The issues surrounding the effort to limit the amount of debt incurred by students who enroll in vocational programs that don’t lead to remunerative careers are more complicated and nuanced than most of the emotional public commentary might lead one to believe.
First, the question of the role of the Baum and Schwartz paper, How Much Debt is Too Much? Defining Benchmarks for Manageable Student Debt (http://projectonstudentdebt.org/files/pub/Debt_is_Too_Much_November_10.pdf). This paper traced the history of the long-time rule of thumb that students who had to pay more than 8% of their incomes for student loans might face difficulties and looked for better guidelines. It concluded that manageable payment-to-income ratios increase with incomes, but that no former student should have to pay more than 20% of their discretionary income for all student loans from all sources. The Income-Based Repayment (IBR) Plan Congress implemented embodied the basic ideas in that paper.
How does this fit with the current gainful employment discussion? Most important, it seems totally reasonable for the government to protect both students and taxpayers from excessive borrowing by students with little hope of repaying their loans without unmanageable sacrifice. Individual students will always face problems because the investment in higher education, valuable as it is, is risky and doesn’t pay off equally for everyone. IBR is an important safeguard for individual students. But the idea that we systematically lead students into borrowing large amounts of money to attend programs that are highly unlikely to lead to careers that generate enough income to support their debt is another question altogether.
So the government has embarked on a sound project. The details of how best to regulate debt-to-income ratios are not, however, straightforward. We are happy not to have to devise those rules. Surely the details of the proposed rules could be improved upon, but the discussion would be more constructive if it were more about rational policy and less about either promoting the interests of for-profit institutions or preventing that sector from prospering.
Much of the discussion about these rules confounds manageable debt levels for individuals with appropriate standards for institutions. But the point at which an individual student should be relieved of responsibility for making monthly loan payments is not necessarily the same point at which average debt levels for groups of students studying at a particular institution should be deemed unacceptable. It is not clear that half (or more) of the students should be unable to repay their loans before we decide that the students are borrowing more than they should.
The rules can’t cover every possible variation in circumstances without being even more complicated than they already are. But a few concepts are critical. For example, the percentage of students accumulating debt at an institution must be part of the calculation, along with the average debt of those borrowers. If a few students borrow a lot of money and are unemployed and/or default on their loans, that is not the serious problem it would be if the majority of the students had this level of debt.
Perhaps most important is the argument about whether the proposed rules would hinder educational opportunity. The argument is surfacing that because many of the programs with high debt-to-income ratios and low repayment rates enroll high percentages of low-income students, denying access to loans for these programs will deprive these students of an education. While it is true that all other things equal, students from low-income backgrounds are more likely to have difficulty repaying their loans, the solution is surely not to allow them to borrow excessively and then struggle for years and possibly default on their loans. This argument distorts the idea of educational opportunity. Surely the appropriate solution is for these at-risk students to enroll in programs that have low enough price tags and/or generous enough grant aid to keep their borrowing needs in check. And of course the programs should lead to remunerative careers for most successful students.
Some of the arguments that take aim at specific technical provisions are really about whether the rules are viewed as too stringent or not stringent enough. Those who complain that students who are in deferment or forbearance because of economic hardship, or who are in IBR and are not paying down their loan principal, should not be counted as non-payers, are really just trying to loosen the standards. The fact that the students are (and should be) protected doesn’t change the reality that they are not earning enough to repay their loans. Of course they should be in the count of non-payers.
There are technical issues that work in the other direction as well. But even valid arguments about one or another detail miss the main point. The main point is how restrictive the rules should be – not exactly how they are calculated. They will never be perfect. Some of the fixes being proposed should certainly be implemented. But the rules can be adjusted to serve their purpose without putting perfectly good programs out of business.
The important moves towards accountability to students and taxpayers should not become a witch hunt. Many for-profit institutions provide students with opportunities not available to them at public colleges. We do need a wide variety of programs and institutions to serve at-risk students if we are going to achieve our goals for increased educational attainment. But if students are being poorly served by borrowing more money for vocational programs than they will reasonably be able to repay, we should find ways to redirect them into educational opportunities more likely to improve their life circumstances.
3 Responses to Gainful Employment
dshefrin - September 8, 2010 at 1:02 pm
This is a case of making what sounds like a good arguement. Baum and McPherson write, “Surely the appropriate solution is for these at-risk students to enroll in programs that have low enough price tags and/or generous enough grant aid to keep their borrowing needs in check. And of course the programs should lead to remunerative careers for most successful students.” Sounds great – but where are these programs offered given the public institution’s shrinking capacity and rapidly rising tuition? Do they even want these students? I think the answer is they do not want these students at the cost of more traditional students. Limited capacity forces the choice.Baum and McPherson further add, “But if students are being poorly served by borrowing more money for vocational programs than they will reasonably be able to repay, we should find ways to redirect them into educational opportunities more likely to improve their life circumstances.”Okay, so they have made the arguement – twice. Do they not have an obligation to express an opinion on how to achieve this lofty goal? It sounds so simple.
mkant69 - September 10, 2010 at 11:57 am
Sandy Baum and Michael McPherson write “Surely the appropriate solution is for these at-risk students to enroll in programs that have low enough price tags and/or generous enough grant aid to keep their borrowing needs in check.” This assumes that repayment behavior has a stronger correlation with debt levels than with demographics. Average debt at graduation does correlate strongly with cost of attendance and related measures (e.g., tuition, net cost). But the lower average debt at public colleges is perhaps due more to the lower percentage of students graduating with debt than to the amount borrowed by students who graduate with debt. For example, 32.4% of low income certificate recipients graduate with debt at public colleges with net cost under $5,000, compared with 72.0% at for-profit colleges, but the average debt among those who borrow is higher ($9,569 vs. $9,237). (Average debt at graduation for Associate’s and Bachelor’s degrees, however, is about $7,000 or $8,000 higher at for-profit colleges than at public colleges.) Since colleges cannot limit student borrowing to just institutional charges, it is unclear to what extent shifting enrollments will reduce debt and improve loan repayment rates and to what extent it will shift the cause of the low loan repayment rates. It’s probably a mix of factors, but there is inadequate research on the potential impact of the proposed changes.
betterschools - September 10, 2010 at 12:30 pm
I find a few of the points made here are disingenuous in what they fail to say. Cloaking an abiding bias in the language of reasonableness, as these authors have done, does not make the assertions (and unstated compelling counterfactuals) more palatable. I encourage the authors to get into the trenches and learn more about this issue.1. Under certain precepts of consumer protection one can reasonable say that “. . . it seems totally reasonable for the government to protect both students and taxpayers from excessive borrowing by students with little hope of repaying their loans without unmanageable sacrifice.” Not mentioned is the fact that the proposed gainful employment rules will apply, overly broadly, to only one class of institution that serves roughly 12% of the market. The Administration’s rationale for this narrow application is (a) that for-profits cost the taxpayer more and (b) have higher loan values and default rates. Both claims are empirically false. Not grey areas . . . false. Economists vary in their assumptions and therefore their findings when determining taxpayer costs of institutional types but the absolute range is from zero to $4,500 for for-profits and $10,500 to $16,500 for publics. Examining the feds own loan database for loan payback and default for public colleges serving higher proportions of lower income, first-generation students, turn in higher loan values and lower payback percentages. See details at: http://chronicle.com/article/For-Profit-Colleges-Wage/124303/#lastComment2. The authors say, “So the government has embarked on a sound project. The details of how best to regulate debt-to-income ratios are not, however, straightforward.” I believe the authors know the magnitude of this understatement is such that the rules, as proposed, are neither sound nor will they accomplish their ostensive goals. The authors know that the largest proportion of variance in the variables of interest (default, etc.) are accounted for by loan value and debt/income ratios. From a different perspective, these same variances are accounted for by student and family demographics (e.g., the University of Phoenix programs offered to working business people have among the lowest default rates in the nation, irrespective of institutional type; their programs chosen predominately by the underclass have high drop out and default rates). Common sense right? I guess not because the schools to be regulated by these proposed rules will not be permitted any visibility into how much their students borrow, to determine whether their students can reasonably be expected to be able to pay back what they borrow, or to have any influence whatsoever on the amount borrowed. They will be held accountable for behavior over which they will be denied any control or visibility. Does that sound fair to anyone? Do these economist authors understand the concept of externalized internalities? Statistics are widely available showing the growing trend of students borrowing as a substitute for saving and working, even taking out maximum student loans to purchase cars and homes. Under the proposed rules, the schools will be held accountable for these excesses but will not be permitted to learn of them until they receive their after the fact default notice from the feds. And, what is the fed’s position this growing loan problem. One need only look at their websites to see that they are encouraging students to borrow as much as they “need” and to consolidate loans. At the same time, the proposed rules count consolidations as defaults against the schools. (There is more detail to this but the main point stands.)3. The authors state, “Surely the appropriate solution is for these at-risk students to enroll in programs that have low enough price tags and/or generous enough grant aid to keep their borrowing needs in check.” What they mean by this is tax-supported public institutions where the total cost is north of tuition plus $10-16K (~$20K). They fail to accommodate the fact that public institutions across the nation have turned in double-digit tuition increases, some as high as 17%, with hidden fee increases reported as high as 54%. In the meantime, they are closing doors on programs, reducing enrollments, and turning record numbers of applicants away. These are the schools these the authors would have the displaced underclass students attend. The truth is that these public institutions do not want and will not admit many of these students. Let them eat cake, I guess.Much attention has been given to the culinary industry as an example of programs for which students of for-profit schools do not meet reasonable gainful employment tests and that the public institutions could just as easily educate. Today, 59% of the culinary bachelors degrees are delivered by for-profits. No knowledgeable person could suggest that the public 4-year institutions could pick up this load when, at present, they provide only 11% of these degrees. (Have these authors done any homework?) Setting my claims aside, take a look at what the National restaurant Association said in their plea to the Department to look at the facts. They depend on the for-profits for an educated workforce and they are worried. See: http://www.intered.com/storage/deptofed/NRA_Gainful_Employment_Comments.pdfThe authors distinguish between problems in application and problems in theory, noting that the former can be worked out so long as the latter are minimal. I agree but, again, this position is either disingenuous or naive. The department of education has a near perfect record of creating rules that it does not and cannot enforce. Do the authors really think this will be different? Who — in reality, based on track record — will work out the bugs in this approach and enforce the final versions? How will that work take place and why would we think it will since there is no history of this kind of detailed follow-up taking place? This and most federal departments follows a standard practice of proposing new rules to address problems created by failing to enforce current rules. Then there is the fact that each administration wants to leave its stamp on every major industry.To anyone working in a public institution who might be enjoying the suffering of your for-profit colleagues, I would advise you to put principle over immediate self-interest. The feds have plans to come after you next and you will have lost your opportunity to stop this paternalism, unreasonable for 17-21 year olds, notwithstanding the fact the 40% of college students are working adults and something in the area of 75% of the for-profits’ students are working adults.Serving all three types of institutions as I do, my career is unaffected by all of this. My concern is for equity and sound policy. I believe policy cannot be sound if it is fundamentally unfair in its application. Even many of its supporters acknowledge that this proposed policy is inequitable in its application.In my letter to Secretary Duncan, I have addressed a range of serious shortcomings –factual, mathematical, theoretical, and ethical — in the proposed regulations on gainful employment. You can see the full letter here: http://www.intered.com/storage/deptofed/InterEdTuckerLetter-to-Duncan_090810.pdf