Student loan defaults continue to cause problems in this country. As recently as 2010, nearly 375,000 students defaulted within two years of beginning repayment. One idea put forward to address the issue involves assigning more responsibility for defaults to colleges and universities themselves. Jane Shaw, president of the John W. Pope Center for Higher Education Policy, discussed the issue with Donna Martinez for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Martinez: Do universities have any risk at all? Is there any skin in the game when a student defaults on their loans?
Shaw: There isn’t any. There is a slight reprimand if a school has 30 percent of its graduates within a two-year or three-year period default. Then they get into a little bit of trouble with the [U.S.] Department of Education. And maybe once a year, there are a couple of schools that are dropped from the federal program. But by and large — no. For the 4,000 or so schools that we have in the country, there is no skin in the game.
Martinez: I mentioned 375,000 students defaulting in 2010. Is that a lot? What percentage are we talking about here?
Shaw: Well, that’s about 9 percent, and that means that within two years of their graduating or leaving school, they’re allowed a six-month kind of hiatus, I guess, and then they have to start paying. And so by two years after they graduate, 9 percent have not — nationally — have not been able to pay. And yet, a definition of default is, I think, six months of nonpayment. So that means you have to be in a pretty bad situation to get that. The Department of Education is now expanding that to three years, so within three years of graduation, the figure is higher. It’s more like 13 percent.
Martinez: What about in North Carolina?
Shaw: It’s very hard to get default rates actually, because some schools apparently don’t reveal them, but in the University of North Carolina system currently, the figure is about 6 percent.
Martinez: Why aren’t these students repaying their loans? Do we have any idea what the problem is? Is it just simple finances? They’re not making enough money?
Shaw: Yes, we do have an idea. Let’s think about the situation. You’ve got young people who enter into college without realizing what it’s like to borrow, what interest is involved, what even interest is. And for four years, typically, they don’t have to pay a thing. And then suddenly, six months after they graduate, they get this big bill. On average, two-thirds of all students do borrow money, and the average loan for each student nationally is $27,000.
So think about a graduate and how much he or she might earn after that — in that first job. Well, it might be $27,000. They’re going to have a challenge paying it — and especially those graduates who don’t have a job. And we know that among young recent graduates, there’s pretty high unemployment.
Martinez: The money: Is it easy to get? Is that part of the issue here?
Shaw: Oh, absolutely. The federal government has no sort of academic standards. It doesn’t make any demands except you have to have graduated from high school. You have to be accepted by a school. And this is great money for the universities; they lap it up. And so they have never been very careful because they have no responsibility.
A student may go through their school, may drop out — that’s one problem. Also, [a student] may go through school and not have … learned enough to get a good job. A lot of … college graduates — nearly half are in jobs that really don’t require a college education.
Martinez: So if a student defaults, who is stuck with the bill?
Shaw: The taxpayer is. Even the earlier loans by banks were guaranteed by the federal government. Now more recently, all loans are coming from the federal government, under the Direct Loan Program, and if they don’t pay, the taxpayer pays. Now there are many efforts to get students to pay — you know, 24-year-olds are getting these collection notices. It’s really rather sad. There are efforts to get students to pay, but ultimately, if they can’t, we’re paying for it.
Martinez: Now recently there was a very fascinating piece that was posted to your website, which is PopeCenter.org, written by Duke Cheston. It’s about a school of thought that seems to be gathering a little bit of steam here, that universities and colleges should be on the hook more for these defaults. What do you think about that?
Shaw: Exactly. They are the beneficiaries. So think about this. Let’s think of the university as a co-signer for the loan, so that if that student does default, some percentage of the loan has to be paid by the university or the college.
Martinez: They would pay attention.
Shaw: They would pay attention. And I have to admit that when I first heard this idea, I thought, “Oh, no, we don’t want to have the federal government even more involved, checking on whether these colleges are paying back.” But as I have talked with people about it and learned, I have concluded that this does shift the incentives away from — well, no one has much of an incentive now except the student, and the student is rather uninformed — incentive to really be sure that you should be taking out this amount of money. It would shift that to the college, which really should have some responsibility. They’re the ones who benefit a great deal from these loans.
Martinez: And that’s where the incentive is right now. Jane, I hear a lot of people say it just keeps getting more and more expensive to go to college.
Shaw: Yes.
Martinez: Is there a relationship between the cost of tuition and the availability of these federally insured loans?
Shaw: Yes. There have been a number of studies. Some people will still argue that they’re not definitive, but it’s pretty clear to me that the enormous amounts of money that are available through the federal government, $1 trillion now of loans. That money is affecting, is enabling, colleges and universities to raise their rates, their tuitions.
Martinez: Not everyone agrees, of course, that the universities should be pulled into this web of responsibility.
Shaw: Right.
Martinez: And the common criticism seems to be that if you do this, access to college is then limited. Do you buy that?
Shaw: Well, in fact, you can use the term “access,” and it sounds kind of bad to limit access, but on the other hand, we know that a number of students, a large number, really shouldn’t be in college. They should be doing something else. Maybe they should be at a community college, which is less expensive. But they are entering into an unfortunate bargain by going to college with these very large loans and not really being able to get much out of college. That’s the situation that’s so sad.
Martinez: And now nationally, as you mentioned, Jane, we have just about one out of every 10 students who have these loans defaulting. And here in North Carolina, the rate is 6 percent.