Obama’s low-quality college bailout will fuel skyrocketing tuition
by Hans Bader
We wrote earlier about perverse federal financial aid policies that encourage colleges to jack up tuition. Recently, the Obama administration came up with something even worse. It announced a new financial aid policy that will effectively bail out low-quality, high-tuition colleges and especially law schools at taxpayer expense, and encourage colleges and professional schools to increase tuition even more. These changes are the product of a revised income-based federal student loan repayment program that will go into effect starting Dec. 21.
The revised “Pay as You Earn” program will allow eligible student-loan borrowers to cap monthly payments at 10 percent of discretionary income, and have their federal student loans forgiven after 20 years — or just 10 years, if they go to work for the government. An earlier version of the program capped payments at 15 percent and offered forgiveness after 25 years. For students who foolishly attended third-rate but expensive colleges and law schools, this could wipe out part of their debt, at taxpayer expense, since their salaries in the low-paying jobs they end up with will be insufficient to pay off all of their massive debt in 20 years if they pay only 10 percent of their leftover income on repaying their student loans.
In the short run, this will primarily benefit those students. But in the long run, the primary beneficiaries will be low-quality but expensive colleges and law schools, which will be able to raise college tuition through the roof, since no matter how much debt their students run up in college, it will be written off after 20 years. That will eliminate market-based price discipline for those colleges, resulting in even more rapid increases in tuition.
As Peter Schiff, the President of Euro Pacific Capital, notes, this plan
will ensure students are able to commit to higher levels of federally backed student loans. By limiting student obligations to repay, and by passing more of the repayment burden onto taxpayers, colleges and universities will be able to continue to raise tuitions at a rate that outpaces nearly every other cost center in the American economy. The move will come as a great relief to the education establishment who otherwise may have needed to cut or cap tuitions.
The Obama plan limits repayment obligations to just 10% of “discretionary income” which it defines as total income above 150% of the federal poverty level (currently translating to about $16,000 for an individual, or $33,500 for a family of four). The plan also limits the term of obligation to 20 years. These terms represent a substantial easing and acceleration of the terms in Obama’s “Pay as You Earn Plan,” which was just announced last year . . .
Assuming that a successful college graduate would earn, on average, $80,000 per year over the course of the 20-year obligation period, the repayment burden under the new plan will total somewhere around $4,500 per year, or $90,000 for the life of the loan. A less successful graduate who earns say $50,000 per year, on average over the 20-year obligation period, would have a repayment burden of just $1,500 per year, or just $30,000 over the life of the loan. Any loan amounts above those totals will be forgiven.
As a result, students need not fear the inability to repay large loans. . . . the less a graduate earns, the greater the amount of loan forgiveness. For the majority of students, who don’t become very high earners, it will make little difference if loan amounts are $90,000, $180,000 or even more. As the repayment burden will be capped to a percentage of average income, loan repayments will be the same for any loan beyond a certain threshold.
These policies could remove all barriers for larger and larger loans, which will then allow universities to charge higher and higher tuitions. . . .The day of reckoning in which the higher education system would have had to offer programs that fit into the budget of average Americans has been postponed, if not entirely eliminated.
Of course the losers in this new arrangement will be American taxpayers who will be on the hook for the unpaid balances. Recently, college loan debt passed credit card debt as the largest, non-mortgage, source of debt in the United States. . . . If college students were willing to rack up this much debt under the assumption they would have to actually pay it back, imagine how much debt they will be willing to amass now that they realize they do not? As a result, expect college tuition increases to not only continue but to accelerate.
Third-rate law schools may benefit disproportionately from this bailout, since law school tuition is funded disproportionately by student loans, loans graduating low students at lower-tier law schools will not be able to pay back with just 10 percent of their income over 20 years. As the American Bar Association’s ABA Journal notes, “Law students . . . are treated generously as future professionals and able to borrow, with virtually no cap, significantly more money than undergrads.” Meanwhile, law school tuition has risen nearly 1,000 percent after inflation over the last half-century. As law professor Brian Tamanaha notes, at 20 expensive low-tier law schools, most students never will be able to fully repay their student loans, since most graduates of these schools don’t find good jobs.
Under the Obama administration’s new program, the federal government will write off most of these foolish law students’ loans, and they will not even have to repay what they are capable of paying, since their payments will be limited to less than 10 percent of their income. (By contrast, prudent students who attended cheaper or better law schools will not receive the same benefit, since their loan payments are already smaller compared to their incomes.) These law schools will respond by increasing tuition even faster, since the increased tuition will be paid by the American taxpayers when the borrowed tuition is later written off (and since the law schools can use some of the increased tuition “loading up their campuses with even fancier facilities such as gymnasiums, performing arts centers, food courts and health centers,” to attract students, and use the rest to pay their administrators a fortune. One fourth-tier law school pays its dean $867,000 per year!).
This taxpayer subsidy for low-tier law schools is especially unfortunate, because such law schools are in many respects economically harmful, and many law schools teach their students so few practical skills (as a few candid law professors have admitted) students would be better off studying for the bar exam on their own, rather than attending such schools (alas, the option isn’t available, since most states require students to attend law school before taking the bar exam, even though I found my time at Harvard Law School to be mostly a waste. Students should be able to sit for the bar exam without wasting three years in law school).
Colleges have been able to increase tuition faster than inflation, year after year, secure in the knowledge they can rake in ever-rising government subsidies and skyrocketing tuition. College students are learning less and less even as education spending has risen. Meanwhile, the Obama administration has de-emphasized the teaching of practical skills needed in manufacturing.
Using faulty math (and assuming interest rates will stay low forever), the Obama administration has given this costly income-based repayment program a ridiculously low price tag of just a few billion. (In one of its computations, it falsely assumed the poverty level — the level of income exempted from repayment under its income-based repayment plan – never would increase because of inflation, even though it rises along with inflation, just like wages do.)
Only 7% of Detroit Public-School 8th Graders Proficient in Reading
In the public schools in Detroit, Mich., according to the U.S. Department of Education, only 7 percent of the eighth graders are grade-level proficient or better in reading.
Some public school teachers in the City of Detroit and around the state of Michigan are reportedly taking a vacation or a sick day today to protest right-to-work legislation likely to be approved by the state legislature. Under current law, Michigan public school teachers must pay dues to the teachers’ union. If the right-to-work law is enacted, Michigan public-school teachers will be free to join the union and pay dues to it if they wish, but they will also be free not to join the union and not to pay it dues.
Detroit public-school eighth graders do even worse in math than they do in reading, according to the Department of Education. While only 7 percent scored highly enough on the department’s National Assessment of Educational Progress test in 2011 to be rated “proficient” or better in reading, only 4 percent scored highly enough to be rated “proficient” or better in math.
Statewide in Michigan, only 32 percent of public-school eighth graders scored grade-level proficient or better in reading, and only 31 percent scored grade-level proficient or better in math.
68 percent of Michigan public-school eighth graders are not proficient in reading and 69 percent are not proficient in math.
Over the past decade, Michigan’s public school have shown no improvement at all in teaching children how to read. In 2002 just as in 2011, according to the U.S. Department of Education, only 32 percent of Michigan public-school eighth graders scored proficient or better in reading.
The state’s public schools have made a slight improvement in teaching math. In 2000, only 28 percent of Michigan public-school eighth graders were proficient or better in math. By 2011, that had inched up to 31 percent.
British government: dock teachers' pay if they 'work to rule'
Teachers should have their pay docked if they “work to rule” in protests against the Government's school reforms, the Education Secretary has said.
In an escalation of tensions with trade unions, Michael Gove has written to head teachers urging a "robust reponse" towards all staff who take part in a new wave of industrial action.
The Cabinet minister condemned the “irresponsible” unions for telling teachers to stick narrowly to their job descriptions and refuse any extra tasks. This disrupts the education of children and causes long-term "damage to pupil outcomes", he said.
Mr Gove said pay can legitimately be docked from teachers who attempt this kind of behaviour, which he described as "damaging the reputation of the profession".
The Government’s relationship with the teaching unions has deteriorated since George Osborne outlined plans to link teachers' pay to classroom standards in the Autumn Statement last week.
The unions are already angry at the Government’s “erosion of working conditions and pay” and ministers’ “daily criticisms” of the profession.
The NUT and NASUWT unions have advised teachers they can legally refuse to cover colleagues' sickness absence, submit lesson plans, allow more than three hours of observation per year or write more than one school report per year.
However, the Education Secretary yesterday told head teachers that staff in unions who take this action are likely to be in breach of their contracts.
He published legal advice to teachers and a letter from his department saying that docking up to a day's pay is a "proportionate" response. "The legal position is clear: teachers who are following this industrial action are very likely to be in breach of their contracts,” the Education Secretary wrote. “Pay deductions represent a lawful response, and the advice sets out how deductions can be made in a proportionate and reasonable way.”
He condemned the unions for causing "unnecessary disruptions" to children's educations. “I would be very grateful if you could support your school in taking a robust response, including through pay deductions where appropriate," he wrote. “I am convinced that by working together in a coordinated way we can protect the pupils, parents, teachers and headteachers who would otherwise suffer because of this irresponsible industrial action.”
A few schools have already seen their teachers work to rule over Mr Gove's education reforms, leading to further strikes in some cases.
More than 15 teachers took part in a separate one-day strike at Westfield Sports Academy in Sheffield because teachers had not being told in advance exactly what time observations of their lessons would take place. Seven members of the NASUWT union have also walked out of Dunston Primary School for two days in protest at the “intrusive and unnecessary” monitoring of their teaching.
Last night, teaching unions reacted angrily to Mr Gove’s letter. Chris Keates, General Secretary of the NASUWT, said|: "The Secretary of State is recklessly encouraging schools to take punitive action against teachers on the basis of advice which is littered with caveats and ambiguities. "It demonstrates quite clearly that the Secretary of State is unable to state categorically that any action being taken by NASUWT and NUT members is in breach of contract. "In the light of this, any school which acts on his advice leaves itself vulnerable to extensive and expensive litigation and escalation of industrial action."
Mr Gove is now reportedly considering new anti-strike laws to challenge the right of teachers to take industrial action.