Today, we wanted to write about a subject that our Congressional Community asked us to look into – Congress’ role in higher education, and the impact it has had and continues to have on students.  We’re going to keep this blog focused on the financial aspects of higher education, with what we hope are practical ideas and resources for people either looking to enroll in college now, or people who have student loan debt that they’re struggling to pay.

One very important note – We’re not experts.  This blog is meant as an overview of where things stand today, particularly when it comes to federal student aid.  Grants, student loans and the rest of the financing options available for higher education are quite complex involving a number of different agencies.  Additionally, Congress and the Executive Branch are constantly updating things.  Please seek the help of a financial aid counselor.

Before getting into things, let’s make sure we’re all talking in the same language.

 

Higher Education – schooling after high-school, including:

4-year degree programs (B.A., B.S., B.F.A. degrees)

2-year programs (associate degrees, technical degrees)

Certificate programs (typically 12 – 16 months)

 

Types of funding

Grants – Available from Federal sources, State sources, Institutions of Higher Learning (i.e., the school you’re attending) and to a lesser extent, Corporations. Grants don’t need to be repaid, but government grants have cumulative limits on them. 

Federal Loans – Either subsidized or unsubsidized – need to be repaid.  Come with income driven repayment options.  Also have caps on them.

Private Loans – Not subsidized.  Usually more expensive, sometimes significantly more (sub-prime).  Do not come with income driven repayment options or other federal protections.

Income Driven Repayment Plans – Available only on federally funded loans.  These plans are designed to prevent borrowers from being overwhelmed by their student loan debt, even allowing for debt-forgiveness in several of the plans.

 

Types of schools

Public 4-year schools – Schools that are established, funded and run by government.  E.g., the UC and Cal State schools in California, the University of North Carolina, Georgia Institute of Technology, the SUNY schools in New York, etc.  Every state has some kind of public four-year university.

Private, non-profit 4-year schools – Non-profit schools, operated and established by non-governmental agencies. e.g., Yale, Pomona College, Bowdoin, SMU, Howard University, etc. 

Community Colleges (or Junior Colleges) – Schools established, funded and run by government.  Two-year programs.

Private, for-profit schools – Schools established principally as for-profit enterprises.  When accredited, credits usually don’t transfer to types of schools listed above.  e.g., Phoenix University, SAE Institute, Southern New Hampshire University.

 

Overview

First of all, from a purely financial point-of-view – and for those of you burdened with enormous student loan debt, please read the entire paragraph before screaming at your computer – it is still a good investment to attain a four-year degree.  Most college graduates, over the course of their lifetimes, will earn about $25,000 more per year than high-school grads who do not attain a four-year degree (Figure 1).  That said (and this for those of you who, after reading that sentence, couldn’t refrain from screaming at your computer) we have to add this HUGE caveat – it’s a good investment as long as you avoid some crucial trapstraps that Congress has either had a hand in creating or has simply, through poor management, failed to rein in.

Figure 1. Source: Bureau of Labor Statistics

One Way to Avoid the Debt-Trap Altogether – A Special Note to Veterans and Children of Veterans.

Before we get into the various student debt traps, let’s start with a program that can help some people avoid college debt altogether.

If you are a veteran, check with the Veteran Affairs department for special grants available only to veterans.  Also, if you are a spouse, child or dependent of a veteran, look into the College Fee Waiver program.  For instance, if you’re a resident of California, go to this website or call (CalVet office: 714-480-6555). College Fee Waiver means what it says – you might qualify to have your entire education covered.

Student Debt Trap #1 – Easy Enrollment

The workload of a good college is intense, and schools with excellent reputations are hard to get into.  Even ones that accept a majority of applicants (for example, 70%), have a formal admission process designed to make sure that you’re ready for the work.  Other schools, primarily for-profit ones, use an open-enrollment model, often selling it as more egalitarian – “Why should you be denied college just because you struggled in high school?” 

Open-enrollment is probably the biggest and easiest red-flag to spot.  It can be an indication that the place you’re applying to might be more interested in making money off you (by getting access to funds you qualify for from state and federal sources) than it is in your academic well-being.  This is not to say that schools with an open-admission policy are all bad, but the odds are very high (2 out of 3, at least) that if you attend an institution of higher learning that has open-enrollment, you will not graduate and will end up with significant debt and no additional skills to increase whatever wages you were making prior to enrollment.   Nearly 50% of first-time students who attend for-profit schools will default on their debt within 12 years (Figure 2).  It is by far the highest default-rate of the different types of schools.  And as you’ll see in a moment, defaulting on student-debt can ruin your financial life.

Figure 2. Source: CAPSEE

 

How to Avoid Trap #1

If you have any question about whether or not you have what it takes to successfully manage a college-level workload, including a certificate program, first consider enrolling in your local community college.  They have staff that can help guide you to either fulfill the requirements necessary for enrollment, or let you know about programs that waive those requirements. 

The enormous upside of taking the community college route is that tuition costs are very affordable.  If you have low or modest income, the community college financial aid office can help you access funds, often in the form of grants.  An additional benefit is that when you attend classes, you yourself can determine if you are a good candidate for college.  (Just because you didn’t do well in high school doesn’t mean you’re not a more academically mature person now.  But test it.  Don’t get exploited.)

If you decide to apply to a private school that has open enrollment, do your research on what others who have attended are saying about the experience, particularly their debt.  Remember, open-enrollment at private schools is a giant red-flag.

Lastly, providing that you get good enough grades (B’s are safe; C’s are questionable; D’s won’t cut it), the credits that you get from community college are usually transferable to public and non-profit four-year colleges.  For-profit credits are usually not transferable.  So, even if you complete a two-year program at a for-profit school and do great academically, enrolling later in a public or traditional non-profit, four-year school would mean you’ll be a freshman again – and you might have used up a good portion of the government funds available to you.

 

The Government’s Role in Trap #1

You’ve probably heard this saying, “Those who cannot remember the past are condemned to repeat it.”  In the 1940s, Congress passed the GI Bill.  More than half of the servicemen who utilized the educational benefits the bill provided attended for-profit vocational schools.  Unfortunately, the majority of these kinds of schools engaged in fraudulent business practices.  When the current methods of making federal funds available for higher education were put in place in 1965, for-profit schools were excluded. Congress seemed as if it had learned from history.  But less than ten years later, Congress made for-profits eligible for funds.  Sure enough, just as in the 1940s, there was a surge in for-profit schools. 

Not surprisingly, because they are profit-driven as opposed to mission-driven, the cost per credit hour is twice that of public and non-profit institutions of higher learning.  Despite evidence of predatory behavior, especially in targeting lower-income and minority communities, for-profits have proven to be very adept at protecting their interests in Washington D.C.

For example, both parties in Congress fought on behalf of for-profit universities to water down Gainful Employment standards.  These standards were designed to make it easier for students to see what they’d actually earn by going to a particular school and pursuing a particular course of study, and to have access to real-world numbers on the debt they were likely to incur.  Today, even after more modest standards were instituted, the Department of Education and the Social Security Administration are not being compelled to release the data they’re required to gather.  So, the only data available is data from the 2015- 2016 academic year.

Another example.  The IRS is allowing for-profit schools to re-classify themselves as non-profits by breaking off the for-profit portion of the operation as a separate entity, but effectively maintaining control of it and the profits it makes.  For-profits are doing this for two reasons – primarily, to confuse students by getting themselves categorized in the same pool as long-established non-profit universities with excellent names; and to avoid having to pay taxes.  It’s because of this movement by the for-profits to make themselves legally indistinguishable from traditional non-profit universities that we titled Trap #1 Easy Enrollment. A few years ago, it would have been sufficient to say, “Pick Community Colleges Over For-Profit Schools whenever possible.”

 

Student Debt Trap #2 – Private Student Loans / Private Student Loan Servicers

Here’s a recent headline from Bloomberg News — America’s Student Debt Problem Is Spurring Suicidal Thoughts: Survey.  This a tragically far cry from Congress’s original intent. 

Here’s what President Lyndon Johnson said when signing the 1965 Higher Education Act (the law that affects college loans to this day) —

“… I made up my mind that this Nation could never rest while the door to knowledge remained closed to any American… when we leave here this morning, I want you to go back and say to your children and to your grandchildren, —tell them that we have made a promise to them. Tell them that the truth is here for them to seek. And tell them that we have opened the road and we have pulled the gates down and the way is open, and we expect them to travel it.”

A big part of the personal crisis individuals feel from student loan debt likely stems from one of two things.  1. Either they borrowed money from a private lender or, 2. If they borrowed federal money, they are not aware of flexible repayment options that exist, including income-driven repayment plans.   Let’s tackle this one at a time.

 

Trap #2, Part 1. Private Student Loans

If you google “student loan” a bunch of ads will appear, all for private lenders.  If at all possible, do not borrow money from private lenders for a student loan.  Instead, utilize the Federal Direct Student Loan Program.   (And if you google, “Federal Direct Student Loan Program,” even though Sallie Mae comes up first, Sallie Mae is a private lender.  Do not use them if you haven’t already accessed federal loans.)  The financial aid office of your school, assuming you’ve been accepted to a reputable institution, should be providing you with a budget to cover your schooling, including a mixture of federal, state and institutional grants, as well as federally subsidized and possibly federally unsubsidized loans.  They should be directing you to the FAFSA application, not to some private lender.  But it’s up to you to make sure they do it – some schools are incentivized by private lenders to make them look like viable alternatives from the outset. 

Here’s the problem with borrowing from private lenders — Should you run into trouble repaying your loans, or should the cost eat up an enormous part of your paycheck, you will not have the option to get adjustments to your monthly payment as you would if you borrowed money using the Federal Direct Student Loan Program, which offers income-driven repayment plans.  These plans put reasonable limits on how much of your paycheck can go towards paying student loan debt, and have the additional benefit of actually forgiving debt in the event that your income situation doesn’t change enough over the course of 20 years to pay down the entire debt (you have to have made timely payments throughout the 20 years).  If you borrow from private lenders, those options don’t exist.  And if you go 270 days without making a payment, you’ll be in default, ruining your credit and subjecting you to endless collection agency calls for the money.

 

Trap #2, Part 2.  Private Student Loan Servicers

Let’s say you got Part 1 right and used the Federal Direct Student Loan Program.  Unfortunately, you’re still not out of the woods.  85% of these loans are contracted out to for-profit loan servicers – Navient, AES/PHEAA, Nelnet and Great Lakes (Nelnet and Great Lakes recently merged).  These are the companies who will be managing your payments, and they’re the ones you’ll need to deal with if you start running into difficulties making payments or just feel like you need to consider changing your repayment plan.

The problem with these loan servicers is that they have been documented as steering borrowers to programs that are more likely to lead borrowers into default than to programs that alleviate crushing debt payments, and when they do direct borrowers to programs like the income driven repayment plans, they don’t always do a good job of managing the required annual reporting you need to do (it’s a 10 page form).  The reason is simple — it is much less time-consuming for them to say, “Hey, you’re having trouble making your payments.  We can put your payments on hold – you don’t have to pay anything for a while.”   This is called forbearance.  Sounds attractive, right?  No payments for up to a year.  The problem is that all the interest is now rolling into the principal on the loan, so your payments, which you’re already having trouble making, are going to be higher in a year, and that year will go by a lot faster than you think. 

If you have one of the non-profit service providers, you’re 3 or 4 times less likely to be taking the forbearance route than if you were assigned to a for-profit (Figure 3).

Figure 3. Source: ValuePenguin

Interestingly, the non-profit servicers have fewer borrowers in the income driven repayment option than their competitors, fewer than 1 in 5.  This is likely because they do a better job at keeping borrowers up-to-date with the annual reporting requirements, moving them out of the category when their income increases.

How to Avoid Trap #2

Part 1.  Utilize the Federal Direct Student Loan Program – Avoid private lenders if any federal or state options still exist.

Part 2.  Even though you’re stuck with whatever loan servicer was assigned to you, you still have the right to have that loan servicer take enough time with you to get you into the right plan, and to help you manage it properly, like filing the annual reports required for income driven repayment plans.   If you are having problems with your student loan servicer, contact your local Congress member’s office and ask for the Constituent Services Representative.  They will open a case file for you and help you resolve the problem.  (For more on student loan servicers, you can read this article from March 2019.  9 Things Your Student Loan Servicer Isn’t Supposed to be Doing to You.”)

 

The Government’s Role in Trap #2

There are a number of ways in which Congress has had a hand in the crisis that some student loan borrowers face today. 

When today’s programs were first created over 50 years ago, despite a successful earlier direct-loan model, Congress instead chose to involve banks to handle the actual loan process.  When banks were slow to sign-on to the program, Congress doubled-down and created a liquidity market for the loans, and, in doing so, created the Student Loan Marketing Association, or Sallie Mae.  Soon, the banks themselves became a separate constituency in the student loan legislation arena, leading to laws favorable to financial institutions but increasingly detrimental to student borrowers.

After the financial crisis that started in 2008, Congress in 2010 reverted fully to the direct loan model, meaning federally backed student loans could no longer be offered by private financial institutions. But, Congress continued to allow banks to offer private student loans, and to act as loan servicers. This created a competing world where some students had non-profit loan servicers, but the majority had for-profit ones.  Congress did not give the borrowers a say in who their loan servicer would be, or the option to change them.

 

Student Debt Trap #3: Bankruptcy Laws

If you run into serious trouble paying back your student loans and end up in default, you need to know that it is very difficult to get rid of your student loan debt by filing for bankruptcy.  In legalese, student loan debt is not dischargeable.  Beyond not wanting the stress of high debt, the way student loans are treated by the courts is reason enough to do everything you can to avoid the traps we’ve already discussed. 

 

How to Avoid Trap #3

If you received your loans through the Federal Direct Student Loan Program beginning in 2011 or later, you have several options.  First, as we mentioned above, federal loans give you flexible income-driven repayment options, including the option to change plans.  If you can prove that your income can only support minimal payments, a good loan servicer will help get your payments adjusted to those minimal payments while you’re in that situation.  Because of these plans, if you ever run into hard times financially, you should never be in a position where your loan payments are overwhelming.  If your loan service provider isn’t giving you the time you need to get your payments adjusted, call your Constituent Services Representative for help.

If you were unable to complete your education because your college closed, like Corinthian Colleges, you might qualify for having all or part of your student-loan forgiven (technically discharged).  If you’re not sure and are having difficulty, you can check with the Department of Education or call your Constituent Services Representative for help.  Your member of Congress’ staff really are there to help.

If your loan was through a private lender after 2005, or if it was federally funded but doesn’t qualify as new, there is one other option to consider that is difficult but not impossible.  You can get the debt discharged through bankruptcy if you can show that payment of the debt “will impose an undue hardship on you and your dependents.”  The most common test used in courts is called the “Brunner test”, which has three parts – 1. The debtor is unable to maintain a minimal standard of living; 2. The state of affairs is likely to persist for a significant portion of the repayment period; and, 3. The debtor has made a good faith effort to repay the loans.  If you’re in bankruptcy court, you’ll already have a lawyer.  Make sure they explain and examine this option with you.  Just be aware it’s a tough hurdle.

If nothing else, trap #3 should make the case for why you want to avoid traps #1 and #2.

 

The Government’s Role in Trap #3

Beginning in 1976, Congress passed bankruptcy laws that put increasingly stringent requirements on student loan borrowers to successfully have their loans discharged, even when other types of debt like mortgages, credit card and auto loans remained dischargeable (i.e., having the debt wiped clean).  Up until the late 1990’s, if you were making payments in good faith for a fair amount of time (7 years), you could still go the bankruptcy route.  In 1998, Congress made it extremely difficult for federally backed student loans to be discharged in bankruptcy.   In 2005, this same bankruptcy provision was extended to all student loans, including those that originated privately through banks. This is a big part of the reason people struggling to make their student loan debt payments feel so hopeless. 

The good news is that Congress did provide a way to avoid this problem with the income-driven repayment options for federal loans made after 2011.  The bad news is they did not make these options available retroactively, nor did they rescind the 2005 law that extended the discharge-ability rule to privately funded loans.

 

A Wild Card in the Student Loan Situation – The Department of Education

The Department of Education falls under the Executive Branch of government.  Depending on the philosophy of that branch, the policies of the department will change from time-to-time.  Currently, the Department is not supportive of one of the repayment options: the Public Service Loan Forgiveness plan, which was created in 2007.  This plan provides loan forgiveness to borrowers who spend a decade working either for the government or for qualifying non-profits and who remain current on their student loan payments for ten years.  This idea of rewarding public service in the form of educational grants and loan forgiveness goes back to the GI Bill of 1944, the National Education Defense Act of 1958, and had a featured role in the 1965 Higher Education Act.  Yet, news has recently come out that the Department of Education has granted loan forgiveness to a miniscule number of applicants, less than 1%.   

This is not the only instance of the Department of Education taking actions detrimental to student borrowers.  Corinthian Colleges was a large, publicly traded, for-profit college that, due to questionable practices, agreed to shut down in 2014.  Over 100,000 former students qualify for either complete loan forgiveness or partial loan forgiveness.  However, the Department of Education still has yet to settle on a policy, leaving tens of thousands of former students in limbo.

While the Department of Education falls under the executive branch, it is only in the last year that Congress has begun to provide oversight of that department in this area.  It is arguable that they’re doing it with little enthusiasm since collecting student-loan payments contributes significantly to the federal revenues.  Nonetheless, if you fall into either of these categories — you participated in the Public Loan Forgiveness Plan or went to a school shut down by the government — and are not getting help from the Department of Education, reach out to your Constituent Services Representative at your Congress member’s district office for help.  (We know we sound like a broken record on this recommendation.  But many people are unaware of it.)

And in Case You Missed it Earlier One Way to Avoid the Debt-Trap Altogether – A Special Note to Veterans and Children of Veterans.

If you are a veteran, check with the Veteran Affairs department for special grants available only to veterans.  Also, if you are a spouse, child or dependent of a veteran, look into the College Fee Waiver program.  For instance, if you’re a resident of California, go to this website or call (CalVet office: 714-480-6555). College Fee Waiver means what it says – you might qualify to have your entire education covered.