Crystal Hewitt-Gill

Social Policy & Services

Fall 2013

Anne Ogden, LMSW

Final Paper

Student loan debt in the United States is approaching 1.2 trillion dollars, and that number

is expected to grow as a college degree becomes a necessity for job seekers in almost all fields,

including vocational and technical areas of work. From that figure, approximately $165 billion is

believed to be in the form of private (that is, non-federally funded) student loans. There are some

immediately noticeable disparities in debt and default rates among college students. While

approximately 10% of students are enrolled in for-profit schools, their student loans constitute

one-quarter of all student loan debt. Additionally, approximately half of the loan defaults in the

country are from students who attended for-profit institutions.

Educational debt has surpassed credit-card debt, auto loans, and home equity lines of

credit to take second place behind mortgage debt as the major source of debt in the U.S. Unlike

other forms of debt, however, one does not need to have good credit in order to qualify for

student loans – frequently, students have nonexistent credit at the outset. Even through the

recession, student debt did not slow, as many people returned to school in the hopes of getting a

better job or improving their marketability. The average graduate of a 4-year degree program can

expect to owe around $26 thousand dollars (not including interest), although that number may be

considerably higher if a student attended college out of state, if they attended a private or for-

profit college, or if they pursue a graduate degree or other further advanced education or training.

According to a Bloomberg report, the cost of an undergraduate degree has increased by 1,120%

since 1978, far outpacing median wages for degree-holders. This has made the student-loan

crisis an issue of primary importance for members of Generation Y (ranging from 18 to around

33 years of age), who have seen the rising tuition costs coincide with a devaluation of the four-

year college degree, in addition to huge fluctuations in the job market and consistently above-

average unemployment rates. While college tuition rates are increasing, they alone are

not responsible for the difficulty graduates face in repaying student loans. Depending on the

loan – and when it was originally taken out – interest rates for federal loans can top 6.8%; private

loans may go as high as 12% (however, this rate is generally higher for parent borrowers than

students).

Unlike other industries, people may feel a more implicit trust – and therefore, may

display less care in consumer choices - in educational institutions than other industries. For

example, we would certainly examine a house or car before we committed to purchasing

it; we may compare the respective APR and interest rates of credit cards before applying for

them; and we would certainly not sign or co-sign a loan for thousands of dollars without

examining how it would be used and what the stipulations for repayment are. And yet, students

and their parents do precisely that every year, believing that the investment will automatically

pay off. While median wages continue to stagnate, and job growth remains tentative, graduates

find themselves facing repayment without the funds to do so while also paying for other living

expenses, including rent, food, and car payments. When faced with a choice between short-term

expenses and long-term credit health, student loan repayment falls by the wayside.

Without repayment, student loan debt simply accumulates over time. When a student

defaults on their loans, they are negatively impacted in myriad ways. This type of default often

precludes people from being able to obtain a loan for a home or car. Unlike other types of debt,

student loans cannot be discharged through declaring bankruptcy, or other forms of economic

hardship. While it is possible to defer one’s loans under a hardship clause, this strategy does not

suspend interest rates; therefore, the longer a borrower forestalls repayment, the larger the

amount they will have to pay. This means, essentially, that the debt will follow them throughout

their adult lives. A person’s remaining student loan balance does not expire or “drop off” a

credit report after seven years (which is generally the case for other types of debt, include

medical and credit card debt). Additionally, student loan companies are not required to negotiate

with borrowers after they have defaulted on their student loans; this means that a borrower may

receive only two options – to pay the entire debt off in one installment, or two. At present, only

about six private loan companies offer debt-consolidation plans, and a person must have

excellent credit to begin with in order to qualify.

Why are students defaulting on their loans? Recipients of federal loans are often not

aware of other options available to them. Student loan companies are not obligated to inform

borrowers of strategies to avoid default (e.g., income-contingent repayment programs). May

borrowers are young (under the age of 30), and simply do not how to advocate for themselves.

Many recent graduates face unemployment or under-employment, and become overwhelmed at

the sheer amount of debt they are in. Further along in this paper, I will explore some of the

recent measures taken to help students prevent defaulting on their federal loans.

Of all of the institutions listed, for-profit colleges show the highest rate of student loan

default following graduation; the reasons for this are complex and illustrate some of the more

serious abuses of consumer trust in the educational world. While not all for-profit colleges are

non-accredited, and vice versa, it is important to understand the interplay between the two. The

for-profit model is a functional business model of higher education, and the primary motivation

is monetary gain. Unsurprisingly, many for-profit institutions are owned by multinational

banking and investment firms like Goldman Sachs, which controls companies like the Education

Management Corporation (EDMC), the second-largest company in the for-profit industry.

(Goldman Sachs also owns some of the best-known for-profit colleges including Kaplan

University, and the University of Phoenix). Therefore, a for-profit school is more likely to

engage in questionable practices in the interest of attracting more students, including unethical

statements regarding the legitimacy and reputability of the program. For financial-aid reformers,

the most frustrating aspect of this model is that for-profit colleges mostly operate within legal

boundaries.

Many for-profit schools are nationally, rather than regionally accredited. There have

been consistent criticisms from agencies like the American Association of University Professors

and the American Association of Collegiate Registrars and Admissions Officers (AACRAO),

which argue that these standards are less rigorous than regional accreditation (which is primarily

among academic, non-profit institutions). Additionally, a college is not obligated to seek

accreditation through any particular agency to declare themselves ‘accredited’; it is even legal –

though tenuously so – to create an accrediting agency with no legitimate standing for the sole

purpose of declaring a college technically accredited. The worst cases of this exist in states that

do not have strict laws against such practices, including Utah, Florida, and California. (One

example of this, Columbus University, states that its programs are accredited by the Adult

Higher Education Alliance, although no such agency actually exists.) These so-called “diploma

mills” often promise a quick route to a better life, and their target demographic are often the

unemployed and low-wage employed. These schools can also be vocational in nature, meaning

that their degree program, while ostensibly academic, is intended to teach students a useful trade

or skill.

A simple Google search showed the dispiriting prevalence of these practices - there were

multiple Master’s in Social Work programs unaccredited by the Council for Social Work

Education (e.g., Walden University); online PhD programs in Psychology unaccredited by the

American Psychological Association (e.g., the University of Phoenix); and numerous schools

with dubious credentials that carefully concealed their illegitimacy through the aforementioned

use of fabricated accrediting agencies (e.g., Kaplan or Cappella University). These colleges

without exception boasted of their flexibility and affordability, making them an ideal choice for

working adults and “busy professionals and parents”. Of all my searches, no college mentioned

that their program would not lead to licensure in their respective field on the first page. This

information is kept to the fine print. In the interest of further understanding how these programs

operate, I filled out a few general interest forms for several well-known private for-profit

colleges – within days, I had received over 26 separate phone calls from four different colleges,

all with the same high-pressure pitch that culminated in the promise to ‘get me enrolled and

started’ in the university’s program. For a consumer who is unaware that these tactics are red

flags, the pressure may be interpreted as sincere interest. (Not to mention, to a student who may

not consider themselves traditional “college material”, this persistence may be deeply flattering.)

Therefore, students who are not generally savvy about the critical importance of proper

accreditation may complete a program to find that, for all intents and purposes, their degree is

essentially a fake. For example, Walden’s online MSW program does not lead to licensure as a

social worker in any state in the US, but their literature omits this detail. People may only

become aware of this after they are out trying to get a job. This will naturally result in a much

greater difficulty finding meaningful employment, and attendance at certain universities could

actually work against job-seekers. (In the state of Oregon, it is actually illegal to obtain a job

using a degree from an unlicensed institution. Whether the job seeker was an unwitting victim or

not, it is considered fraud to present oneself as having credentials one does not really have.)

The lack of accreditation is also significant because, while these colleges have monthly

payment plans, many are also permitted to work with both private and federal lending agencies.

(There are no laws, after all, to preclude people from voluntarily making bad investments.) As

stated earlier, for-profit colleges are disproportionately responsible for much of the loan-default

rate; proponents of the system state that this is simply because they take on a more

socioeconomically diverse population, many of whom do not have good money-management

skills. However, critics have countered that these institutions deliberately prey on consumers

they feel are more susceptible to high-pressure tactics and baseless promises. In the end, they

argue, the student goes into debt, the loan goes into default, the taxpayer foots the bill, and the

business gets the spoils.

When even some for-profit schools strongly encourage students to exhaust all of their

federally funded options before turning to private loans, why do students still do it? Some

students have reported being confused by the FAFSA application or being unsure of how to fill it

out; others fear that they may earn too much and will not receive enough to fund their education;

still others may feel that a private loan is more in their best interests since it promises money

right away, and will generally cover the entire tuition amount. In fact, one of the biggest

increases in private loan debt occurred from around the year 2000 to mid-2008 and was due to

the fact that loan limits on the federal Stafford loan did not increase from 1992 to 2008. In other

words, although tuition increased, the lending limit did not. If a consumer was unable to pay the

remaining balance out of pocket after their Stafford loan maximum had been reached, private

loans could easily become an attractive alternative. Therefore, structural issues, rather than

consumer ignorance, also contributed to the sharp increase in private loan debt. Fortunately, the

Ensuring Continued Access to Student Loans Act of 2008 increased the annual loan limits on the

Stafford loan beginning July 1, 2008, largely motivated by the desire to stem private loan debt.

As research has demonstrated, African-American and Latino students constitute a

disproportionate number of for-profit students, as well as borrowers in default. This is not

coincidental – the for-profit model ensures that universities deliberately seek out low-income

students. Whether federally or privately funded, the poorer the student is, the more aid they are

eligible to receive. As undergraduates, students enrolled in public loan programs are also

entitled to state and federal grants. The taxpayer-funded grant programs also go to support the

for-profit college. Thus, taxpayers wind up subsidizing the for-profit model. In short, this

means that a for-profit college can maximize their own profits by getting as much money out of a

governmental or private loan as possible, while still staying on the right side of the law.

According to a two-year study overseen by Iowan senator Tom Harkin, 22% of for-profit college

graduates will default within three years. In 2008 and 2009, these students also comprised 47%

of defaulted federal loans.

Private loan companies have been consistently found to engage in misleading and abusive

practices, and there have been a number of complaints and lawsuits brought against them in

recent years. One lending giant, Sallie Mae, was recently ordered to pay $24.15 million in a

class-action settlement regarding abusive and excessive collection efforts. This is on top of a

2012 class-action settlement that resulted in Sallie Mae being ordered to pay out approximately

$35 million dollars after being sued for allegedly hiding their student loan portfolio from Wall

Street investors by pushing private loan borrowers into forbearance to hide the degree of risk

they were incurring by lending to this notoriously vulnerable population. (The ruling to this case,

like others, was never made public.) Meanwhile, the Department of Justice filed a whistleblower

suit, in 2011, against Education Management Corporation (EDMC), for obtaining over $11

billion dollars in federal aid money by using incentive-based (i.e., commission basis) enrollment

counselors and knowingly registering unqualified students, thus facilitating high default rates and

wasting taxpayer funds. The lawsuit was filed under the False Claims Act, and while it is still

pending, similar lawsuits have been settled against EDMC, with the details remaining private.

EDMC has also been investigated by the Government Accountability Office (GAO).

These issues are often incredibly complex, and it is important to understand that the

student-loan crisis was not the result of inflation or poor decision-making on the part of a small

numbers of loan borrowers. Nor was it inevitable – that is, this did not occur overnight as an

unforeseen consequence of more students flooding the market than ever before. What most

struck me while researching this topic was how these are elaborate systems designed by

financiers, written by lawyers, and backed by wealthy investors. As a result, consumers are

much more likely to be taken advantage of, especially if they are not aware of their fundamental

rights as borrowers. The for-profit model uniformly encourages growth and capital gains. In

every sector where these practices have flourished (the housing market, health care, and student

loans), abuse allegations have followed. Similarly, every industry that has adopted a for-profit

structure has seen costs balloon out of control in just a few decades. The next section of my

paper will discuss what has been done thus far to help students and limit abuses, and what I

would recommend to help educate consumers about their choices under the law.

Student loan reform efforts in the United States actually span a 20-year period, beginning

in 1993 with the Student Loan Reform Act, which increased lending limits on federal loans.

(The for-profit model has been in existence for a long time, but really has seen its heyday during

the Internet era.) President Clinton also signed the Higher Education Amendments of 1998 into

law, which raised funding levels for the Pell Grant and, more importantly, authorized that

schools that had unusually high loan default rates were not eligible. In July of 2013, the U.S.

Senate passed the Student Loan Fairness Act, with the backing of President Barack Obama. This

Act, introduced by Californian Democratic Representative Karen Bass, includes a number of

significant features intended to protect the consumer and limit the degree to which lending

companies can charge interest and penalties. Among other provisions, the Act would cap interest

rates on Direct Consolidation loans at 3.4%, allow certain borrowers to consolidate private

education loans into Direct Consolidation loans, and would establish a 10/10 Loan Forgiveness

Program that would allow people who have made 120 consecutive payments to discharge their

remaining payments, provided they were employed in certain sectors (e.g., the public health

field). This plan is known as the Public Service Loan Forgiveness program, and is currently only

available to Direct Loan borrowers. In a similar vein, the Student Loan Forgiveness Act,

introduced in December 2012 by Michigan Democrat Hansen Clark, was designed to help

borrowers refinance their loans at lower interest rates and to help borrowers either reduce or

discharge existing loans after a period of good-faith payments.

One of the most important ways that the government is fighting against federal-loan

default is in the creation of different methods of repayment that will allow the vast majority of

borrowers to whittle down their debt without depleting all of their resources. While these

payment plans may not be without some flaws, they offer pragmatic alternatives to direct, fixed-

rate repayment (or much worse, loan default). These include seven types of income-based

repayment for Direct Loan and Federal Family Education Loan (FFEL) programs: the first is the

Standard Repayment Plan, which is applicable for all PLUS loans, Direct Subsidized and

Unsubsidized Loans and Federal Stafford Loans. This involves, as the name suggests, a monthly

repayment plan of at least $50, the advantage of which is that a borrower will owe less interest

over time. This plan operates on the basis that a borrower will be able to find employment

during their 6-month grace period, if not before that. If a person is not able to do this, however,

they can choose another option. However, there must be some documented evidence of financial

hardship to qualify for these programs.

The second option is the Graduated Repayment Plan, which starts repayment at a lower

rate and increases over time, generally on a two-year increment. This assumes, however, that a

borrower will earn more over time, which may or may not be the case in today’s uncertain job

market. The Extended Repayment Plan uses a fixed or graduated rate of repayment, but the

overall time frame to expect repayment can be upwards of 25 years. Of the more income-based

plans, the first is the Income-Based Repayment Plan (IBR), which states that a borrower must be

on a partial financial hardship plan and that their maximum rate of repayment is 15% of

discretionary income – that is, the difference between a student’s adjusted gross income and

150% of the federal poverty limit according to their residential state and family size. Like the

other hardship repayment plans, the IBR can take a long time for a borrower to pay back a loan.

There is also the Pay as you Earn plan, which will cap monthly payments at 10% of

discretionary income. This plan also includes consolidated loans and PLUS loans made to

parents of borrowers. The payment will naturally change as income changes. The Income-

Contingent plan looks at adjusted gross annual income, family size, and the total amount of loans

due to settle on a repayment amount. Similarly, the Income-Sensitive plan develops a repayment

schedule based on annual income. The major distinction between the Income-Contingent plan

and the Income-Sensitive plan is that the former can take up to 25 years for full repayment, while

the latter will only take around 10. Additionally, lenders are permitted to set up their own

repayment formula under the Income-Sensitive plan.

I believe a case can be made that student loan debt is not only an economic issue, but a

public health one as well. When community members are unable to get out of debt, acquire a job

that pays a livable wage, and contributes to the local economy, everyone is impacted. Families

remain mired in poverty, particularly in environments where there is already widespread

deprivation and underemployment. When people can’t buy homes or help their children succeed

in realizing their own educational goals, whole socioeconomic sections of the American

populace are negatively affected. The taxpayer is likewise held responsible, while the businesses

flourish. For-profits exploit an already exploited underclass in America by holding out a potent

symbol of economic upward mobility; by charging exorbitant fees and interest rates while not

providing a quality education that will translate to career success, they all but guarantee that this

same population will remain immobilized in debt for generations to come.

It may prove too difficult to simply shut down all non-accredited schools, particularly in

the Internet era when the establishment of a fraudulent school is alarmingly easy. (There is some

indication, however, that for-profit colleges are dwindling as they face stricter scrutiny – even

the formidable University of Phoenix has reported that enrollment has decreased 18% in only the

past year.) In the meantime, there are ways to limit their influence. One of the most powerful

messages we can send to for-profit colleges is legislation requiring them to disclose their

accreditation status and agency, and to provide links to government websites (i.e., the

Department of Education) verifying their legitimacy. A school should be also required to

disclose whether there are any class-actions lawsuits filed against them, whether pending or

resolved, and the outcome of the resolved cases. (The class-action stipulation ensures that only

public cases are disclosed, in accordance with the law.) Additionally, a policy should be

implemented that orders non-accredited agencies to explain what this means to consumers on the

front page of their website or printed literature. There are lists easily available online

documenting various scams in the educational world; however, these sites should be made

automatically available to enrolling students. For example, if the Department of Education could

provide a comprehensive list of schools with the lowest return on investment (ROI’s) and highest

default rates, to be centrally located alongside the FAFSA application, it would be easily

accessible to a much wider audience.

Finally, education is really the key to combat both predatory practices and keep oneself

safe from overwhelming debt. While it is unfair to expect teenagers heading off to college to

understand all of the implications of the debt they are incurring, it is paramount that we make

basic information regarding types of loans and repayment available to a broader audience,

particularly younger students and people entering college for the first time. I would propose that

high schools take a more active role in educating students about student loan debt and

responsibilities, even before a college has been selected. If a student fills out a FAFSA

application at their school, they should have to receive some basic credit counseling. Some

colleges now offer a mandatory financial aid counseling course for students, to be taken

freshman year. In addition to the “bad investments” pages, I’ve thought that it would be

extremely useful to create a central database where students could compare college choices side

by side, including tuition expenses and reputation, with reviews and complaints. (While some

websites already exist to help students choose a reputable university, a comprehensive, legitimate

site would be a fantastic resource for borrowers and their parents.)

Perhaps most critical, we need to modify our bankruptcy laws to include some cases of

student loan debt. If student loan companies want to be repaid, they have to work with

borrowers. While this sounds obvious, the looming default rates are evidence of a lack of

cooperation between the two parties. If someone has become permanently disabled and is unable

to work – and can provide documentation to prove this – then they should qualify for an

exemption. If they are able to prove that ongoing Building on the Student Loan Forgiveness Act,

I would argue that defaulted loans of the past decade should be allowed to resume status as being

in repayment, under the Income-Contingent Repayment Program. In other words, a student who

makes a minimum number of payments on a defaulted loan under a contractual agreement could

resume their status of actively repaying a loan. Furthermore, we should consider letting student

loans expire after a 30-year period. This would still allow lending companies to seek repayment,

but it would not punish the next generation of students by contributing to student-loan debt.

People now accept student loan debt as inevitability, but there are ways to minimize the

degree of indebtedness. Some high schools offer courses for college credit in conjunction with

local community colleges, and tuition rates tend to be much more reasonable at 2 year colleges.

(For example, a full semester at Hudson Valley Community College – between 12 and 18 credits

- costs $1800, minus books. One can apply 90 credits towards a four-year degree at the

University at Albany, which would result in a student only needing approximately three

semesters at the college to obtain a Bachelor’s degree.) Many programs still offer Federal Work-

Study programs to help defray costs, or on-campus part-time jobs. A college education is

regarded as a sort of default plan for graduating high school seniors; with more people owing

more, it may be useful for students who are unsure about college to pursue other options before

enrolling in a four-year school, including a local vocational school that would help them pursue a

degree without taking out thousands of dollars in loans.

College education should be treated as an educational investment rather than a status

symbol. One of the issues that arise a great deal with college selection is that students may

eschew less expensive state universities in favor of brand-name private colleges, believing that

the cache of attending a more prestigious university will increase their chances of succeeding in

the job market. However, this has been found to be only selectively true, and highly dependent

on the type of degree. (For example, while researching online MSW programs, I noticed that

many private colleges now offer an online program, including Fordham University. While it

would be tempting to brag about going to Fordham, or to be seduced by the lofty reputation of

the school, the reality is that a degree from a private university would cost approximately 3 times

what a state school would cost me - $60 thousand to $20 thousand, respectively – although there

was no obvious benefit of one school over another. A Master’s in Social Work, in particular,

consistently ranks as one of the lowest-paying advanced degrees available, regardless of where it

was obtained. Therefore, regardless of brand-name recognition, I would be assuming an

additional $40 thousand dollars in debt for a fundamentally identical degree.) If we combine

legal mandates for transparency among educational institutions, and mandatory education for

students and potential borrowers, I believe that we can help keep the student-loan crisis from

worsening, and will be able to see some turnaround effects within a generation’s time.

Sources:

http://federalstudentaid.ed.gov/site/front2back/overview/overview/fb_02_01_0040.htm

http://studentaid.ed.gov/repay-loans/forgiveness-cancellation/charts/public-service

http://bass.house.gov/bill/student-loan-fairness-act

http://www.mortgageorb.com/e107_plugins/content/content.php?content.14136

http://www.pbs.org/now/shows/525/Sallie-Mae-law-suits.html

http://money.cnn.com/2013/11/11/pf/college/for-profit-colleges/index.html

http://www.harkin.senate.gov/help/forprofitcolleges.cfm

http://forprofitcolleges.org/

http://higheredwatch.newamerica.net/blogposts/2011/a_widening_for_profit_college_job_place

ment_rate_scandal-56122

http://www.nytimes.com/2013/03/10/opinion/sunday/student-debt-and-the-economy.html?_r=0

http://topics.nytimes.com/your-money/loans/student-loans/index.html?8qa

http://www.motherjones.com/politics/2013/06/student-loan-debt-charts

http://www.studentloanfacts.org/

http://www.finaid.org/loans/