Drowning in Debt?

By Watson Scott Swail, President and CEO, Educational Policy Institute

Yesterday, the Education Sector released a new analysis of federal financial aid data (National Postsecondary Student Aid System/NPSAS) illustrating trends in loan burden and other statistics over the years. As one might expect, the news, while illuminating, wasn’t particularly “good.”

The big conclusions in the analysis are that (1) more students are taking on more debt and (2) they are taking on increasing amounts of private loans—that is, loans not guaranteed or distributed by the federal government. The authors are right on both of these counts, but a little context is warranted in establishing these numbers and trends.

It is certainly true that the costs—the price—of higher education has grown exponentially in recent decades. In fact, it has always grown. As I’ve commented in this column regularly for the past four years, it always will outpace inflation because of the human resources budget pressures. Given this, it is of no surprise that more students are borrowing to pay for tuition, fees, room and board, books, and other sundries related to going to college. It should also be noted that more students are working more hours than ever before, too, but that’s a side discussion.

Having more students borrowing isn’t necessarily a bad or troubling thing. I could even argue that students on the upper end of the low-income spectrum can and should (and do) take on loans. The Education Sector makes the point that more students are taking loans. However, in their Chart 3, the percentage of students in public two- and four-year schools, as well as those at private, not-for-profit four-year institutions, is about the same as in 1999-2000. The percentage growth has been marginal. Since 2003-04, the percentages look identical. So this isn’t a big-deal issue. Students can take on loans, and one could argue that they should share the responsibility. That was Congress’ intent in putting the current financial aid system together.

The real issue is how much debt. For the public two- and four-year institutions, the average loan aid since 1999-2000 has increased only slightly. The biggest jump was at the private, not-for-profit four-year and the career colleges since 2003-04. And that should be a concern.

This issue, of course, comes down to something called “unmet need.” Unmet need is typically calculated by subtracting all aid (grant AND loan) from total cost of attendance. This is the sum of money that students and their parents must come up with in order to attend college. And this, my friends, is where private loans come into the picture.

Larry Gladieux and I reported years ago when we directed the College Board’s Trends in Student Aid report that the private market was rapidly escalating for years. But let’s be clear: the private loan agencies aren’t the bad guys in this scenario. People take out private student loans because they have unmet need, and they have unmet need because we have failed students in the public policy arena.

This saga begins and ends with the college cost issue. Not the price issues. The cost issue. We haven’t done anything to curtail escalating costs of higher education. They continue to rise at 2-3 times inflationary rates, and probably will until we can find a less-costly manner of providing postsecondary education. Our lawmakers have strutted their muscles, but have never written a piece of legislation nor worked alongside higher education administrators to find some solution to this mess. And it is a mess. So that’s point one.

The second major reason for the growth and size of the secondary loan market is that we didn’t do ANYTHING about the loan limits for 20 years. The recent reauthorization of the HEA was the first legislative “redo” since 1988 with regard to loan limits. We, and students, were trapped in $2,625 hell for two decades. I can vividly remember attending a congressional hearing back in the late ‘90s when the University States Student Association (USSA) advocated against raising limits on federal loans because they didn’t want students taking on extra debt. It was a dumb and naïve political move that backfired. The limits stayed the same while the smiles and coffers of the private lenders grew. Only in 2008 did the limits increase to $3,500, with some modifications for extra loan room if necessary.

On the other side of the equation, we have done extraordinarily little on the grant side of the equation. Only now are we seeing increases in the Pell grant, but this is modest respectively of the growth in college prices. Given our current economy, don’t expect it to grow too much more. We just don’t have the money.

So, the private loans weren’t and aren’t the problem. Our inability to tackle the actual policies that created the loan situation is the problem. We—the US Department of Education, the US Congress, and every state house in America—are to blame. We elect these people, and, unfortunately, student aid and college affordability, while important, rarely qualify as critical election issues. Student aid only impacts those of voting age who are going to college, plan on going to college, or those who have children at either of those two stages. That’s a large percentage, but only a fraction of the voting population. The economy, however, impacts everyone. Public safety—affects everyone. So we wait… and wonder why these other things, such as private loans, happen. They happen because we don’t do anything. Period.

Until now.

This Wednesday, the US Department of Education sent letters to the president of all Title IV colleges and universities to expect a switch to 100 percent Direct Lending in Fall 2010 (See associated The Chronicle article). Currently, about 30 percent of all institutions use the Direct Loan program. The majority of institutions use the market-based FFEL program. President Obama has said that this will save the taxpayer $4 billion annually. We don’t know if it will, of course, but it is an extraordinarily bold move currently commandeered by Bob Shireman at the Department. I personally have some reservations about the total switch, but status quo has wrecked havoc on our current financial aid program. The next step hopefully will be to completely redraft the grant programs, so that both sides are better systems. My fingers are crossed.

The Education Sector piece provides the necessarily light on the loan issue, with brand new data from the federal government’s NPSAS study, to allow us to start an important dialogue. But I think it is important to carefully analyze these data with a clear eye on history and how we got here before providing attribution to those who do not necessarily deserve it. We deserve it, because we didn’t act.

I close with help from my pal Nostradamus in providing these predictions for the 2010-11 academic year:

Tuition and fees will increase above inflation in all college/university sectors;

The percentage of students receiving federal loans will increase;

The size of these loans, on average, will increase.

The Washington Nationals will continue to dwell in the cellar of the National League East Division.

I have more, but the last bullet was the nail on the coffin.

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