Everything you always wanted to know about Sallie Mae…

From the advocates at the National Consumer Law Center comes an eye-opening report on Sallie Mae. My first thought was that the “Sallie Mae Saga” should be required reading for everyone who cares about “the dangers of relying on a for-profit publicly traded company to protect borrowers and taxpayers.”  My second thought was that it should be required reading for everyone.

The prepay prevention plan

Every student loan has a prepay option, but servicers make them almost impossible to use.  Ever wonder why they make it so hard?  Rohit Chopra and his team at the CFPB asked private loan servicers and came to some conclusions:

“Creating obstacles for borrowers to direct payments to a specific loan can increase future servicing revenue.  Incentive misalignment was one cause of significant harm to consumers in the mortgage servicing industry. This may also be a contributing factor to the frustration experienced by many private student loan borrowers who submit complaints to the CFPB about payment allocation issues.”

In other words, the harder it is to prepay, the more money the servicer makes.

In my day we worked our way through college…

The Milwaukee Journal Sentinel notes that working your way though a four year public institution, even in a low-cost city, would be impossible at minimum wage.

“In 1978, a UW-Madison student paying his or her own way, without any help, had to earn $2,362. It could be done at minimum wage by working full-time through the summer and about 10 hours a week through the academic year, or a total 891 hours.  Today, a full-time UW-Madison student going it alone couldn’t physically work enough hours at minimum wage to earn $18,402 for tuition, fees, room and board. It would take 2,538 hours, or about 50 hours per week for 50 weeks.”

Climbing the Tuition Wall

Are climbing walls driving the increase in tuition?

The Wall Street Journal has argued since since the late 1990s (sorry, the WSJ hides its light under a pay wall) that universities are able to raise tuition because the government gives students loans to pay that tuition. Universities, in an attempt to lure students, build “Club-med style amenities,” like climbing walls. But are these the drivers of the massive increases in tuition that students and their families are now expected to bear?

Not necessarily. The New York Fed points out that, since the 1980s, state subsidy for higher education has steadily decreased. Between 2000 and 2010, state funding decreased by 21%.  The economics of this are relatively simple, even for a lawyer like me:  In the face of declining state subsidy, public colleges raise tuition to cover costs.

For more information, check out these reports by the Center on Budget and Policy Priorities and the American Institute for Research.  And the situation may not improve anytime soon.  The American Institute for Research reports that the amount that tuition has been raised is not enough to make up for the gap in state funding.

Student Debt at the Intersection of Race, Class and Gender?

The vast majority of reports on student loan borrower and defaulter characteristics tend to focus on one trait– socioeconomic status, race, gender– at a time. While some authors flat-out state that they don’t intend to consider how characteristics relate to one another, for instance, socioeconomic status and race in calculating risk of student loan debt, the majority seem to simply fail to consider exactly how multiple factors might affect a student’s access to resources.

Much of the literature on student loan debt and default rates disaggregates data by single characteristics.  Nicholas Hillman’s College on Credit and the Urban Institute’s Forever In Your Debt take this approach.  Other reports and articles–like Mark Kantrowitz’s Calculating the Contribution of Demographic Differences to Default Rates, the AAUW’s Graduating to a Pay Gap, and Gross, et al.’s  What Matters in Student Loan Default?–mention intersections, but only in passing, and without sustained analysis.

Teasing out single factors is useful, but only up to a point.  If feminist theory has taught us anything over the past decades, it is that we cannot consider race, class, gender or other characteristics in isolation.  To do so is to fail to understand that people do not inhabit one identity at a time, and that the experience of multiple discrimination is the norm, not the exception.  For example, if having a child is is a “risk factor” for drop out and default, why do we not have better analysis of which students are the most likely to be the sole support for dependents?  How can we know the best way to ensure that these students benefit from higher education if we do not know who they are?

Defaults rise, by any measure

The Department of Education has released the most recent numbers for federal student loan default:  “The national two-year cohort default rate rose from 9.1 percent for FY 2010 to 10 percent for FY 2011. The three-year cohort default rate rose from 13.4 percent for FY 2009 to 14.7 percent for FY 2010.”

The Department is in the midst of changing the time frame in which it measures default, from a two- to a three-year window.  Under the new measure, 14.7% of the students whose loans entered repayment between October of 2009 and September of 2010 defaulted before the end of September of 2012.  This means that around 600,000 student loan borrowers (out of a cohort of 4 million) defaulted.  The consequences of default are severe and can be disastrous for students and their families.

The Huffington Post points out that these default numbers are only one component of an increasingly troubling picture, noting that “about $52 billion in student loans that had been current became delinquent in the first half of the year, the highest first-half total recorded since 2003.”

Wherefore Art Thou, Higher Education Act?

This week’s guest post is contributed by Marie Vanderbilt, a 3L at American University Washington College of Law.  Marie breaks down the past, present and future of the Higher Education Act, the umbrella statute for most federal aid.

Will Congress manage to reauthorize the Higher Education Act of 1965 (HEA) before it sunsets at year’s end? The HEA formed one of the main pillars of the Johnson Administration’s War on Poverty (watch LBJ deliver the 1964 State of the Union, minute 20:20.)  The goal was to ensure that no one would be denied an education because of their financial situation.  The HEA removed financial barriers to higher education by authorizing a program of need-based grants and student-support programs. Since 1965, the HEA has been repeatedly reauthorized, most recently in 2008. Each time, the HEA has been amended, edited, and expanded. However, the foundational belief in the importance of access to education remains.

With Congress deadlocked over the budget, it is hard to imagine a serious conversation about how we should fund our system of higher education.  The Senate HELP Committee held new hearings this past month, at least a glimmer of activity.  The last time, Congress didn’t manage to reauthorize until five years after the deadline.  The purpose of having laws sunset is to open up programs for inspection and debate.  In the case of higher education, that moment will soon be overdue.

Does student debt reduce lifetime wealth?

Last week an economist asked me for my most impressive fact about student debt (yep, people in DC really do ask that sort of thing over dinner.  Maybe that’s why they don’t let us outside of the Beltway.)

Student debt swims in facts and figures, but the one that I tend to pull out a parties filled with young urban professionals is that a dual income young couple with bachelor’s degrees and an average amount of debt ($53,000) will lose over $200,000 of lifetime wealth compared to a comparable couple without debt (read the study, by Demos, here.)  A huge chunk of this loss is in retirement savings, despite the higher incomes that go with higher education.  This fact tends to bring the conversation about “why is student debt bad” home in ways that talking about the possibility of default might not.  Then people are usually better primed for the most important part of the story:  that 200K is the best case scenario.  Low-income students, students of color and students of for-profit schools — especially those who default– will see even larger lifetime losses.

Student Debt Blame Game

Jordan Weissman over at the Atlantic wants to know which colleges are to blame for the explosive growth of student debt.  He notes that public disinvestment is driving up debt at public schools (which generate the lion’s share of debt because they educate the majority of students) but that for-profits have the highest rates of default.  And don’t worry, he points the finger at private non-profits that have failed to rein in costs, too.  Apparently, there is plenty of blame to go around.

 

 

Guest post: Kentucky AG takes on Spencerian College

SDEJ is proud to present a series of guest posts by our research fellow, Avie Zhao.  Avie is a 3L at American University Washington College of Law, where she is a member of the Business Law Review.  She is interested in business litigation, and is currently serving as a student attorney with DC Law Students in Court where she represents indigent clients in DC Superior Court.

For the next three weeks, she will highlight some of the actions state attorneys general are taking against for-profit colleges.  These actions situate higher education squarely within the realm of consumer law, a frame that raises fascinating questions about whether better information will lead to better outcomes for students.

Commonwealth of KY v. Sullivan d/b/a/ Spencerian College

Jack Conway, Attorney General of Kentucky and leader of a national bipartisan effort into examining abuses by for-profit colleges, is now investigating Spencerian College.  In January, 2013, Conway’s office brought a consumer-protection lawsuit against Sullivan University System, Inc., the parent company of Spencerian College.  The complaint alleges that Spencerian College knowingly provided false and misleading data regarding the percentage of students who were able to obtain employment.  Spencerian allegedly inflated the employment rates of graduates by as much as 40 % in its publications and on its website.  The complaint seeks injunctive relief, civil penalties, and recovery of investigative costs.

This lawsuit against Spencerian College marks the fourth lawsuit against for-profit colleges filed by Attorney General Conway’s office.  Previously, Attorney General Conway’s office has filed civil lawsuits against Daymar College, National College, and Education Management Corp. (parent company of Brown Mackie College).