Financial Advice

What Elizabeth Warren’s College Affordability Plan Gets Right

Sen. Elizabeth Warren (D-Mass.) recently gave a speech about the affordability of higher education: a matter that is as personal to her, having put herself through school, as it is for those of us who’ve done the same for ourselves and our children.

Her focus is on finding ways to make it possible for graduating students to be free of debt (or, at worst, manageably indebted) through a combination of increased federal and state funding, and other measures that center on the public education system.

The states’ role is indeed critically important in this regard because of public education’s traditionally lower tuition prices for roughly three-quarters of all students who attend these schools. Lately, though, the funding for that has come under increasing pressure because of budgetary constraints.

To be clear, this is not to say that state schools should be the exclusive providers of higher-educational content. There will always be a market for concierge-level education, just as there is for concierge-level health care, and the consumers who are willing and able to pay extra for that.

State-Run Student Loan Programs

Apart from delivering lower-cost education, though, the states have another responsibility as well, which until now has escaped much notice.

A number of states have set up education-financing authorities that offer low-cost loans that rival the Federal Direct program. To the extent that the state-run authorities fund these programs in the same manner as the federal government (through direct borrowing) the authorities should be able to comparably restructure troubled debts. But when a state chooses to guarantee the loans that are then transacted by private-sector lenders, financially distressed borrowers often suffer because the contracts are controlled by nongovernmental entities (FFEL borrowers routinely encounter this problem).

Differences such as this that exist between the two programs need to be made clearer to prospective borrowers.

Rethinking the Business of Higher Education

In her speech, Senator Warren goes on to chide schools that engage in infrastructural warfare (my term, not hers), where costly state-of-the art sports, entertainment, dining and residential facilities are constructed for competitive advantage. Couple that with the fact that nearly half of all students fail to graduate and it’s reasonable to question whether these colleges are admitting applicants who are unprepared for the rigorous study and/or unable to sustain multiple years of tuition payments. Either way, there appear to be too many chairs and not enough students to fill them, which undermines the justification for that increased spending.

So that raises another question: Why is there practically no discussion about ramping up investments in vocational education and developing viable apprenticeship programs as there are in other countries? Not every high school graduate belongs in college, whether because of lack of readiness, or for aptitudinal or financial reasons. Yet there is strong demand for machinists, craftsmen, electricians and plumbers — all of whom can look forward to comfortable livelihoods without undertaking enormous financial obligation by comparison.

Financial Accountability

Speaking of debt, the senator adds her voice to others who want the colleges to have “skin in the game” with regard to defaulting student borrowers who leave school overly indebted and without the requisite skills to qualify for adequately paying employment.

Although the specifics for holding these institutions financially accountable is yet to be detailed (I have long advocated using cohort default rates for this purpose), I hope the plan that emerges will address three important considerations: debts that have been successfully charged back to the schools are discharged for the defaulting borrowers, taxes that would otherwise become due on the value of these forgiven debts are waived, and prior credit histories are expunged. I support this idea because I believe that improper loan structuring at the start (too short a repayment duration) and incompetent administration of the loans after the fact are the fundamental causes for the high rate of payment delinquency and default.

Counting the Dollars

Senator Warren also calls for an accounting of the $164 billion spent annually on federally sponsored student aid. Specifically, she wants to know how much goes to delivering educational content vs. funding increasingly bloated administrative costs.

A better idea would be to divide that same $164 billion by the approximately 18 million undergraduate students who are currently enrolled in the nation’s colleges and universities. Doing so would allocate to each student a little more than $9,000, which, coincidentally, is enough to cover the average annual tuition for in-state residents attending public schools.

As for the senator’s third proposal for colleges to “share in the savings” they can achieve by increasing operational efficiency and accelerating outcomes (i.e., have students graduate students in three to four years instead of five to six), another better idea would be to capitate funding just as insurers and the federal government do with reimbursements for health care costs: a specific procedure (undergraduate education, in this instance) is paid a specified amount and no more.

Dealing With the Loans Already On the Books

With regard to the status of the existing student-loan portfolio, Senator Warren wants a wholesale refinancing of that, a notion that is as obvious as is the severity of the underlying problem and yet inexplicably unable to garner meaningful support. Although the Department of Education is attempting to accomplish this in its own way, it’s doing that on the cheap. The relief programs are administratively cumbersome, and they are not universally available for reasons that include obfuscation on the part of loan-servicing intermediaries acting on behalf of note-holder investors.

Refinancing, however, is not enough. These debts need to be restructured at rates that fairly reflect the true costs the government incurs to provide this service, and the durations of the loans should be extended so that the repayments become more affordable. Doing so will reduce delinquency and, consequently, defaults. It will also lessen administrative expenditures because when handled properly, restructuring should be a once-and-done proposition.

The sticking point on that, I suspect, will be the unacknowledged truth that lurks behind the student loan program’s enormous profits: Because cash is fungible, these excesses end up offsetting budgetary deficits. Coming clean about that won’t be easy for our elected officials.

Building a Better Program

Finally, there is the matter of the ED’s poor stewardship of the student loan program. Senator Warren is right to hold the department to account for that and also in her call for the Consumer Financial Protection Bureau to oversee the management of our nation’s second largest consumer finance program.

But let’s also make this lending activity subject to all the protections that are currently afforded to consumers for their non-education-related debts, including eligibility for discharge in bankruptcy. And let’s also hold the note-holders (including private-sector lenders, securitization investors and the federal government) equally responsible for the improper actions of their loan-servicing agents.

At that point, not only will we have made good progress to making higher education more affordable, but we will also have put things right for the millions of consumers who’ve been left holding the bag.

This story is an Op/Ed contribution to and does not necessarily represent the views of the company or its partners.

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This article by Mitchell D. Weiss was distributed by the Personal Finance Syndication Network.