earned a solid, say, £45,000. Add that to the £27,000 debt, and you're talking about a big investment.

The editorial does a good job of exploring how a shift from universities as a source of gains that cannot be quantified in economic turns to the concept of higher education translating into higher incomes, and thus creating the idea that there should be a return on your tuition 'investment', has distorted higher education and expanded the student population of "immature adults who want to delay their entry into the world of adult responsibility, either because they are lazy or because they are scared of it".

We have gone from a system founded on the principle that university is for the brightest, regardless of background, to one in which university is for all, regardless of ability.

This means that, each year, thousands of non-academic students are packed off to do three or four years of... nothing much.

The author falls into the trap of "the degree has a funny name, so it can't be serious", singling out the boutique study of "pig enterprise management" as an example of a non-serious degree. Those highly specialized degrees can sometimes be considerably more rigorous, and considerably more marketable, than a more conventional degree. It seems to me like the degree you would pursue because you intend to actually manage a pig farm, without much appeal to anybody who lacked either the inclination to or prospect for obtaining such a position.

As university costs rise, and alternative approaches to obtaining job skills are discounted in the popular consciousness, you can worsen the social inequality that you're trying to remedy:

The conflation of schooling and skilling, so aggressively promoted in the past two decades, is unforgivable, because it pushes skills on the poor while preserving schools for the rich. But universities cannot remedy that more foundational problem. And it's the poor who have most to lose from three years spent acquiring debt for a degree they don't need and won't use. It's the poor against whom the biggest fraud is being perpetrated: told that a degree course from a university will help to emancipate them from poverty, they are finding in ever-increasing numbers that said degree is leaving them trapped in it.

With the manner of funding offered in the U.S., we have created a system of schools (including low-quality, for-profit institutions) that offer very little for the money. And yes, a lot of students graduate with a solid grounding in a field in which there is no direct market - it's graduate school, or finding a job outside of their college focus. That's fine, if you can afford the luxury. It's not fine if you end up defaulting on student loans, passing the cost of your education onto the taxpayer while being indefinitely dogged by bill collectors over guaranteed student loans that have no statute of limitations and cannot be discharged in bankruptcy.

The fact that most people cannot discharge their student loans in bankruptcy should tell you something about the value of a college degree. If the experience of default were rare, or the amount of money small, Congress would not have felt the need to preempt state statutes of limitations for enforcement of federally backed student loans and make student loans largely nondischargeablhe. We can look at ways to diminish the distortion, and to shift the cost of default onto those who accept students unsuited to their programs or offer worthless degrees. We can also do a better job making clear what a college degree (and what specific college degrees) can and cannot do, and encourage students to also consider trade schools, community colleges, apprenticeships, or other methods of entering the workforce without the time and money required by a traditional four-year degree.

If I haven't convinced you, Paul Krugman offers some sobering statistics:

Here’s the question: of college graduates with a bachelor’s degree who aren’t enrolled in further schooling, how many have full-time jobs?

In December 2007, on the eve of recession, the answer was 83 percent.

By December 2009, it was down to 72 percent.

As of December 2010, it had recovered only slightly, to 74 percent.

Even when times are good, for close to one in five college graduates they're not so good.
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1. As I've used that term twice in the past day, perhaps I should define it. "Oxbridge" refers to the most elite institutions of higher learning; and in the most narrow definition, to Oxford and Cambridge.

Colleges Are Not Equal

In the Washington Post's latest unsurprising effort to keep taxpayer money rolling into Kaplan (okay... maybe they truly believe it's for the good of the country, not just the company), they offer another defense of the high student loan default rate at private... no, let's use the word "career" colleges.

Although isn't "private" far more accurate, given that they're not including community colleges within that new conceit? And for many of the "careers" at issue, there's no degree requirement for entry to the field? And community college classes to get a certification or to build an equivalent body of knowledge come at a significantly lower price? And many graduates don't in fact find the degree earned helpful when starting a career? But I digress.

Minority students attend career colleges in much higher proportions than do other students, and these are the only schools targeted by the proposal.

I've addressed this before:

[I]f privatizing education is supposed to be a miracle cure for K-12 education, why is "our students are harder to teach" supposed to be an acceptable excuse for the performance of for-profit institutions of higher education? Their students want to go to school and, either with cash or student loan money, are paying for the privilege - you can assume some degree of motivation. Why is it only appropriate to blame schools and teachers for poor outcomes, and insist that the composition of the student body should be irrelevant, when they're part of the public sector?

Also, as previously suggested, the alternative to full-time enrollment at a "career college" that doesn't provide a career - hence the high default rate - is community college. Why is part-time enrollment at a significantly lower cost per credit, or even full-time enrollment if an equivalent community college program is available, a bad thing?

Many career colleges receive their accreditations through the same agencies as the nation's top private and nonprofit universities, which would be spared from the effects of the rule (though 93 percent of historically black colleges would fail the rule's repayment rate test if it were applied to them).

You only need a rudimentary knowledge of the difference between four year colleges and private "career colleges" to understand why you can't compare apples to oranges. And frankly, if a four year college is performing so badly that it can be fairly compared to a "career college" diploma mill, the solution is to apply the new rule to that college as well, not to keep throwing away public money to subsidize private "career colleges" that offer useless degrees.

Career colleges are different only in that they are the schools of choice for many at-risk students, including minorities, parents and full-time workers who believe these schools offer them the best shot at a good job in a field they will enjoy.

If we assume that true, shouldn't the solution be to better educate them such that they recognize that many "career colleges" are a waste of time and money? Believe it or not, if you end up with $40K or more in debt for a "career college" degree that turns out to be worthless in the job market, and you also incur two years of opportunity loss association with your time off of the job market while attending the program or working part-time, you're not better off for the experience. And if you can't make enough money to pay back your government-backed student loans, that's horrible for you - you are stuck with debts that will hound you for decades - and for the taxpayers who pick up the tab. When students default, the only people making out like bandits are the proprietors of the colleges. Talk about moral hazard....

I personally believe we would be better off taking a look at student loans across the board, and putting more responsibility on all colleges to ensure that the loans they convince their students to take are ultimately paid back. Such as by insuring student loans rather than guaranteeing them. That would create a nice, equal playing field for "career colleges" - but I can already hear the squawking.

How About Insuring Student Loans Instead of Guaranteeing Them

The net effect would be similar - if a student defaulted the lender would be able to make a claim for indemnification from the insurer. But the mechanism would be different - rather than having the taxpayer write a blank check, educational institutions would contribute part or all of the cost of insuring student loans based upon their default rate. No educational institution would have to participate, but the price of not participating would be ineligibility for participating in the insured student loan or federal tuition grants programs.

For-Profit Colleges and Student Loans

As people reading this blog probably know, the Washington Post owns Kaplan, Inc., which returns profits well in excess of those earned by the newspaper. In editorializing for the continuation of subsidized loans to private colleges that have astronomical default rates, the Post discloses its ownership of Kaplan but neglects to inform readers that Kaplan is the jewel in its corporate crown.

I'm reminded of a comment by Adam Serwer that pretty much sums up how a lot of those colleges work - and why their default rate is so high.

Universities like this make money by promising easy routes to well-paying and doable careers that in the past really never required a formal degree: those in the culinary arts, massage therapy and support staff for medical and legal professionals. The growth in these programs just take advantage of students who don't have access to traditional non-profit college degrees.

Moreover, there's no evidence it helps them. It's hard to imagine that someone with a degree in retail management will never get higher than retail management, which for the most part is not a lucrative career.

The student graduates with significant student loan debt to compete for entry level, low-wage jobs. Consider, for example, the lack of return for most students who enroll in culinary arts schools, or the anecdote recounted in this forum post about a private college instructor's candid disclosure. If it takes you two years to complete the degree program, odds are you would have been better off spending those two years working in the field and earning experience.

I'm not saying you can't learn valuable skills in those programs, but those skills won't necessarily be valued by employers. You want to start your own catering business? Great. But even then you may be better off working in the field and selectively taking some classes to round out your food knowledge before starting your own enterprise.

Lead, Follow or... Get In The Way?

Evan Bayh demonstrating that he's not so much part of the solution as he is part of the problem. In short, he's obstructing reforms of student loans that will bring about cost savings and efficiencies by having the government directly provide student loans, out of concern that doing something that's good for the country will affect the financial services that profiteer off of the status quo... and did you notice that Sallie Mae is a major employer in his state.

This story has been covered in many locations; I'm just following up on my "lead, follow or get out of the way" quip by noting that it is possible to do worse than to duck out the door whenever things get rough.