Federal policies geared to alleviate the burden of student loans aren’t working right now because they don’t target the root of the problem.
A Manhattan Institute report shows that high dropout rates at many higher education institutions are the cause of the problem. Non-graduates carry debt like graduates, but aren’t able to pay it off because they don’t have the income level that comes with a college degree.
“Most graduates who borrowed to attend a four-year university face no debt crisis. It is students who attended, but often did not complete, lower-quality for-profit and two-year public institutions who are facing financial hardship,” Max Eden, a senior fellow at the Manhattan Institute, wrote.
A Federal Reserve study showed a link between being late on student loan repayments and failure to graduate from college. Borrowers with no degree owe an average $12,542, compared to $24,133 owed by bachelor-degree holders. The gap comes from graduates spending more time in college.
However, the non-graduates were late on their loan payments 43.5 percent of the time compared to the 11.1 percent rate for graduates. Even borrowers who graduated from for-profit institutions had better repayment rates: only 26.5 percent were late, compared with 16.6 percent from public two-year schools, 11.6 percent from private nonprofit four-year colleges, and 10.3 percent from public, four-year institutions.
Holders of any degree scored better on repayment rates than dropouts.
The Income-Based Repayment program, which aims to help borrowers repay in a timely manner by making payments equal to 10 percent of their discretionary income, is riddled with flaws, too. If borrowers have not repaid the full loan within 20 years, the debt is forgiven. However, non-graduate borrowers who are more likely to need the IBR plan often do not use it due to an “information and administrative bottleneck.”
That’s a result of “bureaucratic complexity.”
“You have to proactively navigate the regulatory paperwork process. It’s a much easier thing to do for folks who have gone through college or graduate school than for folks who have dropped out,” Eden told CNS News.
Eden also says in the report that forgiving the debts of graduates with good job prospects ignores college dropouts who cannot find work. He complains that students are consistently told that they need to go to college to achieve success, which leads to many unprepared students that colleges have no incentive to vet or support. Eden claims that colleges and universities would be incentivized to improve their programs if they were responsible for paying back part of their students’ unpaid loans.
“Even a small amount of risk would give postsecondary institutions a reason to contain their costs and offer a better education,” Eden said.
A Brookings Institution study also found that the rise in loan defaults were associated with students who borrow money to attend for-profit, two-year and other non-selective colleges with low graduation rates. Only 26.5 percent of students at for-profit institutions who started in 2008 graduated within six years, according to the National Center for Education Statistics.
Students borrowing money for non-traditional academic institutions are also the students most likely to struggle to repay their loans. This group of students grew to half of all student borrowers during and directly after the Great Recession, according to another Brookings study.
For-profit colleges “have no particular institutional incentive to make sure that students graduate” because the dropout rate “doesn’t affect their bottom line,” Eden told CNS News.
To address the deep problems in federal aid for higher education, reform should start within the IBR program and accountability for colleges instead of blindly increasing subsidies for students and colleges.
