Last week, New York State Attorney General Andrew Cuomo sparked a mini-furor when he accused the student-loan industry -- while testifying at a hearing before the Senate Banking Committee on private loans -- of engaging in redlining. If students historically underrepresented in higher education are being offered more expensive loans, this clearly strikes directly at the heart of college access. Ironically, statements made by Sallie Mae's own lobbyists just a few weeks ago may add fuel to the fire.
Friday, June 22, 2007
On Wednesday the students of Maine won an amazing victory. Opportunity Maine is a citizen ballot initiative that will provide a tax credit to all graduates of Maine colleges to offset their student loan repayment for each year they stay in the state. Employers can also take the tax credit to pay off their employees' student loans.
The state currently experiences a bad brain drain. The "creative class" effects of having more college grads around will benefit Maine's tax base by $14 million in 2018, more than paying for the measure, according to one economic analysis.
What's really cool is that this victory belongs to a very professional, focused and dedicated coalition of students and community members, both Opportunity Maine and the League of Young Voters. They worked over the Maine winter with hundreds of volunteers to gather 73,000 signatures to get the measure considered. Then instead of putting it to the voters, the Maine Legislature and Senate passed the bill outright. The Legislature voted unanimously - 142-0.
I was up in Augusta last month testifying before the Taxation Committee in support of this bill, so I'm pretty proud to see it passed. Even facing budget difficulties, Maine has chosen to take a step to help both students and its economy. Federal reforms are very important, but college costs also need to be dealt with on a community basis.
It is completely wrong for the government to subsidize college costs. I personally do not want money taken out of my paycheck to create a generation of art history majors. And I seriously doubt that you want to pay for that as well.
Actually, it's completely absurd to imagine a college system without government subsidies.
No tax-exempt nonprofit status = no Harvard or any other private university.
No federal land grants = no Big 10 or any other public university.
No federally subsidized student loans and grants = no for-profit colleges.
How about some old video footage of Cambodia under the Khmer Rouge? They hated art history majors too.
To a reasonable progressive percentage, and with the caveat that those art history majors work and contribute to their own education as well in a partnership that recognizes the public and private benefits of education as both a social good and a personal investment = Take my paycheck, please!
(oh and by the way, if you care about defense not education, no government sponsored GI Bill benefits = a severe reduction in military recruits = a much less safe nation.)
The WSJ, whence comes this pearl of wisdom, recently published a column about how 20somethings don't see the point of working their asses off like this,
either because they are just impatient or because "the rules have changed" or because they know jobs come and go and their loyalty is unlikely to be reciprocated. The frat brothers at Employee Evolution (one of whom is quoted in the article) are always talking about this issue.
I don't know if it's time to bemoan the death of hard work or not. Most of the young people I know seem to work pretty hard and concern themselves with work quite a bit, but maybe that's because they happen to have chosen careers they feel strongly about and identify themselves with. It's less about career advancement or ambition and more about the meaning of the work they do.
But most people I know don't spend most weekends at the office, either.
Fair Payment Assurance (text of S.359) means that you can have the option of reducing your loan payments to no more than 15% of your "discretionary income"--meaning, your income over 150% of the poverty line for your family size.
So if you make $15,315 or less--no "discretionary income," $0 loan payments.
Let's say you make $20,000 a year and have $30,000 in loans. Currently you'd pay $345 a month under standard repayment, $208 under extended repayment. That's a big bite out of a monthly take-home of about $1400.
Under Fair Payments you'd pay just 15% of ($20K-$15,315), or $58.50 a month.
Or let's take a single mom with two kids who earns $40,000 a year and has $40,000 in loans. Her standard payment would be $460. Her "fair payment" would be $178.
Under these scenarios, "fair payments" are fair from one point of view but not from another. They are low enough to be manageable even on low incomes, but they don't even cover the interest. This means that if you opt for fair payments, either you better hope your income goes up dramatically so you can get back into standard repayment, or you better be prepared to make these small token payments for 25 years until your debt is finally erased.
To my mind, one looming issue with fair payments is the effect on credit ratings. High student loan balances can affect credit scores, although not as much as messed-up payment histories will. If people go into fair payment plans, their loan balances will actually grow year after year , until they are erased, because the payments don't cover the interest. What kind of effect will this have over a lifetime?
A second issue is, as raised in the comments, who's going to pay for this? Let's take the first example: a person who borrowed $30,000; under today's interest rates and standard repayment they would pay back $41,428.
Under "fair payments," if their income did not go up, they would pay back $702 a year for 25 years, or a total of $17,550. Who's going to pay the rest of the loan balance and the accumulated interest? Is the government going to supplement the payments each month to the lender and avoid having interest accrue?
Personally, I'm on the record in favor of having the federal government heavily subsidize college costs, but I want to make sure that we know what we're getting into and that the subsidies are available to those who need them most. One of the problems with subsidizing college costs through Fair Payments is that it requires someone to take on the debt and the risk up front.
Thursday, June 21, 2007
1) The Benefits:
The proposals would have borrowers pay no more than 15 percent of their discretionary income for federally backed student loans. They would allow such loans to be forgiven after about 25 years. The Senate measure would gradually boost the maximum Pell grant, the nation's main aid program for low-income students, from $4,300 to $5,400 a year. The House plan calls for a smaller grant increase but would cut in half the interest rates on federally backed student loans, to 3.4 percent.2) The Cost
The Senate version would cut subsidies to lenders by $18.3 billion; the House version would cut subsidies by about $19 billion...[Rep. George]Miller said in an interview that [DESPITE WHAT THEY SAY PUBLICLY], lenders have told lawmakers privately that they could accept the subsidy cuts, which are about the same as reductions President Bush proposed in his budget this year.
Wednesday, June 20, 2007
"The importance of engaging and gainfully employing young progressives is hard to overstate, both for its immediate practicality and the long-term sustainability of the left. By ignoring progressive grads’ economic constraints, the progressive movement—activists and funders—are squandering an immense opportunity to utilize the ideology, size and energy of the post-graduate generation."
"There's a trade-off occurring here," said Brett Lief, president of the National Council of Higher Education Loan Programs. "It's almost like we're Robin Hood taking from the moderate to give to the needy, when what we really need to do is increase funding over all."
I'm not sure that efforts to trim the excessive subsidies that go to private lenders and directing them to student aid is akin to stealing and aiding the poor. When the American public sits around thinking about where their tax dollars are headed, I'm pretty sure they think of students and not bankers. Making sure more students can go to college, and that student debt is more manageable seems like the right policy to me.
That being said, is Robin Hood really the best example the lenders could find to justify the status quo? I don't seem to remember Robin Hood stealing from the "moderate," I'm pretty sure he only took from the egregiously wealthy. And not just benign rich people, but really bad, theiving rich people. Also, don't people like Robin Hood? I know I grew up in the era of Kevin Costner and not Errol Flynn but still, he was a hero, the good and just people of Nottingham Forrest rallied behind him...all that stuff right? I'm also pretty sure the moral of the story wasn't, "more money for everyone" even the excessively wealthy. So if you're an oversubsidized industry looking to justify your continued overpayment by the government at the expense of millions of students, should you be comparing yourself to the villains of a well known story about wealth redistribution?
On second thought, maybe not a bad comparisson after all.
Tuesday, June 19, 2007
(With parents who were both college professors I didn't feel as left out as Aurora sounds like she did at Yale, but there were enough outrageously rich, socially well-connected, private school kids to alienate anyone who didn't have their own car in high school).
The Hartford Courant article also has a chart of which elite schools enroll the most Pell Grant recipients. The winner? Smith College, my mother's alma mater. :
"With a fraction of Yale's endowment, Smith enrolls twice the percentage of students with Pell Grants. Smith looks beyond SAT scores to identify students with talent and motivation, a practice that the school's dean of enrollment said has probably hurt the school's place in the U.S. News and World Report "best colleges" rankings. Smith also helps students navigate financial aid forms, especially cumbersome for students raised by a single parent.
Once the students are there, Smith provides extra academic support and even a closet full of suits for students to borrow on job interviews. The school sees educational value in exposing students to all viewpoints. It's also a matter of fairness.
"We're a tax-exempt organization," said Audrey Smith, dean of enrollment. "We have a mission to serve the public good and I think we're doing that."
Monday, June 18, 2007
House Committee Embraces New America's Loan Auction Proposal The House Education and Labor Committee has embraced the New America Foundation’s proposal to use an auction mechanism to set student loan subsidies. The Committee unanimously adopted an amendment to the College Cost Reduction Act of 2007 proposed by Representative Tom Petri (R-WI) that would test loan auctions in the government-guaranteed loan program.
Student loan auctions are a way to set subsidy levels competitively, by having lenders compete for the right to make loans in the FFEL program. Right now, for example, the law guarantees 97 to 100% reimbursement rates for loan defaults. If there was an auction, maybe there'd be a lender who'd say, "I only need 50% reimbursement to make a profit." Presto: big subsidy cut.
Auctions are sort of a moderating proposal favored by the New America Foundation, among others concerned with college access. Others, like presidential candidate John Edwards (and Billl Clinton, back in the day) say we should throw out the lenders altogether and go 100% to the government-administered Direct Lending program, which is much cheaper for taxpayers.
As a journalist who doesn't have to sit in the room for higher ed bill markups, I feel like the second approach is just cleaner and more appealing. The FFEL program is a semi-monopoly anyway. If you institute an auction or some other kind of forced "competition", what's to stop Sallie Mae and the other big lenders from simply colluding to keep the subsidies high? They have the market share to force out any upstart (read, MyRichUncle) who wants to demonstrate that loans can be done cheaper.
I feel like the burden is on the lenders to show that they can actually add value by competing on price and offering better service. And they can do that just fine on the other side of the line: the private loan market.
What?! Ok, this needs a new post.
Thursday, June 14, 2007
Tuesday, June 12, 2007
*Pell Grant goes up by $500 a year to $5200.
*Expansion in loan forgiveness: Providing loan forgiveness for first responders, law enforcement officers, firefighters, nurses, public defenders, prosecutors, early childhood educators, librarians and others. Revising policies to allow public servants to have their loans forgiven after 10 years.
*Upfront tuition assistance to undergraduates who commit to teaching in underserved public schools (Sort of nationalizing Teach for America, way to go Wendy Kopp)
*Increased federal loan limits.
*Paying for it all, plus a $750 million spending cut, with reductions in lender subsidies.
The bill addresses most of the 4 main concerns raised in a letter sent today by the PIRGs and other student advocates. Luke Swarthout says, "We applaud Chairman Miller" etc.
What the bill leaves out? Bankruptcy protection on student loans. Fair payment assurance: tying repayment to income, so folks don't get trapped with untenable debt burdens. And amnesty for those buried under long-defaulted, "exploded" loans and dangerous levels of private loan debt.
Redlining is a term coined by community activists in 1960s Chicago. It refers to mortgage brokers excluding predominantly black inner-city neighborhoods from getting loans for housing, and by extension, to any discrimination achieved by drawing arbitrary lines.
Sunday, June 10, 2007
While federal loans also allow borrowers myriad chances to reduce or defer payments for hardship, private loans typically do not. And many private loan agreements make it impossible for students to reduce the principal by paying extra each month unless they are paying off the entire loan. Officials say they are troubled by the amount of debt that loan companies and colleges are encouraging students to take on.
“It’s a huge problem,” said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “When a student signs the paper for these loans, they are basically signing an indenture,” Mr. Nassirian said. “We’re indebting these kids for life.”Dozens of students interviewed said that when they signed for their loans they were unclear on what interest rate they were getting and that financial aid counselors discussing repayment failed to include interest that students were compounding while in college
Thursday, June 07, 2007
"If you leave them so thoroughly in debt even after bankruptcy that they can't get back on their feet and they are driven into the underground cash economy and not into the career they trained for, the taxpayers don't get anything."
Andrew Davis, Chief Executive Officer of The Illinois Student Assistance Corporation told The Chicago Sun-Times in May.
One of the reasons our debt-based college aid system puts up barriers to college access is that student loans are treated differently under the law than any other unsecured debt.
In the case of a defaulted student loan, student-loan guarantee agencies can garnish your wages without even taking you to court, and the government can seize tax refunds, federal disaster relief payments, and Social Security retirement and disability benefits without a court order.
The big gun in the student lender's collection arsenal is the bankruptcy exemption. Since 1998 federal student loans have been not been dischargeable in bankruptcy except in extremely rare circumstances of "undue hardship," determined at the discretion of a judge.
Wednesday, June 06, 2007
I'm writing this post from beautiful, sunny Las Vegas, Nevada, where I just gave a talk and saved hundreds of dollars by not gambling. It strikes me that the casino business and the student loan business have something in common: the house can't lose.
Casinos offer their customers beautiful surroundings, free food and drinks, as well as the occasional jackpot. Student lenders offer their customers inducements and discounts on fees and interest rates.
In both cases, the businesses can afford to sweeten the pot this way and still turn a very, very healthy profit because they operate at virtually no risk, with the odds heavily weighted in their favor.
Tuesday, June 05, 2007
Your Money columnist Damon Darlin scolds grads to save 10% of their income first, put raises away into savings, and avoid that pesky latte habit (geez, you'd think Starbucks was responsible for the financial downfall of our entire country). But I don't think his breakdown of the average grad's finances really adds up, because he totally ignores debt and other common extenuating circumstances.
"If you are only making $40,000, a not-untypical starting salary for a college-educated professional in a big city, the weekly gross of $769 works down to $561 in take-home pay after income taxes and payroll taxes for Social Security and Medicaid," he writes. "Were you to divert 10 percent of your salary to a 401(k) plan, the bottom line becomes $509."
Is his $40,000 typical? According to the College Board (pdf), for 25 to 34 year olds who are full-time year round workers, yes. Obviously, you'll make less if you are at the beginning of that age range, if you are like the 30 percent of the young workforce who finds part-time or otherwise contingent work, or if it takes you time to find a job, or if you change jobs, or if you find a job outside a big city, etc. Oh, and liberal arts grads can expect to be making more like $31,333, says the NACE.
But let's stick with the $40,000 number for a second. By Darlin's calculation, putting away 10% in savings leaves you with $1,950 a month to live on after taxes. Get a roommate, he says, like anyone in their mid-20s doesn't have 2 or 3 roommates already. But what if you're like the 2/3 of college grads carrying an average $20,000 in student loan debt? Your payment averages $230 a month.
What if (uh-oh) you ran up the average college student's credit card balance of $2864?
Your minimum payment starts at $70 a month, and that's if you start retiring the debt right now and don't add to it at all. No mean feat.
Now you have $1,650 a month to live on. Realistically, rent in a big-city share will take at least half of that. That leaves $206.25 a week for groceries, cell-phone bill, Internet access, work clothes, and everything else. Plus, since you're putting that 10% away for retirement only, you don't have an emergency fund yet either.
Is it doable? Sure. Is it easy? Nope. Does it have anything to do with expensive coffee drinks? I don't think so.