Neither do I. I think my plan better addresses that than yours. (The government is not on the hook for these loans… private lenders are. Maybe the government can subsidize the interest rate, but if the loan is not repaid the government is not the one holding the bag.)
In fact, I think your plan encourages more of what you say you don’t like.
“Come play with us at Mega Party For-Profit U for six years and it will barely cost you anything at all! Don’t even attend classes… just take out these crazy high loans and use them to pay us while we look the other way about the copious drinking and drug use on campus!!!”
I’m still not describing it quite right. (The joys of writing while trying to multitask.)
Ultimately, I want the schools to bear the risk of students screwing around and not being productive…and the schools to be rewarded if their former students overachieve. Ideally the government would not bear risk from the program; it would just provide the collection mechanism and permit the funding mechanism to benefit from better interest rates.
There’d need to be some mechanism in the future to account for that…
So, at program launch, upon execution of the student loan deal, the school receives (NPV of collections from future income), but in subsequent years that payment is adjusted by some factor reflective of students’ over/underachievement?
Not sure what to do to recoup losses if a lousy school produces underachieving students and goes under. Maybe there would need to be some government underwriting, to ensure that the schools are turning out alums that are reasonably likely to meet expectations.
You know, as I go along, I like this less and less, although my increasing dislike is the result of the details rather than the general concept I have pictured in my head.
Technically, the government wouldn’t need to be involved at all…except that the government is in a unique position to be able to monitor future income, and to be in the financial position of being able to handle the long-term nature of the collections.
A private entity could handle the financial aspect, but there’d be an extra burden in collecting future income information, and a profit motive would influence the entity to accept only certain students into the program.
You’d need the government or some extremely well-capitalized nonprofit to avoid the problems a profit motive would introduce in setting up the financial mechanism of the system.
When I went through in Australia, the government would lend for tuition costs only and then you would pay it back once you start working and earned above a certain threshold. I think you would get 10% taken out of your income until it was paid off. I believe the interest on the loan was at the same rate as inflation.
I definitely didn’t understand that the school was bearing the risk, but that still doesn’t address why schools would bother with loaning money to teachers and social workers. These are professions that pay enough to cover a student loan at a reasonable rate of interest for what state universities used to charge before they got crazy bloated.
But they’ll never have the ROI of a doctor or lawyer. I don’t want to turn academia into a profit center.
In fact, I’m worried they’ll get even more bloated and just zero in on the highest paying professions… screw everyone else. Maybe even actuaries.
So to use my quintessential example of the gal who borrowed $200,000 to attend Sarah Lawrence and then dropped out after 3 years and is working as a barista making $25,000 a year… ten percent of her wages doesn’t begin to cover the interest on the loan assuming an average 3% inflation.
Is there any mechanism to prevent such ludicrous loans from being made in the first place?
(Even if she’d graduated and found work as a teacher she still wouldn’t have been able to pay those loans off.)
(By the way, that’s a real person… I’m borrowing this example from The Economist.)
Was that for tuition only? I don’t think anything was anywhere near that expensive (in real dollars) when I was there.
Probably tuition + room & board + books.
According to a quick Google search the average cost of attendance at Sarah Lawrence is currently $79,414 per year, so for 3 years that’s $238,242.
But the article was from several years ago, so costs were lower.
Room, board and books wouldn’t be covered. Room and board were a lot less fancy then though, so more affordable.
Think The Young Ones.
I was envisioning a system with as little underwriting as possible. You are accepted into school, and you always have the option to fund your studies with this mechanism.
There would, of course, still be the risk that some schools would simply avoid offering programs that led to low-paying careers (like social work or education). Or perhaps some schools would see a niche there and find a way to make the economics work.
It’s definitely not a perfect, fully-formed idea. Mostly it’s the result of trying to find a way to shift schools from having a perverse incentive to allow students to dig huge holes for themselves to having a vested interest in their students’ future success (beyond the vague hopes that rich alums will donate money in the future).
There’s probably a better way to do that…but I haven’t figured it out yet.
Yeah, I think that’s a pretty perverse incentive. There’s already significant shortages in these professions so I don’t want to exacerbate that problem. I don’t want to go into those professions, but I do want other people to go into them.
Well you haven’t commented on my idea of forcing lenders to actually underwrite and assess a student’s creditworthiness by allowing loans to be dischargeable in bankruptcy, subject to certain carefully written conditions that would allow the Sarah Lawrence non-grad to, after some time had elapsed and it becomes apparent that she’s really not finishing, discharge her debts, but the medical school graduate with a promising lucrative career in front of her cannot.
Ignoring the rebuttals from my still-asleep inner libertarian (or at least it was still asleep before work distracted me from writing this…)
College and a means of financing it should be viewed as one of the greatest tools for at least partially offsetting social inequities that exist. A student’s background or the wealth/poverty they were raised in should be as minimal a factor as possible in deciding the accessibility of education that could potentially be a factor in whether they themselves will be successful or risk continuing their family’s potential reliance on the government dole.
That opens the door to one of the problems I see with your idea: the need for underwriting. Underwriting by private lenders opens the door to inappropriate bias entering the system. An ideal situation would be: student is accepted into college, and they automatically have access to a long-term financing program that is flexible enough to efficiently respond to the usual surprises of life/financial planning: unemployment, economic downturn, death and disability.
(Despite my reservations of underwriting, there probably would need to be some broad, general rules to address the risk that someone could game the system by e.g. becoming a perpetual student.)
Another problem I see is the reliance on private lenders would likely increase the cost of financing the system. Ignoring questions of the long-term creditworthiness of the federal government, a private lender is going to face higher financing costs than the feds, and would need to have a dedicated debt servicing system, and would have a profit motive to abuse that system.
I have mixed thoughts as to the question of whether student debt should be dischargeable through bankruptcy. Making such debts dischargeable adds credit risk and therefore cost, and creates a risk that someone might game the system by declaring bankruptcy immediately after graduating, when limited income increases the likelihood that their debt could be eliminated rather than restructured.
However, under the current system…we see the problems of debt not being dischargeable in bankruptcy: unemployment due to issues with the economy, disability, etc. And John Oliver highlighted how profit-motivated private entities seem to play games that render debtors ineligible for other avenues of student debt relief.
And now that caffeine has reached my inner libertarian… another place where I see a problem is that involving a third party potentially distorts the perception of the economics in decision-making.
Involving a third party makes it potentially easier for the school to press for higher costs (since the lender wants to provide more money in the hopes of greater profit), and the student (or the parents) feel like they don’t have much choice in the matter, at least if they are of limited means, and may not feel empowered to provide appropriate/effective resistance.
I want a system where the school has a vested interest in ensuring their students’ success, but one that isn’t so restrictive as to preclude support for needful but not necessarily profitable professions, and one that is less exposed to risk of bias while still providing access to students from disadvantaged backgrounds.
It needs to be a system where the net cost to taxpayers is minimal, where students are generally on the hook for paying for their education, but the schools have some skin in the game as well as an incentive for cost control and for educating students on making wise decisions…but still flexible enough to recognize that 
happens and that life is unpredictable. Student debt shouldn’t be what drives a person into financial ruin in an already had situation.
I think that’s been sorely lacking. A student who struggled to get Cs in high school should not be loaned $200,000 for college. They just shouldn’t. The likelihood of them finishing and being able to pay it back is just SO slim. Especially when their game plan is to be a teacher. Even a teacher would struggle to repay $200,000 of student loans which would’ve been more if she’d actually finished, and this was a while ago. Four years at Sarah Lawrence now costs around $320,000. Five or six years would obviously be more.
Maybe a student with mediocre grades & standardized test scores could be loaned less money. Attend community college for a year and get good grades there? Ok, now you’ve proven you’re serious… now you go get that degree at the best school you can get yourself into.
Another thing that is needed in higher education is a student bill of rights. The two main rights that students need and do not always have are kind of two sides of the same coin: they need protection from the bait & switch.
- Protection from graduation requirement changes
If you start in a program at a particular school, whatever the graduation requirements are for that program at that school should not be permitted to change while your degree is in progress, subject to some liberal time restraints.
Suppose that you start a bachelor’s degree program in, say, mathematics. When you start the college requires two semesters of English and one semester of a foreign language. So you duly take your two semesters of English and your one semester of foreign language. Then your junior year they decide that actually you need one semester of English and two semesters of a foreign language. Your second semester of English is now worthless and you’ve forgotten all the Spanish you took first semester of your freshman year.
NOT COOL!!! If they want to change up the requirements for NEW students, fine. No problem. But you paid for that second semester of English and opted to stop taking Spanish in good faith, believing that you were following what the school wanted you to do.
Now if you’re on the 8 or 10 or 20 year plan that’s different. I’d say protect the students for 2 years longer than the anticipated completion time (so 6 years for a bachelor’s degree if they’re enrolled full time). We could quibble about the precise cutoff, but something along those lines.
My college had this when I enrolled in 1993. It’s absurd that this isn’t universal.
- Protection from unreasonable tuition hikes.
The amount that they can increase the tuition for existing students gets capped at the CPI. Remember the students at UC Davis who got maced? They were protesting something like a 30% tuition hike. My cousin was a student at UC Davis at the time and was telling me how glad she was to have a full ride because she was shielded from the madness.
If you’re going into your senior year at a college they can essentially hold you hostage because whatever they charge it’s probably cheaper to pay it than transfer somewhere else and lose credits. Once again… NOT COOL!!! No college should be permitted to raise tuition that much on existing students. Freshman year tuition + CPI increases seems reasonable enough although we could possibly tweak the exact formula slightly.
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I could settle for loans being refinanceable, and NEVER variable. Of course that won’t help somebody who took out loans at 5% and now average rates are 8% and never drop below 5%, but if somebody took out loans at 11% and then rates drop to 4%, they should be able to take advantage.
As for the variable portion, I didn’t have student loans so only learned that variable rate college loans even exist. But I know somebody whose went up from 5% to 11%, or so I am told as I haven’t looked at their documents of course.
Also, immediately before you sign on that line, there should be a full repayment schedule showing the minimum monthly payment and the duration of time until that satisfies the loan (whether it’s 20, 30 years, etc.) And a disclaimer mandatorily read out loud to them that this minimum payment is on top of any other debt they may have such as credit cards.
Perhaps even a disclosure about the average 5-year-out monthly earnings per major, to compare against the minimum payment. Maybe don’t take out $120k to go to a private college to be a teacher. Maybe do community college for 2 years then 2 years of a cheaper college. Or shit, do the $120k loan if you want, after you’ve been informed that the minimum might be 20% of your earnings.
In that context, I would agree.
Initially, my reaction was that no student should be expected to graduate with $200k+ in debt to finance their education…but then I remembered that college is ridiculously expensive, and if part of what I’m expecting of a broad college financing program is reduction of inequities caused by differences in backgrounds of high school graduates, the program needs to support (for example) the possibility of a teen who grew up in the projects getting access to an Ivy League education.
I’m concerned about third-party underwriting perpetuating some of those inequities.
Part of me does say that if there’s going to be a government-supported student loan program, it needs to do no more than to support a couple of years in community college followed by a couple of years in the local state school (assuming the community college and state school in question satisfy basic accreditation)…but then how do you handle the reality that going to certain schools is how certain advantaged folks establish and perpetuate business, social, and political networks that folks from disadvantaged backgrounds have little hope of accessing?
In the system I was hypothesizing (and describing poorly), there would still be some underwriting, but that underwriting would come in the form of the regular admissions process. If a student that struggles to get C’s in high school is seeking admission to an education program at a ridiculously expensive college…the question of whether to give them a loan seems to be much in line with the question of whether they should be admitted in the first place. And because the college is going to be repaid based on that student’s future earnings, the college has a little more incentive to say “we won’t accept you at this time; maybe go prove yourself in community college, or get some life experience, and come back when you have a little more proof of being able to make it”.
(But I do still concede that that sort of a system will need some mechanism to ensure that there are enough graduates destined for professions that actually require a college education, are necessary for society, but are currently low-paid.)
One other one that I’d add: There needs to be some provision to ensure at least certain credits are transferrable among schools.
I know there’s been progress in at least some states since I went to school, but back in the day it was a mess trying to ensure that some classes would transfer.
While my family wasn’t as poor as some in the city where I grew up…well, I knew that paying for college was going to be a challenge. (I lucked out and was able to cover most of my education with game show and lottery winnings…but that’s another story). So, I tried to get most of my general education requirements for my degree covered via AP exams and classes at less-expensive schools (either the third-tier university in the city where I grew up, or a community college local to the university I actually graduated from).
Figuring out which classes I could take that would or would not transfer was ANNOYING…and I did lose/have to retake a couple of classes because credit wouldn’t transfer despite my having done (I thought) my homework in that regard.
I get that some colleges have good reasons for not wanting to accept certain classes from other schools. But general education requirements, classes not required for one’s major…those should be pretty darned portable.