Tuesday, August 05, 2014

To keep grads solvent, take middleman out of student loans

The mounting student debt crisis could cause serious economic damage to the United States. Rising college costs and declining financial aid at both state and federal levels have significantly contributed to the problem. A good deal of responsibility, however, belongs to the financial institutions that service federal student loans, according to a new report.

Millions of students use loans underwritten by the Treasury Department and granted by the Department of Education to help make college a reality. Once the loan is approved, however, borrowers usually deal with third-party servicers — and that’s where the trouble often begins.

In 2010, the Education Department expanded its Direct Loan Program and contracted many for-profit financial institutions to service and administer the loans. Complaints to the department’s Office of Federal Student Aid jumped significantly.

The Consumer Financial Protection Bureau has documented a wide range of complaints, including payments not showing up in payment histories; processing errors that maximize late fees and penalties; misinformation on how payments are applied to multiple loans; misplaced paperwork that results in missed deadlines, and poor customer service that denies borrowers vital information about flexible repayment options.

Borrowers also complain that servicers often make debt management more complicated instead of helping them manage their debt. Servicers, however, are at fault for far more, according to the new report by Eric Fink, associate professor of law at Elon University, and Roland Zullo, an assistant research scientist at the University of Michigan.

Thousands of college students and faculty march at the State Capitol in SacramentoTheir study shows that servicing firms are playing a major role in the huge increase in student-loan defaults and delinquencies — because the companies have neglected their responsibility to counsel borrowers with distressed loans. By complicating the process and providing misinformation about repayment options, many servicers make paying off student debt an incredibly difficult process.

Since Education Department contracts cap the total revenue a servicer can make on each account, many companies seek higher profits by trying to cut other costs. The result is often a reduced customer-service staff and overall decline in service.

Yet these financial institutions do not shoulder all the blame. The report also blames the Education Department for not providing appropriate oversight and allowing servicers to take on new loans they cannot manage efficiently. Though the department periodically reviews each contractor, the companies are all guaranteed to receive some proportion of new accounts — essentially undermining any demands for performance improvements.

Moreover, because contractors are assessed against each other — rather than against independent standards — the entire floor is lowered with no consequence or penalty for poor performance.

Education Secretary Arne Duncan has recently agreed to conduct an internal investigation of his department’s servicers. But other government agencies have already looked into this — and the results were troubling. The Federal Deposit Insurance Corporation and the Justice Department both investigated one of the largest student-loan servicers, Sallie Mae (as well as Navient, formerly a division of Sallie Mae). The companies were found to be overcharging active-duty soldiers  on their federal student loans. The investigation resulted in a large settlement from both companies.

This helps demonstrate the Education Department’s failure to oversee its contractors effectively. Several senators have also called on the Office of Federal Student Aid to address complaints about Sallie Mae. Senator Tom Harkin (D-Iowa), for example, charges that the servicers are being treated as though they’re “too big to fail.”

To rein in servicers, policymakers should move contract monitoring to the Consumer Financial Protection Bureau. It has no stake in the servicers’ performance.

uspo-texasAnother way to overhaul the program is to cut out the middle man. Administration of the loans could be taken on fully by the federal government and moved to a government agency better equipped to handle it, with a mandate to insist on responsible servicing rather than revenue maximization. In their report, Fink and Zullo recommend moving oversight to the Treasury Department, the Internal Revenue Service or the United States Postal Service.

Their suggestion dovetails with the Postal Service inspector general’s recent comments about expanding into nonbanking financial services, particularly for people underserved by existing banks and other financial institutions.

The agency is logistically well-positioned for loan servicing with its vast network of offices, many on college and university campuses. It has the personnel and infrastructure to assist borrowers with financial transactions.  Unlike current servicers, the Postal Service could offer face-to-face counselors. In addition, the Post Office is already more trusted than banks.

Combating student-loan debt will require reform on many fronts — including tackling college affordability. There are clear, actionable steps, however, that can be taken immediately to ease borrowers’ debt burdens and lessen the resulting drag on our economy.

One crucial missing ingredient, however, is the political will to stop this crisis from getting even worse.


College Sticker Price Still Matters. Here's Why

Sure, there are "coupons" like scholarships and grants, but sticker price still has a big impact on both the federal government and students.

Over on The Upshot at the New York Times, David Leonhardt throws a little cold (or maybe just “slightly cool”) water on the hysteria over rising tuition, noting (correctly) that the primary tuition inflation measure that the federal government used for years was based on the average sticker price of tuition, rather than the average price that students end up forking over to attend (which would include grants, scholarships, and the like). No one disputes that net prices are rising, and contrary to what Leonhardt infers, the federal government has been releasing net price figures for decades, but he’s right that the overall tuition inflation number is the one that gets cited by his media colleagues most often. The result—as in many things—has been a less-than-accurate read over how much the overall cost of college has been increasing for families.

Leonhardt likens the overall college business model to men's retailer Joseph A. Bank, where it would be silly to extrapolate the “affordability” of their product from the price of one suit (since the store has a constant buy-one-get-seven-suits-and-a-also-a-smartphone deal to entice consumers). If you’re less into menswear and fancy a home goods analogy instead, Ben Miller of the New America Foundation has also compared the college pricing model to ubiquitous 20 percent off coupons from Bed, Bath and Beyond.

The problem is that while net price gives a more accurate picture there are several reasons why sticker price, and its overwhelming increase over the past several decades, still matters.

The first reason is that, willingly or unwillingly, neither colleges nor the federal government have been able to fully communicate the actual price that students will pay to attend a given institution. On one hand, financial aid—that is, grants and scholarships, not loans—reduce the overall cost to students and act like the “sale” at Joseph A. Bank.

On the other hand, looking at tuition and fees alone is pretty useless if you want to understand the total bill for which a student is on the hook while in school.
On the other hand, looking at tuition and fees alone is pretty useless if you want to understand the total bill for which a student is on the hook while in school. After all, students are also responsible for living expenses, food, books, transportation—not to mention the opportunity cost of not working (or not working full-time) while in school. Tuition and fees make up less than half of what it costs to attend college, even by the stingiest measures.

One can also make the case that the tuition sticker price underestimates the overall cost of college because students take on average longer than four years to graduate from four-year institutions (and longer than two years to graduate from two-year schools). Further, the “net price” after grant and scholarship aid almost never factors in interest rates on the loans that students are forced to depend upon—which can make it so a student borrows $10,000 but is really on the hook for well over twice that, depending on his or her payment schedule.

So the inability to communicate net cost of attendance makes students both overestimate and underestimate what it’s going to take to get through school.

This matters because it very much impacts students’ choices of whether and where to attend college. Many studies—including a 2012 poll conducted by the College Board—show that more than half of students are ruling out institutions, or basing their college decisions, on sticker price alone and not factoring in net cost. Either the “sale” has not been clearly communicated to them, or because it’s a lot more complicated than taking seven suits to the checkout counter, they have removed the possibility of attending a school whose tuition has doubled over a 20-year period. This phenomenon is the reason behind the Obama Administration’s myriad efforts at “consumer information,” from the College Scorecard to standardized financial aid award letters, and even to its idea to rate colleges based partially on affordability and value.

Basically, it’s likely that most families still make decisions based on sticker price, either when a student is college-age, or well before.

In other words, sticker price dictates how much the federal government has to play catch-up.
But the most important reason that sticker price matters is that sticker price inflation dictates how much the federal government spends to make it so there is a net price. In other words, sticker price dictates how much the federal government has to play catch-up. High sticker price is one of the main reasons the feds dole out almost $170 billion in grants, student loans, tax incentives, and work study money each year, or nearly $70 billion in non-student loan money—money that, unlike loans, actually reduces the net price.

Beyond all this, there are some reasons to be alarmed about even the net price figures that Leonhardt cites. Others have noted that the College Board controversially includes tax credits and deductions when factoring in the net price of college—basically the tax benefits that some students and families are eligible for 9 to 18 months after tuition bills are due (benefits whose take-up rates are staggeringly low). We also allow colleges themselves to determine and report the cost of living (or non-tuition costs of college), which can lead to some very wacky results as Robert Kelchen, Assistant Professor at Seton Hall, thoroughly noted here a few weeks ago.

But beyond methodology, net price—which again, everyone agrees is rising well beyond inflation—is actually increasing for low-income families faster than for higher-income families (see this tool from the Dallas Morning News and others that uses federal data for more). Others, including New America and Education Trust, have also noted that even net price for low-income students represents a far bigger percentage of family income than net price for higher-income students.

By all means, the federal government—and the media that reports on it—should try to as accurately as possible determine what students are actually paying to attend college. But price tags are relevant, too. They dictate what a student’s expectations are, and they also make it so the federal government needs to play catch-up just to discount the exorbitant sticker price. Even beyond that, we have plenty of evidence—from increased borrowing to some pretty regressive increases in net price as well—that college costs are less than manageable.


UK: Boys more likely to drop out of university than girls

Boys are still more likely to drop out of university than girls, according to figures published today.

Statistics released by the Higher Education Funding Council for England reveal that 7.6 per cent of male students dropped out after their first year in 2011/12, compared to 6.9 per cent of female students.

Earlier this month, Ucas figures revealed that there is a growing gender gap in applications to university, with the number of girls seeking a place more than a third larger than the number of boys.

The dropout rate for students from state schools was 6.5 per cent, while only 3.5 per cent of those who were privately educated quit their courses. 9.4 per cent of black students dropped out of university, which was the highest percentage of any other ethnic group.

Overall, however, fewer students are quitting university than before. Between 2004 and 2010 the dropout figure was around 8.4 per cent, whereas now the figure sits at 6.6 per cent.

Professor Les Ebdon, director of the Office for Fair Access (OFFA), said: “This valuable data shows that more full-time students than ever are staying on in higher education, which is a positive and welcome finding.

“However, students from disadvantaged backgrounds, and some other groups under-represented in higher education, are less likely to continue their studies than their more advantaged peers.”

“The data highlights why it’s so important that universities and colleges support students throughout their studies”.

The chief executive of HEFCE, Professor Madeleine Atkins, said: “This new HEFCE information confirms that non-continuation rates in England remain low, relative to other countries, and have improved despite the increase in participation during the last decade.

"There is, however, no room for complacency as we see very different rates for men, students with disabilities, students from certain ethnic minority groups and mature students, as well as variations by region and subject.”

The report shows large differences in dropout rates between subjects, with only 2 per cent of students quitting medicine and dentistry – the lowest figure – compared to 11 per cent for computer science.


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