My inbox was inundated last week with emails from irate people with huge debts they fear they will never get out of. Most argue that, on the contrary, Biden’s plan was too modest and should have wiped out a lot more debt.
Most of these pen pals have one thing in common: they attended shoddy, for-profit schools.
These are institutions with abysmal completion rates and programs that often do not pay even when completed. Those who carry huge debts related to such programs have basically been defrauded. Many will never be able to repay their debts. I agree on this: they deserve help from the federal government, in the form of more generous loan forgiveness.
The problem, though: The schools these people attended—in some cases, are still attending—will continue to be able to rip off students, at government expense, and persuade even more students to rack up even more. more debt for all but worthless programs. Uncle Sam will end up with the bag again when those future classes can’t pay.
Everyone likes to point out how expensive selective top universities are, but they are not the point. As expensive as their prices (stickers) initially seem, they usually come with a fee. That is: their students graduate and earn a living wage return on their investment through higher lifetime wages.
The most problematic schools are those where, say, less than a quarter of students complete what is supposed to be a four-year degree in six years and whose students have disappointingly high default rates. labor market outcomes. Not all for-profit institutions are bad actors, but they are overrepresented in these ranks: for-profit schools still enroll only about a tenth of all students account for half of all student loan defaults.
Students at for-profit institutions also end up borrowing far more than demographically similar public school students, in part because two-year for-profit institutions charge on average more than $10,000 more tuition than community colleges.
Even with poor record, schools may receive more 90 percent of their income from the federal government through grants, loans, and other student-related payments. Worse still, they can be sued multiple times for defrauding students and still receiving public funds. Some of the institutions named in a recent major legal settlement implying whether schools have deceived students still eligible for federally subsidized funding, as Sarah Turner, professor of economics and education at the University of Virginia, pointed out to me.
Without the ability to obtain government-backed loans, these schools could close. And they probably should! They seem to spend more resources aggressively enrolling students than providing them with valuable education.
Where does Biden’s school funding overhaul fit?
Biden revamped the system known as the “reimbursement based on incomeplans. These plans cap monthly payments based on the borrower’s income, with balance forgiveness granted after a certain period of time. The concept is good; getting the details right is hard.
The specific changes Biden has made — capping monthly payments at much lower levels and canceling some balances much sooner — may reduce the amount borrowers repay. But these changes also have unintended consequences.
Among them, said Adam Looney, a professor of finance at the University of Utah, students will be pressured to take on much more debt because much of it could be forgiven. “If people expect to pay back, say, $60 out of every $100 they borrow (some more, some less), a lot of things change,” Looney said over email. “Previously [the Congressional Budget Office] expected people to repay more than $1 for every $1 borrowed. Thus, borrowing was the worst way to pay for college. Rather, it will be the best way to pay.
Additionally, schools—especially those adept at maximizing revenue from the federal aid system—are likely to find that they can raise tuition fees since students will expect to pay a lesser share in the end.
“These schools have already figured it out,” said Student Loan Planner consultant Meagan Landress. “There is no incentive to keep tuition fees low.”
In addition to changing some of Biden’s reimbursement design parameters, there are other things the government can do to reduce those risks. This could force institutions to play a role in the game (clawback provisions for underperformers, for example). The government could also provide more funding to public post-secondary institutions, especially those with the best track records of low-income graduates.
But above all, the government must be more selective which schools he sends checks to in the first place.