Student loan reform isn’t the answer

I just finished making this year’s tuition payments for my two oldest children who are in college. Coincidentally, this past week, I went on a number of college campus tours with my third child who will be starting college in the next year or so. With all of the student loan reform talk that’s been in the news recently, it got me thinking about the source of the problem.

While the proposed student reform initiatives are nice, they don’t solve the root of the problem. Expanding programs to increase student loan forgiveness, allow bankruptcy, provide a feedback system, and address rogue debt collectors are like putting a band-aid over a gaping wound. It may temporarily stop the bleeding, but the underlying problem still exists. Akin to pulling out the top of a weed, without getting the root, the problem is likely to grow back in a way that will make it stronger and even more difficult to address in the future.

The root of the student loan problem has nothing to do with the loans. It’s due to the uncontrolled, rising attendance costs. Basically, colleges and universities are receiving free money from the government and lenders that they don’t have to repay – the students are the ones on the hook. As pointed out by Judah Bellin (a higher-education policy expert at the Manhattan Policy Institute) in a recent Yahoo! article:

“It’ll [student loan reform] help students manage existing debt, but it won’t prevent students from over-borrowing, because it doesn’t address the cause of rising debt: the unimpeded growth of tuition,” Bellin said in a statement. “One of the reasons colleges have little incentive to keep tuition down is that the federal government ties loan awards to a student’s cost of attending a particular college. So colleges can raise tuition knowing that the federal government will make up the difference. Unless that incentive changes, student loan debt will remain a problem.”

Worst of all, the majority of the tuition costs isn’t being put into education, it’s being poured into extravagant buildings, bigger campuses, opulent athletic facilities, and larger administration salaries. Here are cases in point:

  • On the UC Berkeley campus, they are doing a massive overhaul of the student union building. I was on campus two years ago, and there was nothing wrong with the existing building. Why does it need a major construction overhaul?
  • On the UC Davis campus, new dorm buildings are built with huge etched glass windows. My guess is that these windows are not cheap given their size and detail. Why are such excesses necessary on freshman dorm buildings except to make a statement that they can?
  • The athletic facilities and student gyms on the campuses I visit are head and shoulders above the private facilities I have access to. Students are going to be very disappointed when they leave the university environments and discover that their neighborhood club is not nearly as well equipped or maintained.
  • UC regents approved major pay increases for UC Chancellors this past year, in some cases raising salaries 20% and indicating that they will need raised further to be competitive since they are “below industry average”. The problem with this line of reasoning is akin to CEO pay. Comparing pay to the average only means that the average pay will increase. Public university employees are making nearly $500K per year, which is more than most corporate CEOs make.

Reforming student loan programs only insures that money will continue to flow unabated into the college system. Those universities with the highest tuition costs will be the ones who benefit the most since these are the ones who will receive the most in subsidized loans. The worst part of this pyramid scheme is that students are at the bottom of it. Although they are supposed to be the ones that benefit from the education, they end up being the ones who are saddled with the debt responsible for funding all of these excesses.

Is there hope to fix the system? I’m not sure. Many employers expect or demand college degrees. There is immense societal pressure for high school graduates to attend college. For all intents and purposes, colleges have a monopoly on higher education. Students are being forced or coerced into college regardless of the cost. Until kids have an alternative, I don’t see why colleges wouldn’t continue to raise their costs.

Until a suitable alternative is available to compete with a college education, here are a few things that the government could do to put pressure on the monopoly:

  1. Bankruptcy protection only applies to federal student loans. Students who declare bankruptcy would have their private loans forgiven. It would cause private lenders to think twice before offering loans.
  2. Cap rates on private loans such that they cannot be higher than federal loan rates. The point here is to prevent private lenders from gouging student borrowers and remove some of the private loan monies from the system.
  3. Limit private loan amounts to federal limits. In other words, private lenders cannot lend more to a student than what the student can obtain through federal loans.
  4. Private student loans would not require a co-signer. The student would be the sole person responsible for paying back the loans.

There needs to be some controls put in place that limit the amount of money being provided to the higher education system. Colleges will be forced to maintain or lower rates in order to attract students. The colleges will also need to become more efficient in how they use their money, and they will be forced to get back to their roots – educating students. If students are not able to gain employment with their degree, then private lenders will begin to reduce funding to students attending schools who are not preparing students for employment.

Bottom line, student loan debt is going to remain a problem, and one that will continue to grow, until the cost of attending college is addressed.


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