Student rates

Student loan subsidies could have dangerous and unintended side effects

The centerpiece of the student debt relief plan President Biden announced last month is his decision to forgive up to $20,000 per borrower in federal loans. But the most ambitious — and, over time, most costly — element of the president’s strategy is his proposed revamped income-linked repayment plan, which would dramatically reduce what many borrowers pay each month.

However, this could have unintended consequences. Unscrupulous schools, including for-profit institutions, have long used high-pressure sales tactics, or outright fraud and deception, to burden students with more debt than they could ever reasonably hope to repay. . By providing more generous education grants, the government can be create a perverse incentive for schools and borrowers, who might start to pay even less attention to the true price of their education – and taxpayers might find themselves footing more of the bill.

“If people take on the same or more debt and pay less, it’s just the taxpayers bearing the brunt,” said Daniel Zibel, chief attorney for the National Student Legal Defense Network, an advocacy group.

Experts are particularly concerned about how new grants could be manipulated by for-profit colleges, many of which have a history of coaxing people into deep debt for degrees that often don’t provide the kind of income that schools advertise.

Sharon Arnold, 44, a first-generation student, enrolled at the University of Phoenix in 2009 because she saw higher education as a way out of her $12-an-hour service job. She was drawn to the school’s online programs for working adults and advertisements promoting its job placement services.

Pell grants and federal loans covered her tuition, but the bachelor’s degree she earned four years later in human services management didn’t improve her job prospects. Although she was reluctant to take on more debt, guidance counselors urged her to pursue an MBA. She said she was told it would increase her earning power and that the school has partnerships with large employers who give preference to its graduates when it comes to hiring.

But again, his job search was in vain. Ms. Arnold, who lives on the outskirts of Oklahoma City, now earns $16 an hour working in hospitality and owes the government $126,000 in student loans more than a decade after she first enrolled in Phoenix. Debt prevented her and her husband from getting a mortgage to buy a house.

Ms Arnold’s alma mater has long been in the crosshairs of watchdogs over what they said were a set of misleading allegations. The University of Phoenix has paid more than $127 million over the past two decades to settle government lawsuits over illegal tactics, such as tying its recruiters’ pay to the number of students they serve. registered and run deceptive marketing campaigns that falsely claimed partnerships with large corporations.

The University of Phoenix is ​​on a list of 150 schools who the Department of Education said showed strong signs of “serious misconduct”. (The list is included in a legal settlement reached by the department in June that, if finalized, will forgive $6 billion in federal student loan debt for 200,000 borrowers, including Ms. Arnold.) The school is part of more than a dozen on this list that still work. He remains eligible for federal student loans and depends on them for almost all of his income.

University of Phoenix spokesperson Andrea Smiley said the school is “proud of all of our one million graduates, and we employ several student support initiatives, including a tuition award guarantee, academic and career coaches, lifelong career services, and 24/7 online support, among other efforts.

She added that the school “categorically” disagrees with any implication that she has ever acted inappropriately. The University of Phoenix has not commented on the Biden administration’s loan cancellation plan.

Experts say Mr Biden’s new plan could increase schools’ incentives to saturate students with unreasonable debt.

“Debt cancellation and income-contingent repayment cannot be isolated,” said Sarah Sattelmeyer, project director for higher education at the New America think tank. “We need to combine these elements with a very strong accountability structure.”

Past efforts to rein in poorly performing institutions have been derailed by lobbying, litigation and shifting political tides. The government’s mightiest hammer – a regulation put in place during the Obama administration known as the “paid employment” rule, which threatened to cut federal aid funds to for-profit schools whose students were earning too little to repay their loans — was dropped in 2019 by Betsy DeVos, education secretary under President Donald J. Trump.

The new grants could also make students less cautious about high debt loads. The Department of Education has yet to release details of Biden’s new repayment plan, but the plan the president outlined last month could transform funding for higher education, especially for degrees. undergraduate education, shifting more of the costs from borrowers to taxpayers.

Jason Altmire, chief executive of Career Education Colleges and Universities, a trade group that represents for-profit colleges, said: “As several economists have argued, the new reimbursement plan could increase costs across all sectors of higher education and encourage students to take on more debt. He criticized the Biden administration’s proposal for an income-driven plan, saying it would “cause more confusion and do nothing to reduce education costs.”

About 45 million people owe the government $1.6 trillion in student loans, with the average balance hovering around $37,670. Currently, borrowers who choose an income-contingent payment plan generally have to pay more than 10% of their discretionary income, defined as all income above 150% of the poverty level.

Mr. Biden wants to raise that floor and shelter incomes up to 225% of the poverty line, reduce the undergraduate loan repayment rate to 5% of income, and stop charging interest to borrowers who make their monthly payments. As with existing income-driven plans, any remaining balance would be canceled after no more than 20 years of payments.

Collectively, these changes will allow millions more borrowers to pay little or nothing on their loans. But anything that isn’t paid will eventually be absorbed by the government – a risky proposition in a system already plagued by abuse.

With what can be billions of dollars at stake, schools accused of wrongdoing are highly motivated to fight back, and cutting even the most gruesomely bad actors can take years. The government relies on independent accrediting agencies to ensure a school’s quality, but schools that have lost their accreditation — a drastic action meant to spell the end — have sometimes managed to retain their eligibility for federal funds.

Jonathan Glater, a law professor at the University of California, Berkeley, said the government’s options for dealing with school misconduct had never been “prophylactic – they operate after the fact”.

“It would be great,” he added, “to have a regulatory system that could actually prevent harmful behavior, and it’s quite surprising that there aren’t more claims for it.”

The Department of Education said in a written statement that the Biden administration is “committed to preventing a future student debt crisis by holding colleges and universities accountable if they leave students with mountains of debt or without good jobs”.

The department recently said it was rebuilding its Federal Student Aid Unit’s enforcement team – which was dismantled by Ms DeVos – and would more actively monitor accreditors.

It’s a start, but the agency needs to move faster, said Aaron Ament, who worked on enforcement issues at the Department of Education during the Obama administration. In particular, he would like to see the gainful employment rule, which Ms. DeVos rescinded, come back into effect.

“The rule is one of the best initial accountability measures we have to weed out failing programs,” Ament said.

Ms Arnold, a University of Phoenix graduate, is proud of her degrees, but in hindsight she said she would never have taken on so much debt had she realized how financially unprofitable her education would be. “As hard as I worked on my studies, as many hours as I put in, I also wanted a good return on investment,” she said.

The University of Phoenix wants her back. Last month, he sent her emails offering her a scholarship of up to $3,000 if she returned to pursue doctoral studies. Ms. Arnold declined the offer.