Federal Student Loan Research Articles

Disabled student loan debtors offered loan forgiveness

As part of the Student Aid Bill of Rights, the Obama administration announced loan forgiveness for more than 387,000 federal student loan borrowers on the basis that these students are permanently disabled but have not yet sought loan forgiveness on their own. About 179,000 of these students, or nearly half, are currently in default on their student loans, and nearly 100,000 of these students face such debt that the government could legally seek to garnish their wages or Social Security because of the loan debt. The total of the loan forgiveness for these disabled students would be more than $7.8 billion.

Proprietary Law Schools and the Marketization of Access to Justice

The rise of for-profit law schools in the United States highlights the interplay of political and moral economy in the reproduction of legal expertise. This article offers ethnographic evidence from one ABA-accredited for-profit law school pseudonymously labeled New Delta School of Law. The article posits New Delta as a case study in market fundamentalism of the kind first theorized by Hungarian economist Karl Polanyi. Polanyi defined global capital as a “double movement” between free marketeerism on the one hand and countervailing social protectionism on the other. Treating this as incomplete, social philosopher Nancy Fraser has since argued that the emancipatory new social movements form a third element in what should more properly be considered a “triple movement.” In this article, I argue that for-profit law schools such as New Delta support Fraser’s revision. Drawing in capital commitments from large institutional investors with promises of high returns on the basis of guaranteed federal student loan dollars, New Delta recruits disproportionately from minority and low-income communities while offering low chances of bar passage and legal employment. By marrying free marketeerism with the discourse of emancipation, the school has successfully evaded scrutiny.

Offshore Medical Schools Are Buying Clinical Clerkships in U.S. Hospitals: The Problem and Potential Solutions.

U.S. medical education faces a threat from for-profit Caribbean medical schools which purchase clinical rotation slots for their students at U.S. hospitals. These offshore schools are monetizing a system that was previously characterized as a duty-the duty of the current generation of physicians to educate their successors. Offshore schools purchase clinical rotation slots using funds largely derived from federally subsidized student loans. This leads to pressure on U.S. schools to pay for clinical clerkships and is forcing some of them to find new clinical training sites.For-profit Caribbean schools largely escape the type of scrutiny that U.S. schools face from U.S. national accreditation organizations. They also enroll large classes of students with lower undergraduate GPAs and Medical College Admission Test scores than those of students at U.S. medical schools; their students take and pass Step 1 of the United States Medical Licensing Examination at a substantially lower rate than that of U.S. medical students; and their students match for residencies at a fraction of the rate of U.S. medical school graduates.Among the potential solutions proposed by the authors are passing laws to hold for-profit Caribbean schools to standards for board passage rates, placing restrictions on federal student loans, monitoring attrition rates, and denying offshore schools access to U.S. clinical training sites unless they meet accreditation standards equivalent to those of U.S. medical schools.

Accounting for the Rise in College Tuition

We develop a quantitative model of higher education to test explanations for the steep rise in college tuition between 1987 and 2010. The framework extends the quality maximizing college paradigm of Epple, Romano, Sarpca, and Sieg (2013) and embeds it in an incomplete markets, life-cycle environment. We measure how much changes in underlying costs, reforms to the Federal Student Loan Program (FSLP), and changes in the college earnings premium have caused tuition to increase. All these changes combined generate a 106% rise in net tuition between 1987 and 2010, which more than accounts for the 78% increase seen in the data. Changes in the FSLP alone generate a 102% tuition increase, and changes in the college premium generate a 24% increase. Our ?ndings cast doubt on Baumol’s cost disease as a driver of higher tuition.

Decreasing Your Student Loan Cohort Default Rate: Leading a College-Wide Change Initiative at Mohave Community College

ABSTRACTBurgeoning student debt and the ability of programs to adequately prepare students for jobs that will allow them to repay that debt comprise a topic of great interest in the current higher education policy environment. A key accountability measure used by the Department of Education for more than two decades has been the student loan cohort default rate (CDR), which measures the percentage of an institution’s student borrowers who default on their federal student loans. Mohave Community College (MCC) had the sixth highest CDR for two-year public institutions for the FY2009 cohort at 36.7%. At risk of losing all federal financial aid eligibility, the institution underwent an impressive transformation in just 3 years, during which time MCC decreased the CDR by 8 percentage points through a combination of challenges and appeals, outreach, financial literacy, and student success efforts. MCC was able to achieve successful transformation through a top-down leadership strategy that included open communication and empowerment.

Student Loan Relief Programs: Implications for Borrowers and the Federal Government

As college costs increase and more students fund their education through borrowing, debt load and delinquency rates have become significant problems on a number of levels. Student loan obligations are challenging to manage for new graduates with lower earnings and borrowers in financial hardship. This paper discusses the federal student loan repayment relief programs that are available and estimates their borrower and fiscal impacts. The implications of relief plans on borrowers’ costs and the federal budget vary for different loan amounts, income levels, and relief program. {{p}} It is challenging for policymakers to design programs that adequately balance the risks between borrowers and taxpayers. Existing programs are also tremendously complicated, making it difficult for borrowers to make informed decisions on repayment programs. This paper examines how the various programs work in practice and considers their likely outcomes over a set of income-debt-program scenarios to bring much needed clarity to the repayment environment. In our analysis, lower-income borrowers and borrowers who will have significant remaining balance forgiven at the end of the required repayment period are generally more likely to benefit from student loan relief programs, but participation of these borrowers can be very costly from a fiscal perspective.

Borrowing and Repaying Student Loans

This essay synthesizes the most recent and rigorous research on student loan debt. It focuses on basic questions about who borrows, how much, and whether debt affects behaviors. Answers to these questions are necessary for informing federal student loan policymaking, yet the research findings are surprisingly mixed because of poor data quality, research design challenges, and the growing heterogeneity of borrowers. This ambiguity makes federal policymaking difficult when questions about the benefits and burdens of student loan debt are left unanswered. By synthesizing the current research, this essay helps answer some of these questions while calling attention to others.

The Developing Federal Student Loan Debacle and the Real Cost to Taxpayers

Government financed student loan debt of $1.3 trillion has grown 15% a year for over a decade as tuition and other college costs have risen at a multiple of the inflation rate. Problematic are defaults and income-based repayment arrangements with their partial loan forgiveness. Applied to this burgeoning balance they pose a serious burden on taxpayers and the economy that bear the costs and effects of borrowing and taxation to fund the program. Also alarming is the prospect of total loan forgiveness and ongoing free college education gaining political currency amid the wails of so many overextended borrowers, some of whom seemingly face lifelong debt. This paper examines the true cost of the student loan program which is enormously distorted by the U.S. Department of Education and the Congressional Budget Office. The reason is the Federal Credit Reform Act of 1990 (FCRA) requires government to adopt a misleading methodology for computing the program’s profit and loss that greatly understates defaults. As a result, the program is mistakenly believed to be profitable. Specifically, the government computes operating results based on a net present discounted value of future cash flows. This process effectively amortizes defaults over the remaining life of respective loans, which can be up to 20 years or more, rather than recognize them fully in the period they occur like a bank. The analysis herein contrasts this methodology (subject to the limitations of opaque federal accounting), with a pro forma presentation of operations based on generally accepted accounting principles (GAAP) observed by banks. The upshot: a $135 billion government projected profit for the ten-year period 2015-2024, versus a $1.9 trillion loss that a bank would report. As such, the real cost of the student loan program in the coming years compares with the losses of the 2008 financial crisis as explained in the study.And that is just the current student loan program. If blanket loan forgiveness were declared in the next decade, taxpayers would bear an immediate budget hit of $1 trillion to $4 trillion depending on the loans outstanding at the time of implementation. In addition, taxpayers would have to support subsequent free college for all thereafter. Not only is this time bomb concealed by the current accounting methodology, but also by the political class that is loathe to inviting opposition to a program that could be a new government entitlement.

Understanding Federal Student Loan Repayment

The purpose of this study was to explain the federal student loan repayment process. Individuals with a college degree earn more over their lifetime than those without a college degree. However, the price of a college education has increased substantially and 69% of college graduates in 2012 had student loans to repay. There are eight federal repayment plans that may lead to confusion for borrowers. Education is needed to assist borrowers in making informed repayment decisions. Educators at postsecondary institutions have an opportunity to provide education to students.

Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs

We study the link between the student credit expansion of the past fifteen years and the contemporaneous rise in college tuition. To disentangle simultaneity issues, we analyze the effects of increases in federal student loan caps using detailed student-level financial data. We find a pass-through effect on tuition of changes in subsidized loan maximums of about 60 cents on the dollar, and smaller but positive effects for unsubsidized federal loans. The subsidized loan effect is most pronounced for more expensive degrees, those offered by private institutions, and for two-year or vocational programs.

The Flawed Reasoning and Evidence for the Department of Education's Gainful Employment Regulation of Private, For-Profit Colleges and Universities

This study examines the basis and implications of the “Gainful Employment Regulations” (GER) issued by the Department of Education (DoED) October 31, 2014. DoED intends to use these regulations to identify programs at colleges and universities which it determines should be ineligible to receive Title IV student aid funds. While claiming that the regulations will apply “equally to public, private and for-profit programs” that accept Title IV funds, the DoED has limited the purview of the GER to vocational programs that prepare students for “gainful employment in a recognized occupation.” As a result, an estimated 98 percent of students likely to be affected by the GER are enrolled in programs at for-profit institutions. Further the GER establish a set of standards based on rates of student loan repayments and the earnings of graduates from particular programs and institutions. Our analysis found that demographic factors such as low family income and minority status have large effects on student loan debt levels, repayment rates and subsequent earnings. The result is that the GER systematically discriminate against low-income and minority students and the for-profit institutions that educate disproportionate numbers of “at-risk” students. The analysis produced the following additional findings. 1) Graduation rates from two-year for-profit institutions are three times higher than from two-year public institutions and slightly higher than two-year private not-for-profit institutions, although graduation rates from four-year for-profits are lower than those of four-year public or private not-for-profit institutions. 2) Students at for-profit institutions account for a disproportionate share of federal student loans, because those students are more likely to be from low-income, minority families than students at public or private not-for-profit institutions. 3) After controlling for family income and race/ethnicity, the repayment rates for students from for-profit institutions are 3.9 percentage-points higher, and their default rates are 0.6 percentage-points lower, than students who attended public institutions. 4) DoED data show that graduates of two-year for-profit institutions earn 4.2 percent more than graduates of two-year public institutions and about the same as graduates of two-year private not-for-profit institutions. 5) While DoED data show that graduates of four-year for-profits institutions earn on average 5 percent less than graduates of four-year not-for-profit private institutions and 8 percent less than graduates of four-year public institutions, our regression analysis found that nearly 90 percent of the gap between these earnings gaps reflect demographic characteristics -- family income, minority status and SAT scores -- unrelated to the institution they attended. 6) If the GER is applied as written, we estimate it will deny 1,172,000 students at for-profit institutions access to Title IV federal loans; and an estimated 716,000 of those students will drop out of college, including 430,000 to 544,000 minority students.

From the Co-Editors

From the Co-Editors

Student Loan Default: Do Characteristics of Four-Year Institutions Contribute to the Puzzle?

College student debt and loan default are growing concerns in the United States. For each U.S. institution, the federal government is now reporting a cohort default rate, which is the percent of students who defaulted on their loan, averaged over a three-year period. Previous studies have amply shown that student characteristics are strongly associated with educational debt and one’s ability to repay student loans; however, few studies have deeply examined the relationship between institutional characteristics and student loan default. This study examined characteristics of 1,399 four-year notfor-profit U.S. institutions and found significant differences in the 2010 federal student loan default rate by some important institutional variables, including admissions yield, geographic region, percent of minority students, institution control (private versus public), endowment, and expenditures for student services. Findings related to institutional characteristics can illuminate our understanding of the student loan default puzzle, and have implications for student success, academic policy, and resource allocation decisions.

Does Missing Classes Decelerate Student Exam Performance Progress? Empirical Evidence and Policy Implications

A total of 389 business students in undergraduate introductory microeconomics classes in spring 2007, 2009, and 2011, and fall 2012 participated in an exam performance progress study. Empirical evidence suggested that missing classes decelerates and hampers high-performing students’ exam performance progress. Nevertheless, the evidence does not indicate that gender is a factor in determining whether missing classes impedes students’ exam performance progress. Moreover, policy implications are discussed. For faculty, a mandatory attendance policy, daily motivational quiz, and incentive-stimulating attendance strategy are suggested. For school authorities, increasing campus employment opportunities is suggested. For the government, the author suggests that Congress should annually restore the purchasing power of federal grants by increasing the maximum grant awards and lowering federal student loan rates to half of present rates, but restrictions should be added on grant recipients to ensure that better attendance behaviors are achieved.

Lowering the Basement Floor: From Community Colleges to the For-Profit Revolution

For-profit colleges have become a major force in higher education. They claim to offer a career-oriented practical education that is an alternative to community and four-year colleges. Often they fail to provide what they promise. Rather than being a new alternative, for-profits are the new basement floor of education, offering substandard educations at inflated prices. The primacy of profit motives and especially financialization means that for-profits are more like a financial instrument of neoliberal policies than educational institutions. Fueled by the reliance on federal student loans for operations expenses, educational aims are secondary to advertising and recruitment of a continuing supply of students without much regard for graduation rates. They appeal to first-generation students and recent immigrants with little information about higher education or the job market.

Helping or Hindering? The Effects of Loans on Community College Student Persistence

More community college students are taking out loans than ever before and their median debt levels are increasing. This trend is disconcerting because community college borrowers are overrepresented among loan defaulters and those who dropout without having earned a degree. While not without criticism, a growing number of community colleges are choosing not to participate in the federal student loan programs, citing a desire to protect their students from future financial hardships. This study used data from the Beginning Postsecondary Student (BPS:04/09) survey and propensity score matching techniques to examine the effects of loans on persistence for students enrolled in associate’s degree programs. Results indicated that borrowing during the 1st year had a positive effect on persistence at the end of year one, but had a negative effect on persistence measured three and 6 years after initial enrollment. As community college students assess their prospects for degree completion and the return on their financial investment in higher education, we hypothesize that borrowers are more likely to become dissatisfied with their investment decision than non-borrowers and choose to dropout rather than take on additional loan debt. Findings from this study suggest the need to carefully reconsider current policies and practices regarding loan use among community college students.

Federal Student Loan Servicing: Contract Problems and Public Solutions

One consequence of the 2007-2008 financial crisis was an abrupt shift from bank-based to direct federal student loans. This momentous change required the Department of Education to rapidly establish the capacity to service loans, which was achieved by outsourcing this responsibility to four large for-profit firms and a group of smaller regional entities. Loan servicing involves routine payment processing, account management and borrower communication, as well as the non-routine yet more labor intensive role of assisting borrowers that face hardship with debt repayment. Borrowers have expressed dissatisfaction with the present system. Complaints jumped significantly in the first two years of the loan servicing contracts and remain at historic highs. Problems with loan servicers have been a significant factor in these complaints. Both the Education Department and the Consumer Finance Protection Bureau have identified questionable practices regarding how servicers process and credit loan payments, and their failure to provide adequate advice and assistance for borrowers with delinquent and distressed loans. To understand why the system is underperforming, we examine the public-private contracting system for student loan servicing, and conclude that the contract terms establish incentives to reduce operational costs that far outweigh the incentives to be responsive to the needs of borrowers. This case illustrates the inherent limitations of performance-based contracts as an administrative tool. Regardless of design, contractors will strive to minimize operational commitment to any labor-intensive task, in this instance attending to the personal needs of borrowers. We identify two remedies improving the efficiency and responsiveness of student loan servicing. The first is more robust contract monitoring and contractor performance oversight by the office of Federal Student Aid (FSA). The second is the establishment of a public loan-servicing unit that would raise standards by competing against the private loan-servicing agents. While these two options are not mutually exclusive, we view the latter as having the greatest potential to improve the student loan servicing system. The concept of loan servicing as a government function is not novel. The Department of Agriculture, for instance, successfully issues and services farm loans. A similar function can be established within a federal agency for student loans. The loan servicing function could be added to FSA's existing role under the Direct Loan program, or assigned to another federal agency, such as the Treasury Department or the Internal Revenue Service. We identify some particular advantages in assigning this function to the United States Postal Service, which has a history of providing financial services, manages an accessible retail network, and enjoys a favorable image among the public.

Mortgaging the American Dream: The Misplaced Role of Accreditation in the Federal Student Loan System

In 2013, outstanding student loan balances in the United States exceeded $994 billion. This growing volume of student debt has had far-reaching consequences for both individual borrowers and society as a whole. In many ways, the federal student loan program, available to students under the Higher Education Act (HEA), has achieved its goal of making higher education more accessible. Undergraduate college enrollment increased from 10.5 million students in 1980 to 17.6 million students in 2009. Despite the benefit of increased enrollment, however, the federal loan program has been criticized for increasing student loan debt and contributing to the “student loan crisis.” This student loan crisis threatens to undermine the purpose of the HEA by making higher education less accessible to Americans.Higher education institutions must be accredited to be eligible for Title IV federal funding under the HEA. The federal government relies on accreditation to assess the academic quality of the institutions and programs to which it provides federal funding. This federal funding- accreditation relationship, riddled with conflicts of interest, has been ineffective in regulating student loans, contributing to the mounting student loan debt. This Note examines the relationship between the federal student loan system and accrediting bodies through economic theory, ultimately arguing that the HEA be amended to decouple accreditation and federal student loans.

Cohort Default Rates

This study examines the institutional factors associated with student loan default. When a college has more than 30% of its students default on their loans, then the institution faces federal sanctions that could make them ineligible from participating in the federal student loan program. Using Integrated Postsecondary Education Data System (IPEDS) data from 2008 ( N = 4,488), and applying logistic regression, this study finds for-profit colleges, those accredited by vocational education programs, and those serving diverse student bodies are most at risk of federal sanctions. It concludes that accreditation reform and improving graduation rates could be long-term solutions to addressing the default problem.

Securitization of Student Loans: A Proposal to Reform Federal Accounting, Reduce Government Risk, and Introduce a Market Mechanism for a New Quality of Education Signal

This paper outlines looming budgetary and accounting issues with federal student loans and proposes using securitization as an innovative mechanism to reform federal accounting, reduce federal balance sheet risk, and provide a new education quality signal. The current federal loan program is unsustainable because it overestimates the repayment rates and underestimates the cost of certain loan programs. This, and not bad outcomes for individual students, will necessitate reform in some form. This paper proposes using securitization mechanisms to reduce federal risk while also forcing institutions to bear some of the risk created from student loans (similar to risk retention provisions in Dodd-Frank for mortgage originators). This would create a neutral pricing mechanism outside the direct control of federal regulators which would fairly show whether certain institutions provide a quality education (i.e., closing the education quality feedback loop). While complicated, this proposal is a back-end loaded solution to introduce risk-based pricing into the student loan programs without placing the risks fully on uninformed students. Updated to to reflect new changes to student loan interest rates from the Bipartisan Student Loan Certainty Act of 2013 (H.R. 1911). The legislation was signed by President Obama August 9, 2013, and retroactively effective July 1, 2013. Final Published Version uploaded January 9, 2014.