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Why the White House Fudged the Numbers on Student Loans

Liz | Wednesday, October 08, 2014 - 11:31 am

~The dip in student loan defaults is bogus

~Loan default rates were recalculated to spare some schools

~Caught in the trap were for-profit schools, even the good ones

Eager to broadcast some good news approaching the midterm elections, the Obama administration recently announced a welcome dip in student loan defaults, from 14.7 percent for the 2010 cohort (loans taken out in that year) to 13.7 percent for 2011. Policymakers, alarmed about how our trillion-dollar student loan burden and soaring default rates are undermining our economic growth, cheered the report.

Unfortunately, it turns out the numbers are bogus. 

In keeping with a White House that talks a good game on transparency but that is cloaked in secrecy, the Department of Education moved the goalposts at the last minute, changing how the default rates were calculated and thus sparing some colleges from tough penalties. It has so far refused to say which schools were given a reprieve, though it appears likely that black colleges were the major beneficiaries.

Related: Student Loans Get the Boot at The University of Chicago

The academic world has been anxiously awaiting the Department of Education’s annual announcement on student loan defaults. As of this year, schools with three consecutive years of default rates above 30 percent (or one year above 40 percent) will risk losing federal financial aid. The review was expected to clobber the for-profit sector, but also to penalize some smaller schools characterized by higher-then-average student borrowing, such as numerous members of Historically Black Colleges and Universities, or HBCU. Last year 14 colleges in that organization had default rates above 30 percent.

Faced with impending penalties, some institutions worked to lower rates. Edward Waters College in Jacksonville, Florida, for instance, had a default rate for its 2009 cohort approaching 32.5 percent, but has managed to lower it to 26 percent more recently.

Though many schools adopted practices aiming to reduce defaults, some were still expected to fall below the government standard. Education Secretary Arne Duncan, speaking recently at a gathering of HBCU leaders, announced that because of changes to the way the numbers were calculated, none of the black schools would lose federal aid.

Proprietary (non-profit) schools, which have been under attack by the Obama White House for some time, were not so lucky. Twenty-one institutions, typically small for-profits offering beauty and cosmetology programs, were deemed to have default rates above the federal limit; those schools will likely lose their opportunity to offer students federal loans and grants – thus effectively putting them out of business.

Related: Why Easy Student Loans Are a Moral Hazard

For-profit schools enroll almost two million Americans, many of whom are older, are military vets, and minorities – in other words, exactly the population groups the White House should support. The Obama administration, for whom the word “profit” arguably triggers attack hormones, has long waged war on the sector.

Earlier this year the Department of Education issued yet another set of rules targeting proprietary schools mandating that the amount of student loan repayment must not exceed 8 percent of earnings – the so-called “gainful employment regulations.” By some estimates, that rule could cause some 40 percent of for-profit enrollees to lose federal financial aid.

Writing recently in Forbes, Vicki Alger, research fellow at the Independent Institute in California, notes, “The net taxpayer cost of a private for-profit college student is $183 compared to more than $13,000 per public college student.” She concludes, “If private for-profit options aren’t available, many of these students would have to transfer to public colleges and cost taxpayers nationwide an additional $1.7 billion annually.”

Related: How to Stop the Epidemic of Student Debt Defaults

While some proprietary schools have been feeding off the unfortunate, promising unlikely jobs and wages and taking advantage of generous federal lending, many offer opportunity to a segment of the population with limited options for advancement. Greater oversight may be necessary, but the problem lies with the system, in addition to a few bad apples.

Bottom line: Fudging the figures on newly established rules meant to curb wasteful lending by the federal government does not seem the most intelligent (or honest) way to rein in our towering student debt, which is a genuine problem. Studies have shown that young people burdened by loans are unable to buy homes and start families – their futures end up in hock to their education rather than guaranteed by extra hours in the classroom.

There are many better approaches, including:

Most important, giving young people better and more productive high school educations, including vocational training. While we consider sending an ever-higher portion of youngsters to college a sign of progress, it is also admission that few emerge from high school with the tools necessary to compete for jobs. According to economist Richard Vedder of Ohio University, there are 1 million retail sales employees and 115,000 janitors today with college degrees. Simultaneously, employers report a shortage of skilled workers. Something is amiss.
Limit the federal government’s role in college lending to military vets and targeted groups that would otherwise not be able to access financing. Borrowing for education should be rational; those seeking loans and those making them should be forced to analyze the value of the degree and the prospects for repayment. Just as the patient-payer disconnect has caused our health care spending to spiral out of control, so has overly generous government financing ramped up the cost of education, creating a trillion-dollar millstone around the country’s neck.
Do whatever it takes to put more Americans to work. The unemployed cannot repay student loans. There are 92 million adult Americans not working today. Some are retired or receiving disability, some are stay-at-home moms, but far too many have simply given up looking for work. President Obama’s jubilation over last week’s announcement that the unemployment rate dipped to 5.9 percent from 6.0 percent failed to note that fully 315,000 more Americans left the workplace. The decades-low workforce participation rate is a disaster for the nation, one that the president has conspicuously failed to address.

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