The right way to end federal student loans
Plus: FAFSA chaos continues, and my visit to a leading technical college.
Welcome to The Tassel, FREOPP’s newsletter on higher education policy, written by senior fellow Preston Cooper. Each month, The Tassel dives into our latest work on higher education, along with a handpicked selection of research and articles from around the web that we think are worth your time. To manage your subscription preferences, visit your Substack settings.
I get readers from all parts of the political spectrum, but it probably won’t be controversial to say this: the federal student loan program is a mess. Administrative chaos, high delinquency rates, subsidies for low-quality institutions, and enormous fiscal costs are just some of the problems with federal student lending.
Many people, particularly those on the right, think the government should give up and let the private sector take over the responsibility for making student loans. Those arguments are gaining more currency as the problems with federal student loans reach something of a climax. Millions of borrowers missed their first payments in October, and new loan-relief plans threaten to drain the Treasury of hundreds of billions of dollars.
It's time to start taking student loan privatization seriously. That’s the subject of a new report I coauthored with Beth Akers and Joe Pitts of the American Enterprise Institute. We explore the current state of the private student loan market, weigh the benefits and drawbacks of privatization, and outline a policy agenda to make privatization work.
Privatization could improve higher education—but there are drawbacks
Just 10 percent of college students use private student loans, since the federal student loan program is so heavily subsidized that private lenders cannot compete. But the federal government will make a loan to almost any student to attend almost any accredited college, even if that college has an abysmal track record of helping students graduate and find jobs that enable them to repay their debts. Federal bureaucrats lend taxpayer dollars rather than their own, so there’s little incentive to ensure those funds actually go to good programs.
Private financial institutions, by contrast, won’t lend to students unless they expect to be paid back. Beth, Joe, and I find that the delinquency rate on private student loans is just one-third the rate on federal loans. Lenders have an incentive to steer prospective college students towards programs where graduates typically earn enough to repay their debts. If the private sector assumed a greater role in higher education finance, colleges would need to shape up or risk losing access to loans for their students.
That would hold colleges accountable for their outcomes in a way that the government seems incapable of doing. We’ll see far fewer horror stories of students mired in education debt they can’t repay. Privatization would also save taxpayers around a quarter trillion dollars over ten years.
But privatization comes with stumbling blocks that its proponents need to address. There are practical and regulatory barriers to expanding private student loans, particularly to student borrowers without a satisfactory credit record or a creditworthy cosigner. Mortgage borrowers can use their house as collateral, but students can’t exactly borrow against the value of their degree. Moreover, regulators are hostile towards new methods of underwriting based on students’ expected return on investment. Private lenders face loads of regulatory uncertainty.
The right way to end federal student loans
All this may lead the private sector to underinvest in higher education—that is, deny loans to many students who could nonetheless benefit from college. While some degree of market failure is inevitable—and may pale in comparison to the government failure that plagues the federal student loan program right now—reformers should still think about how to mitigate the drawbacks of privatization.
Regulatory reform is an obvious candidate. The Equal Credit Opportunity Act discourages lenders from using students’ expected return on investment (ROI) from higher education to make lending decisions, so they instead fall back on FICO scores. Lawmakers should create regulatory “safe harbors” to allow lenders to use ROI-related measures.
Policymakers should also consider a modest expansion of scholarship aid for low-income students and others who might have trouble securing a private loan. Just a fraction of the estimated $249 billion savings from student loan privatization could enable a significant increase in the Pell Grant, which would reduce low-income students’ need to borrow. Privatization advocates typically want to get the federal government out of higher education, but considering that federal student loans do far more damage than Pell Grants, swapping the former for the latter is still a worthwhile trade.
With the federal student loan program going off the rails (if it was ever really on them), the time is right for a serious conversation about privatization. A sensible privatization agenda—combined with regulatory reform and better grant aid—would help ensure students come out ahead when they pursue college.
What I’m writing
The Education Department has failed its obligations to America’s students. (National Review) The bungled launch of the new FAFSA—that’s the form prospective college students use to apply for federal aid—just keeps getting worse. Every day seems to bring news of a new oversight or error that will delay financial aid decisions for millions of students; there will probably be a new one by the time you finish reading this sentence. Among the more farcical issues: after the Department directed some students to submit some of their information by email, it never assigned anyone to check the inbox—meaning 70,000 emails from frustrated students went unread. The chaos is a predictable consequence of the Department prioritizing high-profile initiatives like student loan cancellation over the humdrum work of actually governing.
The student loan cancellation cheat sheet. (OppBlog) Speaking of student loan cancellation, FREOPP held a Hill event earlier this month that walked attendees through the myriad loan-relief initiatives that the Biden administration has advanced without Congressional approval. I compiled information about those various initiatives into a “cheat sheet” to help observers make sense of everything. The list includes high-profile plans as well as those that have flown below the radar (the one-time IDR payment count adjustment, anyone?). If implemented, the total cost of these plans could reach one trillion dollars.
Why your college tour should include a technical school. (Forbes) I was in Texas last month, which gave me the opportunity to visit one of the nation’s foremost technical schools: Texas State Technical College (TSTC). The school’s appropriation from the state depends entirely on what students earn after graduation, which means economic mobility is baked into its mission. Though the school only offers two-year programs, starting salaries for alumni are comparable to those of four-year college graduates. Technical schools are becoming a more popular choice, with enrollment up even as fewer students attend college overall.
What I’m reading
Standards in American high schools are falling, according to an analysis by the Economist that compares high school graduation rates to average SAT scores. Holding SAT scores constant, students are far likelier to graduate today than in 2007—suggesting declining standards, not real improvement, are the reason behind rising graduation rates. The findings have serious implications for college readiness.
Many jobs that “require” a master’s degree don’t pay enough, according to a new issue brief from Urban Institute scholar Molly Scott. Half of jobs where the typical minimum qualification is a master’s degree pay less than the median wage for people with only a bachelor's degree. The findings suggest we need to reduce degree requirements for these professions.
AI could help rebuild the middle class, writes economist David Autor for Noema. AI is not a substitute for human labor, but a tool to augment existing expertise. Autor argues AI could enable workers “possessing complementary knowledge to perform… higher-stakes decision-making tasks.” This could result in more opportunities for workers without advanced degrees.
Kansas sued the Biden administration over its "SAVE" loan repayment plan, writes Michael Brickman of AEI. More than half of borrowers enrolled in SAVE pay nothing towards their loans, effectively making the plan backdoor student loan forgiveness at a half-trillion-dollar fiscal cost. If courts side with the states, it would deal a significant blow to the administration’s loan-cancellation agenda.
Gen Z is becoming the toolbelt generation, writes Te-Ping Chen at the Wall Street Journal. Despite comfortable wages, the skilled trades suffer from a shortage of workers. But younger Americans, raising an eyebrow at the value of traditional colleges, are powering a rebound in the ranks of skilled tradespeople.
What I’m doing
Last weekend, I visited Niagara Falls to enjoy the total solar eclipse. No photos of the event itself—my iPhone camera didn’t cooperate, and I didn’t want to waste three minutes of totality getting things in focus—but I took plenty of shots around the falls. This one is from the Cave of the Winds on the American side of the river.
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