By Greg Ganske
April 7, 2024
A recent “Tuition Madness” bracket for the NCAA basketball tournaments listed the schools’ 4-year costs in the pairings. The range was from $66,000 for Green Bay to USC’s $374,000. In general, state universities were in the $115,000 range while the private colleges and universities averaged around $300,000.
Of course, some students at each of these colleges receive student aid or scholarships that help cut the cost. Nevertheless, the cost of a college education has far outstripped inflation by factors of 5 or more in inflation- adjusted dollars. Colleges and Universities have grown so used to annual 4% or higher increases in tuition that when a university like Purdue keeps its instate tuition under $10,000 for twelve straight years, people want to know how that is possible.
So how did we arrive at today’s burgeoning college costs and resultant college debt problem and how do we fix it?
Sometimes the best intentions go awry. Education is terribly important in this competitive global world personally, nationally and internationally. Higher education helps many attain all that they can be, contributes to the national weal, and helps our country to compete in a global economy.
The beginning of federal college loan assistance had its start in President Johnson’s Great Society with good intentions to wipe out racial injustice and raise people out of poverty. Yet, this laudable goal carried with it the seeds of the current debt crisis for many. More than 40 million Americans now bear $1.3 trillion in debt, an average of $30,000.
We should keep in mind that the vast majority of those with college loans are repaying those loans but that about 3 million borrowers have defaulted (7%) and the rates of default can reach 50% for some for-profit colleges.
Nevertheless, the press is replete with stories of people being slaves to their college debt. While not defaulting, their debt is altering lives, relationships like being able to afford getting married, ability to own a home, and even retirement. By law federal loans can’t be erased by bankruptcy and the federal government has ways to collect on its loans through deductions from tax returns, garnishments on wages, and deductions from social security. Unless something is done to prevent and fix this problem some face the prospect of paying on their federal college loans until they die (although if one makes 240 payments on income-driven IDR loans they are forgiven).
As the cost of a college education has exploded, a college degree is still seen as a necessity for a competitive role in today’s economy. A Georgetown study estimates that two-thirds of jobs require more than a high school degree. At the same time, Business Insider reports that the return on this investment has fallen and that the 40% of kids who don’t graduate are left with no return, only the debt.
The possibility of federal student loan forgiveness grabs the headlines, but experts say that no single policy is going to solve the problem in the long run, not even wiping the slate clean for millions of borrowers. There is no $1.7 trillion silver bullet. I wrote a previous op-ed on this topic, “Biden’s College Loan Forgiveness is Unfair, Unconstitutional and Unwise” predicting that the Supreme Court would rule that Biden’s executive order on college loans was unconstitutional and also why it was unwise. Since then, Biden has tried to skirt the ruling.
President Nixon expanded Johnson’s 1965 student loan program by private lenders and guaranteed the loans by creating a quasi-government agency, the Student Loan Marketing Association, otherwise known as Sallie Mae, to increase the amount of money available for student loans. Banks loaned to students, Sallie Mae bought the loans from the banks, then flooded the banks with cheap cash, and used the student loans as collateral.
Two federal initiatives in the early 1990s spurred student borrowing. The 1992 reauthorization of the Higher Education Act broadened eligibility for subsidized federal loans, increased annual loan limits and formed a new unsubsidized student loan program available to anyone regardless of income.
The concern over the burgeoning college debt is not new. When Congress was balancing the budget and paying down national debt from 1995 through 2000, we introduced a modest proposal to eliminate the interest subsidy that the government was paying on student loans while the borrowers were in college. This would have saved the government $2,2 Billion.
We thought that everything had to be on the table if we were going to be serious about debt reduction. The higher education establishment went ballistic.
This did not mean the GOP Congress was not sympathetic to the rising costs of a college education. We renewed the Higher Education Act to cut the interest rate on student loans to its lowest level in 17 years. In addition, we provided $40 billion in tax breaks over 5 years to help students and their families pay for college while also increasing federal spending on Pell Grants for the poorest students and College Work Study Programs to record levels. In the 8 years I was in Congress federal education spending increased 70 per cent.
We differed with President Clinton on whether the federal government itself should do direct lending with longer pay back times. Critics argued that this would lead students into more interest and even more debt. Also, the Department of Education had no experience in administering such a huge expansion of responsibility. Competition between lenders would go out the door. Clinton wanted to eliminate the middleman; Sallie Mae and the banks couldn’t compete with the federal government offering lower rates than the banks which had to make some profit.
To keep his government program, Clinton agreed to privatize Sallie Mae. As a private company now listed on the stock exchange, Sallie Mae could buy other companies and make its own loans not guaranteed by the federal government at higher rates. There are maximums on the amounts of federally guaranteed loans that can be purchased by individuals (to reduce government cost exposure).
Sallie Mae could then make additional loans to students who had maximized their subsidized loans. Sallie Mae consolidated the array of services that had been done by different government agencies and contractors such as collecting premiums and penalty fees. Free of government control it became the dominant player.
Sallie Mae paid college financial loan officers to serve as consultants. For instance, a New Jersey agency was paid $15 million to steer business to it. Sallie Mae placed employees in university call centers to field questions from students who thought they were getting advice from college loan officers.
By 2007 the direct loan program had declined more than 40 percent. The universities loved this as it was providing more students who could pay for increasing college costs. Many invested in Sallie Mae and made huge returns as Sallie Mae’s stock shot up like a rocket. Sallie Mae’s CEO said that the universities were as much their customer as the students.
Then came the 2008 financial crisis, and Sallie Mae’s stock dropped like a rock. Schools like Northwestern University and many of the Ivy League schools lost $millions on their investments in Sallie Mae.
In 2010 Congress and President Obama, as part of the legislation authorizing the Affordable Care Act, eliminated the Federal Family Education Loan Program (FFELP) which enabled banks to issue federally assured loans. The federal government was now the only player in the direct loan business. Today Sallie Mae only provides private loans.
About 90% of student loans are now backed up by the government, while the rest are private loans by banks and companies. Private contractors like Navient, a former Sallie Mae subdivision, collect fees to administer the federally backed loans.
Student loan bearers have been given a respite from repaying their loans during Covid. This has cost the federal government about $5 billion per month. Collection activities will resume in September. A wise borrower would have used the moratorium on interest to pay down as much principle as possible. One can only hope that at least some took advantage of this.
Back in 1987 then-Secretary of Education Bill Bennett argued that “increases in financial aid in recent years have enabled colleges and universities to blithely raise their tuition, confident that Federal loan subsidies would help cushion the increase.”
The higher education establishment vigorously denied this, but a 2017 study from the Federal Reserve Bank of New York found that the average tuition increased 60 cents for every additional dollar of loans Administrators salaries rise (not so many professors). bureaucracy greatly expands, more courses are offered, and dorms, dining halls, and recreation centers become lavish.
The former CEO of Sallie May, now on the board of Penn State, had an epiphany, “Colleges are incredibly inefficient businesses, and the student loan program enabled them.”
Colleges complain that the reason they’ve had to raise their tuition so much faster than inflation is because state governments under the pressure of increased health costs like Medicaid have cut back on their support.
While it is true that states support of state institutions has gone from about 50% to about 30% of tuition, an article in the New York Times claims that is misleading. From 1960 through 1980 public funding for higher ed increased by 309% and that more recent cuts are more like a correction than an abandonment of support for the importance of higher education.
This reminds me of the arguments that constituents made when we in Congress were balancing the budget in the second half of the 1990s. Constituents claimed that we were “cutting” when we were slowing the rate of growth while still appropriating more money each year.
The New York Times article made the same point, “It is disingenuous to call a large increase in public spending a “cut,” as some university administrators do, because a huge programmatic expansion features somewhat lower per capita subsidies. Suppose that since 1990 the government had doubled the number of military bases, while spending slightly less per base. A claim that funding for military bases was down, even though in fact such funding had nearly doubled, would properly be met with derision.”
There are ways as outlined in a WSJ article by Purdue resident emeritus Mitch Daniels to hold tuition increases steady. It isn’t any one big thing but a constant commitment to watch spending, to develop efficiencies and to be prudential.
I am not advocating a return to the 1970s spartan World War II era Quadrangle dorm at the University of Iowa with its linoleum floors and locker room showers that I lived in as an undergrad, but facilities are much more lavish than necessary and don’t increase learning.
Instead, colleges could sell a competitive lower total cost instead of a fancy dorm room as has Purdue. Students flock to Purdue.
Colleges are now competing for a dwindling college age population and entice them to enroll for the nicest college experience possible. They then raise tuition and dorm rates to pay for these luxurious amenities while paying 60% increases for administrators with higher salaries than the professors. This is Amenity Madness!
Members of the resulting debtor class talk about how easy it was to borrow for college and how no one–not even their parents–warned them of the risk they were assuming. Colleges assured them that everyone had loans. There was little talk about how they would pay back their loans based on probable future earnings for their particular majors.
Somehow colleges must have some skin in the game for their students to repay their loans. Maybe the college or university loses some of its state and federal funding for higher rates of graduates not repaying their loans? That way, they might not push loans so readily to students with debt beyond their ability to ever repay.
One emerging private lending solution to get Colleges involved is income-sharing agreements. Students get financing from their schools and pay it back based on a percentage of the income after graduation. Their monthly payments would be lower when their income is lower, or they could pay them off quicker when their income is higher. Employer sponsored repayment programs could ease the debt burden.
The Federal government similarly should put stricter limits on the amount of loans they will issue to a student based on likelihood of repayment. Both the federal government and universities need to act more like banks do in making home and auto loans. Banks look at income, credit ratings, assets and statistically decide whether they can take on the risk of default. The federal government and colleges need to do the same.
In a sense, the attention the college loan debt problem has generated in the press has focused students and their families on the long-term consequences of too much debt. We need improved financial literacy of borrowers. My daughter, Briget Ganske, mentored a Royal Oak, Michigan high school group in creating a video for PBS Nightly News Hour Student Reporting Lab in which they discuss going to college, how to pay for it, and how their decisions are affected by future ability to repay college loans. With higher education costs soaring and the perception that college is no longer the guarantee to financial advancement it once was, more parents and young adults are considering alternative paths post high school.
Currently there are income-driven repayment plans of the federal government in which loan repayments are set as a portion of a borrower’s income. The four current income driven options and the three federal repayment plans could be streamlined into one. Borrowers close to defaulting would be automatically enrolled.
Pell Grants are subsidies to students with exceptional financial need. These grants help students with the least financial resources. The current maximum of about $6900 should be increased which would focus federal assistance on the most needy. These are grants, not loans.
Another way to reduce loan costs would be to reduce interest rates on federal loans. The rates are set each year based on the 10-year auction rate for Treasury notes and “other factors.” Currently the student loan rate is 5.05% while the ten-year treasury note is 4.2%. A 1% difference is significant over the length of a college loan.
Reducing the national debt and lowering interest rates is crucial to lowering the ten-year treasury rate. One of the reasons, besides the inequity of making non college grads pay for the loans of those who go to college, for not writing off significant amounts of college loans is the added deficit spending that increases debt and inflation thus raising the ten year note interest.
Canceling debt is just not fair to those who choose not to go to college or those who have faithfully paid off their debt because they then have to pay for it in the form of inflation. Besides, the vast majority of current outstanding college loans will be repaid and losing those payments would be a real hit to the budget.
The best way to reduce the debt and rising college cost problem is to avoid the loans in the first place. A credit hour at Des Moines Area Community College (DMACC) costs half as much as the state universities. There are even cheaper on-line courses at DMACC. Attending a community college for two years allows the student to save on room and board by living at home. After two years the student can then transfer those credits to a 4-year college saving more than half of the expense rather than starting at the university.
The history of college loans shows that both political parties have wanted to help students go to college. Those college loans have made it possible for many to pursue their dreams.
However, these best intentions need some correctives now as the size of the national student loan debt has grown so much. This will require individual realistic assessment of the benefit of adding personal debt, colleges to be part of the solution, and the government to offer ways to help those who need it the most.
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Greg Ganske, MD, Member of Congress (ret), is a retired surgeon who cared for women with breast cancer, children with cleft lips, farmers with hand injuries and burn patients. He served in Congress representing Iowa from 1995-2003.
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