U.S. Secretary of Education: Help Students! STOP spending a BILLION dollars on Student Loan Collectors.
The Department of Education is paying $1 billion dollars a year to collection agencies to collect on defaulted student loans when the reality is that almost no one should default if adequate default prevention and aversion counseling strategies were put into effect and adequately funded.
We need your support to protect student loan borrowers from collection agencies, student loan servicers and even schools that have a vested interest conflicting with the “best interest” of the students.
We are asking the U.S. Secretary of Education, Arne Duncan to allocate just $200 million of the $1 billion currently going to collection agencies, to fund a successful default aversion and prevention process both at schools and through independent non-conflicted organizations.
Independent organizations have successfully assisted student loan borrowers in preventing their loans from default by providing students with highly experienced counselors to guide them through the loan repayment process.
Unfortunately, college debt isn’t just taking a financial toll on millions of borrowers. It’s also inflicting staggering costs on the health, careers, emotional well-being and personal relationships of those burdened with big college loans.
We just created this petition: U.S. Secretary of Education, Arne Duncan: STOP spending a BILLION dollars on Student Loan collection agencies , because we care deeply about this very important issue.
I’m trying to collect 100 signatures, and we could really use your help.
To read more about what we’re trying to do and to sign this petition, click here!
It’ll just take a minute!
Once you’re done, please ask your friends to sign the petition as well. Grassroots movements succeed because people like you are willing to spread the word!
President Lyndon Johnson signed the Higher Education Act (HEA) on November 8, 1965. The ceremony occurred before a packed house at his alma mater, Southwest Texas State College (now Texas State University-San Marcos). With his wife, Lady Bird, by his side, and surrounded by faculty, students, and administrators, Johnson gave prefatory remarks that were solemn yet optimistic: “The president’s signature upon this legislation passed by this Congress will swing open a new door for the young people of America. For them, and for this entire land of ours, it is the most important door that will ever open — the door to education.”
The $3 billion act marked the culmination of three decades of federal support for research funding and student aid that stretched across the New Deal, World War II, and the Cold War. One title provided aid for land grant urban extension programs; two titles offered assistance for construction projects; another title created the Teachers Corps; and another lent support to historically black colleges. But it was the student assistance title (Title IV) and its trio of aid options — work study, loans, and grants — that revolutionized college-going in this country, helping tens of millions of Americans go to college. It was the key to opening Johnson’s “door to education.”
This year the act is again up for reauthorization, and for the first time in recent memory there exists genuine concern that the door the act opened is starting to shut. The “cost crisis” in higher education, now more than four decades in the making, has finally come home to roost. Since the economic crisis hit five years ago, state appropriations have plummeted and tuition has climbed. Spiraling dropout rates and student debt combined with reports of “limited learning” in college and high unemployment after have upped the anxiety level. Recent polls indicate that the American people are worried about paying for college and unsure whether it’s still a worthwhile investment, even though all the evidence indicates that earning a degree today matters more than ever.
In last month’s State of the Union Address, President Obama said he intended to “ask Congress to change the Higher Education Act so that affordability and value are included in determining which colleges receive certain types of federal aid.” With an agenda already loaded down by sequestration, gun control and immigration reform, this will be very hard to do. But let’s assume that the act is overhauled and changes are made to the current financial aid system. It’s worth speculating what this new regulatory regime might look like. That it might end up bearing a family resemblance to No Child Left Behind (NCLB), the decade-old K-12 accountability model built on Johnson’s Elementary and Secondary Education Act of 1965 (ESEA), should give pause to those of us who care about higher education.
The fundamentals of NCLB are well-known. In exchange for federal Title I funding, the states must annually test students in math and reading in grades 3-8 and once in high school, and all students must be “proficient” in these subjects by 2014, unless your state received a waiver from the Department of Education. Schools that fail to make adequate “annual yearly progress” face increasingly severe sanctions: staff can be fired and a new curriculum installed, and if improvements aren’t made, failing schools can be restructured or even closed. While the results of NCLB have been mixed — gains in one place offset by losses in another — there is no doubt that regulation of this sort would harm American higher education. The strength of the U.S. system lies in the autonomy and freedom it affords and in the wide range of institutional and pricing options that it provides. This is rarely acknowledged. The media home in on what are actually outlier institutions, like Harvard University or the University of California at Berkeley, cite anecdotal evidence, then generalize across the whole sector, as if all institutions are the same and all students have identical educational goals.
Most students don’t go to residential colleges or have endless free time. Most students aren’t 18 to 21 years of age and most students don’t graduate in four years. In fact, it’s quite the opposite. Most students in this country go to a broad access four-year public institution or a two-year community college. Most students commute to class and work part time. And 40 percent of students are from low-income households.
All of which is to say that if new measures are passed to hold “colleges accountable for cost, value, and quality,” as the White House has since described it, they will not affect all students or institutions the same. At wealthy colleges that attract exceptionally well-prepared students it will be business as usual no matter what happens. Not so at broad access institutions. Just as the burden of NCLB has been borne most by poor students and districts, similarly styled higher education reform will mean even more obstacles for “those who aspire to the middle class” — poor, racial and ethnic minorities, and first-generation students whose college options are already limited.
The president’s reluctance to address the link between poverty and education is notable, since the ESEA and the HEA were the main fronts of Johnson’s “unconditional war on poverty.” The Educational Opportunity Grant, forerunner of the Pell Grant, was the HEA’s silver bullet, targeting students of “exceptional financial need” to help them earn a college diploma. Passed the year after the Civil Rights Act barred discrimination by any institution that received public funds, the HEA fueled the enrollment of African Americans and other underserved populations. Roughly 160,000 African Americans were in college in 1960, the majority of them at a historically black college or university (HBCU); by 1975 more than a million African Americans were in school, most of them outside the HBCU network.
In retrospect, the late 1970s was the golden age of college access, when the portable Pell Grant actually covered half the cost of a college education, as it was intended to do, and African Americans and other minority groups reaped the benefits of equal opportunity. It didn’t last. By the mid-1980s, loans eclipsed grants as the government’s preferred aid instrument, supplemented later by tax credits, tax-deferred 529 college saving plans, and state and institutional merit aid programs that have disproportionately benefited middle- and upper-income families. All the while the purchasing power of the Pell Grant has withered and the education gap has grown, impoverishing us all.
This brings us to our current moment and the various NCLB-inspired plans to tie aid to cost, value, and quality — that is, to outcomes and accountability rather than access and opportunity. This shift in priorities will not only hurt poor students but the entire higher education system. Colleges will be less willing to take chances on students that can’t pay full freight or look like they won’t graduate on time, leading to greater economic stratification and the end of student diversity as we’ve known it. Professors will feel even more pressure to pass students along regardless of the work they do, thus making rampant grade inflation worse. Administrators will be apt to massage student data to improve their institutional outcomes and rankings. And parents will demand that their students pursue pre-professional degrees with the strongest employment prospects, further marginalizing the liberal arts and other “blue sky” fields that offer less immediate “bang for the buck,” turning them into wealthy majors for those who can afford idle cogitation. Meanwhile, ever greater numbers of poor students will cluster around the least desirable yet most expensive diploma mills, resulting in even more young people being left behind.
Are these doomsday scenarios far-fetched? Not really. Some of these things are already happening, now. But we’re not going to solve these issues by following policy makers and self-anointed reformers who want an aid model based on outcomes rather than opportunity. Simply put, higher education is setting itself up for failure by making promises it will not be able to keep. Does anyone really believe that we can create a system where every student who enters college graduates four years later with a degree, debt-free? Or that we can have classrooms where all students learn the same amount and in the same way? Or that every college graduate will land the job of her dreams? Higher education has never, ever done that. Not in the 19th century or in the 20th. And it never will.
Rather than creating more problems, we should mine the past for approaches that we know will keep “the door to education” open. The Pell Grant should be expanded and restored to its full purchasing power. To pay for it, regressive education tax credits favoring high earners should be abandoned and along with it financial aid to for-profit education providers, where the dropout, debt and default rates are highest and always have been. Colleges should be required to provide applicants with easy access to real pricing information to help with the choice process. And the income-based loan repayment program should be streamlined and a national service program created to put college graduates to work. After all, we don’t just need doctors, lawyers, engineers, and scientists; we also need teachers, artists, historians, and community organizers.
The challenge of our lifetime remains the problem of poverty. But to meet that challenge requires acknowledging that it exists. Lyndon Johnson knew that a truly great society was not possible “until every young mind is set free to scan the farthest reaches of thought and imagination.” This remains as true today as it was then, and so too does Johnson’s fair warning: “We are still far from that goal.”
The Consumer Financial Protection Bureau said on Thursday that it wants to regulate the companies hired by lenders to maintain records, collect payments and report to creditors and investors.
Students, who have no say over which company services their loans, complain that the companies treat them poorly, but the companies counter that they are dealing with an increasing number of borrowers who either cannot or will not repay their loans.
The bureau wants to supervise companies that handle more than a million student loan accounts. It is also concerned that private loan repayment options are limited and often come with high interest rates.
According to the bureau, there are more than 38 million student-loan borrowers, who combined owe more than a trillion dollars in outstanding debt. In the 2007-2008 academic year, nearly 40 percent of undergraduates and 43 percent of graduate students took out loans. As of 2011, there were more than $8 billion in defaulted private student loan balances. While federal loans often come with income-based repayment options, private loans are typically less flexible.
Reuters reports that, according to the Federal Reserve Bank of New York, 6.7 million borrowers were at least 90 days delinquent on their repayments.
The situation isn’t just a problem for lenders who want their money back. According to the bureau, distress among borrowers could also negatively impact the economy. Debt may limit consumption as people tighten their belts and devote more money to loan repayment, which could affect everything from homeownership to car sales.
Meanwhile, college costs continue to rise. States and local governments have reduced the amount of funding they give to colleges, and schools have turned to students to make up the lost funds.
According to a 2012 report from the Center for American Progress (CAP), minority students are particularly likely to graduate with debt.
“African American and Latino students are especially saddled with student debt, with 81 percent of African American students and 67 percent of Latino students who earned bachelor’s degrees leaving school with debt. This compares to 64 percent of white students who graduate with debt,” reads a 2012 report.
Latinos are also more likely than whites or blacks to be unemployed when they graduate, which makes paying back loans especially difficult.
The situation is even worse for students at for-profit colleges, which disproportionately attract minority students. For-profit colleges are mostly owned by publicly traded companies and private equity firms. Much of their funding comes from federal student loans, but federal regulations mandate that 10 percent of their revenue come from other sources. The colleges often target veterans because veterans’ benefits count toward fulfilling that requirement
“Students at non-four-year, for-profit colleges have seen the largest increase in student loan debt among any group of student borrowers,” according to the report. “In 2001, 62 percent of freshmen at these schools took out student loans—and just eight years later, that number jumped to 86 percent. These trends are a result of a lack of oversight of private lenders and the marketing practices of these loans by for-profit schools in particular.”
According to Tobin Van Ostern, deputy director of Campus Progress, the youth-focus arm of CAP, for-profit schools also target minorities who are eligible for federal funding and then encourage them to obtain private loans as well.
Unfortunately, Van Ostern said, many of those students don’t exhaust their federal loan options before turning to private loans.
For-profit schools have the highest dropout rates, and their dropouts have the highest rates of unemployment among all college dropouts.
Van Ostern thinks the bureau’s proposal to increase regulations “is a good step,” particularly for minority students who may come from families that are unfamiliar with both the college loan process and loans in general.
“Latinos highly value education and they understand the positive impact it can have on life,” he said, “but they’re not going or they think they’re not able, and the reasons are usually financial.”
The center argues that students are driven into accepting the first job offer they receive, even if it’s low-paying or not in their field, because they must start repaying loans after graduation. As a result, the center says, this may reduce the number of young people who decide to start their own businesses because they are already struggling to repay debt.
Minorities are also less likely to graduate in four years, Van Ostern said, meaning they often need to take out additional loans to cover more years of school.
While a Pew Charitable Trusts project reports that most Americans earn more than their parents, it’s worth noting that they’re only talking in absolute terms. The study doesn’t take into account the fact that it costs more money to live now than it did 50 years ago, and incomes haven’t necessarily kept pace. Where a single income used to support many families, now it often takes two.
The sequester could also make the situation worse. While Pell Grants, which provide federal financial aid for students, will not be impacted this year, the program could see cuts in 2014. A reduction could increase the number of students seeking private loans. Other federal grant programs, such as the Teacher Education Assistance for College and Higher Education program, which provides money to students studying to teach in high-demand fields such as math or science, could be limited, as could federal work-study programs.
And yet it has become increasingly difficult to find well-paid work without a college degree. College graduates are twice as likely to find work as those with only a high-school diploma, according to the Bureau of Labor Statistics.
The bureau is currently seeking feedback on their proposal to regulate servicing companies.
UniversityNow’s Patten University may be the first institution to successfully renew its regional accreditation while also voluntarily dropping out of federal financial aid programs.
That move is one of several that make the Bay Area startup novel, or at least a new twist on emerging models in higher education.
UniversityNow operates New Charter University and Patten, a former religious college in Oakland the company bought last year. The two sister institutions both offer competency-based degrees that are self-paced and online, but feature a relatively heavy dose of faculty support.
The company is unapologetic about how it has copied liberally from Western Governors University, a nonprofit pioneer in competency-based education. UniversityNow even poached talent from the university, including Salvatore Monaco, WGU’s former provost, who is New Charter’s CEO and president.
But UniversityNow has deviated from WGU’s successful playbook in several ways – most notably with its for-profit status and by forgoing federal aid eligibility.
The aid decision is a big part of how the company manages to keep its tuition levels down.
Participation in federal aid programs comes with a lot of red tape. Colleges spend time and money filling out required paperwork. As a result, research shows that colleges that remain on the outside of Title IV, which is the law governing federal aid programs, generally are less expensive than their counterparts.
For example, UniversityNow spends under $100 to enroll each new student, said Gene Wade, the company’s CEO and founder. He said federal aid processing costs would drive that number up — way up.
“Our enrollment process is 20 minutes,” Wade said. “It’s two phone calls.”
The online tuition rate at Patten is $350 per month for undergraduates and $520 per month for graduate students. The university charges a flat rate for its term, which students are typically expected to complete in 16 weeks. That works out to $1,316 per semester equivalent for undergraduates.
Patten’s on-campus tuition is higher, but still relatively affordable. And the fully online New Charter, which is not regionally accredited, is priced even lower than Patten (see box).
The payoff for students, Wade said, is that tuition rates are reasonable enough that they eliminate the need for federal aid.
Innovation and Politicization
The company raised eyebrows last year with its purchase of the struggling Patten.
That’s because it has gotten tougher for a for-profit to buy a ground campus that comes with accreditation. The once-popular technique of “accreditation shopping” has drawn the wrath of a powerful U.S. senator and other critics of the industry. But UniversityNow was able to make it work by promising to maintain Patten’s mission of serving lower-income students.
“We’ve married for-profit with social justice here,” said Janet L. Holmgren, Patten’s CEO and the former president of Mills College.
In July the senior college commission of the Western Association of Schools and Colleges (WASC) reaffirmed Patten’s accreditation. It also approved two of the university’s new online business degree programs – one bachelor’s and one master’s.
“That’s really when things began to take off,” said Gene Wade, UniversityNow’s CEO and founder.
Wade said the university’s growth has been rapid since then. Along with New Charter, the two universities total enrollment recently topped 1,000 students, with the bulk enrolling online through Patten. And last month UniversityNow landed $19 million in venture capital funding.
“More students are interested in a regionally accredited institution,” he said.
While UniversityNow is still in its infancy, the model has generated a lot of buzz. And not just from foundations and others interested in potential “disruptions” to traditional higher education institutions.
Bob Shireman, the former U.S. Department of Education official who tangled often with for-profits, applauded the company for its low cost and focus on job training. Another prominent critic of the sector, Barmak Nassirian, echoed that praise.
“In the abstract, I absolutely want them to succeed,” said Nassirian, who is director of federal relations and policy analysis for the American Association of State Colleges and Universities.
The reason, he said, is that UniversityNow has taken the risk of forgoing federal dollars. Nassirian has long argued that for-profits should be able to thrive without such a heavy reliance on students who receive Pell Grants and other federal aid.
“I respect the fact that they have stepped away from Title IV,” he said. “They are exposing themselves to the market place.”
Wade knows about the strings that can come with public funds.
He previously headed Platform Learning, a K12 tutoring firm. In 2005 the company lost contracts in Chicago amid complaints about administrative lapses and other snags. At the time Wade said bureaucracy in the city school district, which was headed then by Arne Duncan (now the U.S. education secretary), contributed to the mess.
Wade said the experience taught him that it’s much easier to innovate when you can avoid politicization. “Not taking government money makes us not political,” he said.
Support and Self-Pacing
Michelle Rhee-Weise, senior research fellow at the Clayton Christensen Institute for Disruptive Innovation, has kicked the tires on a lot of online learning platforms, including ones that are competency based. But Rhee-Weise said UniversityNow has the most impressive one she’s seen.
“They’re being thoughtful about it in terms of learning science,” she said, calling the platform “sleek and impressive.”
The company is also giving potential students a chance to see how the courses work before enrolling. They can watch video lectures for New Charter courses, take an initial assessment and work through course material and assignments. The only missing piece is the final exam.
“It doesn’t cost you very much to let people try the product,” Wade said.
A growing number of students have gone the “try before you buy” route at New Charter and then enrolled at Patten. Wade said that probably wouldn’t be possible if UniversityNow was participating in Title IV.
Self-paced online learning remains controversial, in part because it looks so different from the traditional classroom. Critics worry that it moves higher education toward being a box-checking widget factory, where learning finishes a distant second to test-taking.
New Charter and Patten are trying to ease some of those concerns by featuring plenty of opportunities for students to interact with instructors.
The two universities’ faculty members will be full-time employees, Wade said. And the company expects them to work with students for at least 32 hours per week.
Peter Francis is a Patten instructor. He teaches business courses and an introductory course of learning strategies for new students, many of whom have been out of school for a long time.
The goal is to help students “function as independently as possible,” Francis said. But when they get stuck on a concept, Patten makes sure they have an instructor available to help. Francis said he is available “on demand” and talks often with students through the university’s internal messaging system.
“I list my office hours as 9 to 9, every day,” said Francis, who has also taught as an adjunct for the University of Phoenix.
Patten’s students are encouraged to work together, which the university’s leaders said is a distinctive feature for a competency-based program.
The company uses a software-based system that places students with peers who are working at similar paces. Those cohorts move through the course material together, and can lean on each other for help.
Employer partnerships are a big part of UniversityNow’s plans for expansion. The company has already struck deals with the cities of Sacramento and Oakland, whose employees pay nothing out of pocket to attend the university thanks to tuition discounting by the company and the cities’ tuition assistance plans.
Wade said UniversityNow is working on partnerships with a dozen large private employers as well, and has begun recruiting students from their ranks.
One reason for that approach, Wade said, is that potential students might not understand how competency-based education works at first glimpse. It helps to have employers vouch for the university.
UniversityNow isn’t the only low-cost, competency-based provider that cultivates relationships with employers. In addition to Western Governors, the upstart College for America has made noise of late, as have others.
More are coming, Wade predicts. He thinks many colleges will soon charge roughly $5,000 per year for online degree programs.
“That’s what we’re gearing up for,” said Wade. “The market’s going to move this way.”
Online, undergraduate: $350 per month, $1,316 per term
On-campus, undergraduate:$1,316 per term (up to 18 credits)
New Charter University:
Online, undergraduate: $199per month, $796 per term
“Sticks and stones may break my bones but words will never hurt me.”
Growing up we heard versions of this lie all the time. In reality, words are powerful. Words are full of emotions and connotations, and they should always be handled with care. Using words prudently is just as important when talking with students as in our scholarly writing. When communicating with students, whether in an e-mail, in the office, or in the classroom, using a combination of inclusive, positive, and welcoming language is best.
I still remember one negative, almost hostile e-mail I received as a college freshman from a professor. It said, “Andrew, you need to greatly curtail the number of e-mails you send.” This was in the third or fourth week of the semester. This was a small honors class with a dozen students. One e-mail I sent was a reply to a message this instructor sent out to everyone requesting specific information. One was an e-mail following the course procedure for mistakes we found in the online chapter quizzes. The last one was a content-based question about the lecture and reading material. While we all voice this frustration — we do receive far too many e-mails — we should communicate and deal with this in a very different way.
I have days where I am tempted to delete all my e-mail and not look back because I receive so many — 50 to 100 every day. For me, the number of e-mails from students has always been small (actually too small) — no more than 10-20 weekly. Perhaps we think our students send more because they generally ask questions that are covered in the syllabus or in other handouts. I just do my best to take a few minutes once or twice a day and answer any messages. It always takes less time than I anticipate. A few ways to make answering more manageable are: 1) for questions that more than one student is likely to have, go ahead send an e-mail to the entire class, 2) send e-mails to everyone regularly with course information and reminders, 3) keep a document with replies and announcements that be can recycled and revised, and 4) have an online discussion board where other students can help answer the more general questions.
Nonetheless, always remember: we are there to help students stay in college and help them learn. E-mail even sometimes provides an opportunity to really reach out to a dedicated student. For example, I recently received an e-mail from a student roughly saying, “I don’t understand the readings, what tips do you have, please.” (The reading assignment was a transcript from a trial in the 17th century.)
Dear [name redacted],
I’m sorry to hear the readings are giving you difficulties. Have you tried reading out loud? Don’t worry about every detail. I don’t know about Windows computers, but if you have a Mac, you can have the computer read text to you. You might try listening to the text. Here’s a website that has the same reading assignment…. Let me know if any of this works.
Consider how different the message would have been if I had said, “I’m sorry to hear you are having difficulties with the readings.” By placing the blame on the reading assignment, so to speak, I am hoping that this student will receive a positive message and one that does not criticize the student’s current academic abilities. Additionally, I like to end e-mails with a message that conveys that it is O.K. to write again.
Occasionally, a smiley face emoticon or “LOL” can also help an e-mail message bridge the absence of body language and audible tone that would exist in face-to-face communications.
I am sure you are thinking, “Hold up! We have enough trouble getting students to send somewhat coherent e-mails and now you’re saying to use emoticons and LOLs?!!” Certainly, our students generally have much to learn about formal online communication. I remember a few e-mails that were written with so many different abbreviations and slang that my only option was to ask the students to send them again in complete sentences because I could not understand. In general, however, I think we are being too picky when we insist every message begin “Dear Professor so and so” and conclude with “Sincerely, Your Student, Chemistry MWF 9-10” and too picky when we expect so-called perfect Standard English in e-mails, for example. We need to remember that language is always shifting and adapting to new realities. As it has developed, e-mail serves largely informal purposes for our students. Naturally, to be effective teachers, we have to be effective learners and that means adjusting, within reason of course, to the realities of students and their world.
In online or face-to-face communication, I also use “we” as much as possible. If a student says, “I’m struggling with…” or “I don’t understand….,” I reply with statements that begin, “It’ll be alright. We’ll get through it.” If a student asks a question that I know has been addressed in the syllabus, for instance, I will say, “I believe that’s in our syllabus. Check there and let me know if that helps.”
In another scenario, students ask almost every semester, “Will we have any graded group projects?” I respond with something like, “We might do some group work in class, but everything will be graded on an individual basis. I don’t like group projects because each student has a different level of interest in this class and the assignment, and I want everyone to get along effectively.” Saying something like “some students care more about projects than others” is far more positive than saying, “there are always slackers and some weak groups.”
I particularly dislike the signs I occasionally see on office doors that say, “Lack of planning on your part does not constitute an emergency on my part.” This is condescending and likely hypocritical. Students need our help to learn how to meet deadlines and receive assistance. This does not mean that I shy away from conversations with students who are earning grades lower than those required to pass the class. I always frame conversations in terms of asking students, “What does success mean to you?” Then, we discuss the behaviors needed for that goal. When I give students advice, I always end by telling them to please let me know if they ever have any follow-up questions or if they need me to deliver my “advice talk” again.
Students need to feel safe at college. Part of being safe is knowing that they can ask questions, even the silly ones, and make mistakes and not be put down. We can also teach students about effective communication by the ways in which we communicate with them. Timely, clear replies phrased in ways that aim to help students learn and that give students the benefit of the doubt are most effective. College is about learning, and our job is to help guide students through this messy process. All this is hard enough – effective communication is an easy fix.
WASHINGTON — Americans cut back on using their credit cards in August for a third straight month, a sign that consumers remain cautious about spending.
Consumers increased their borrowing $13.6 billion in August to a seasonally adjusted $3.04 trillion, the Federal Reserve said Monday. That is a record and it followed a gain of $10.4 billion in July.
Once again, the increase in borrowing was driven entirely by auto and student loans. A measure of those loans rose $14.5 billion to $2.19 trillion.
But credit card debt dropped $883 million to roughly $850 billion. The decline could hold back consumer spending, which accounts for roughly 70 percent of economic growth.
The report highlighted trends that have surfaced in the post-recession economy.
The measure of auto and student loans has risen 8.2 percent from a year ago and in every month but one since May 2010. But credit card debt is essentially where it was a year ago. And it is 16.9 percent below its peak hit in July 2008 — seven months after the recession began.
Slow but steady job growth and small wage gains have made many Americans more reluctant to charge goods and services. Consumers may also be hesitant to take on high-interest debt because they are paying higher Social Security taxes this year.
At the same time, the weak economy is persuading more people to attend college. The Federal Reserve Bank of New York’s quarterly report on consumer credit shows student loan debt has been the biggest driver of borrowing since the recession officially ended in June 2009.
The Fed has just started separating student loans from auto loans. But that data is two months behind the report. For June, the most recent month available, student loans totaled $1.18 billion while auto loans totaled $841 million. Those figures are not seasonally adjusted.
The consumer credit report was one of the few government reports issued since the shutdown began last week. The Fed kept operating because it does not depend on budget appropriations from Congress.
The Fed’s borrowing report tracks credit card debt, auto loans and student loans but not mortgages, home equity loans or other loans secured by real estate.
The rate at which borrowers of federal student loans default on their debt within two years after beginning repayment rose for the sixth consecutive year, reaching its highest level since 1995, according to data released Monday by the Education Department.
One in ten borrowers across the country, 475,000 people, who entered repayment during the fiscal year ending in September 2011 had defaulted by the following September, the data showed. That’s up from 9.1 percent of a similar cohort of borrowers last year.
Even more borrowers are struggling in delinquency when the period of measurement is extended to three years. The percentage of borrowers defaulting within three years after beginning repayment has also risen from 13.4 percent to 14.7 percent for the most recent cohort of borrowers available (those who entered repayment from October 1, 2009 to September 30, 2010 and had defaulted by September 2012). The 14.7 percent default rate represents 600,000 borrowers.
The default rate is used by the Education Department to potentially cut funding to institutions that have high large proportions of borrowers defaulting on their loans. Colleges are currently barred from receiving federal student aid money if their default rates are 25 percent or higher for three consecutive years or if they exceed 40 percent in a single year.
The Education Department is in the process of transitioning to using only the three-year default rates. Next year will be the first year for which institutions will face penalties based on their three-year rates, which student advocates say is a welcome change since the measurement will be more expansive. Still, though, some argue that the cohort default rates don’t reflect the full burden of debt that students borrow.
“Even at schools where lots of students borrow, [default rates] don’t tell you how many students are behind on payments, overloaded with debt or defaulting after more than three years,” Debbie Cochrane, research director at The Institute for College Access & Success, known as TICAS, said in a statement. TICAS has also issued reports about how colleges are manipulating their default rates to be lower than they actually are by combining programs or pushing students into unnecessary forbearances.
Differences Between Sectors
The average two-year default rate for all public institutions was 9.6 percent, compared with 5.2 percent for all private institutions. For-profit institutions as a sector had an average two-year default rate of 13.6 percent. But at 15 percent, community colleges appeared to have the highest two-year default rate of any type of institution.
Justin Draeger, president of the National Association of Student Financial Aid Administrators, said that the community college rate reflected significant problems with repayment rather than debt loads, since community colleges tend to be less expensive and have lower rates of loan borrowing.
“Given that 15 out of 100 borrowers (who presumably have small cumulative loan amounts) from the community colleges are defaulting, I think the data continues to tell us that we have a repayment crisis, not a student debt crisis,” Draeger said in an e-mail. “Borrowers have many ways of avoiding default; we have a lot of work to help them to those alternatives.”
As a result of the data released this year, eight institutions are now face sanctions for having default rates that are too high. That’s the highest number of institutions since 1998.
The affected schools are: John Wesley International Barber & Beauty College in Long Beach, Calif.; Pacific Coast Trade School, in Oxnard, Calif.; Palladium Technical Academy, in El Monte, Calif.; New Age Training, in New York City; Huntington School of Beauty Culture, in Huntington, W.V; Tidewater Tech in Norfolk, Va.; Florida Barber Academy, in Pompano Beach, Fla., and Henri’s School of Hair Design, in Fitchburg, Mass.
WASHINGTON — The arrangements between colleges and financial institutions that provide debit cards and checking accounts to students may mirror some of the problems that previously arose with private student loan kickbacks and predatory credit card marketing on campuses, U.S. consumer protection officials said Monday.
Richard Cordray, the head of the Consumer Financial Protection Bureau, said his agency’s seven-month inquiry into the contracts that colleges have with banks to disburse financial aid and provide other banking services had left him concerned that “some of our colleges and universities, whether well-intentioned or not, may be encouraging or even requiring our young people to use financial products that do not offer the best deals.”
The partnerships often involve financial companies paying colleges to offer institution-branded student ID cards that double as a debit card or separate debit cards that students use to access their federal financial aid money.
“We are distressed to hear that some students feel pressured to use specific products and may be unaware that when they sign up for those products their schools are secretly making money,” Cordray said in remarks introducing a forum here on Monday about debit card issues. The event, organized by the CFPB, featured Education Department officials, student advocates, and representatives from several financial institutions and the trade association for college business officers.
Rohit Chopra, the bureau’s student loan ombudsman, said that while the partnerships have the potential to provide benefits to students, the arrangements may share some of the problems previously found in colleges’ deals with private student lenders and credit card companies.
In both of those areas, policy makers responded to problems with legislation and new regulations. For example, in the wake of the “preferred lender” arrangement scandal exposed by the New York Attorney General’s Office in 2007, in which college officials were receiving gifts and other kickbacks for directing students to certain lenders regardless of whether they were the best fit, Congress tightened the rules for when colleges are allowed to make such recommendations.
Congress also passed legislation in 2009 prohibiting credit card companies from aggressively marketing their products on campuses and requiring agreements between credit card issuers and colleges to be made publicly available.
Chopra said Monday that colleges’ agreements with financial institutions were increasingly shifting toward student checking and debit cards. The number of credit card agreements, for example, shrank to 198 in 2011 from 1,045 in 2009.
It now appears, he said, that more colleges have agreements with financial institutions to offer debit cards than credit cards.
A 2012 study by the U.S. Public Interest Research Group’s Education Fund found that about 900 colleges nationwide have agreements with banks or financial services companies for debit or prepaid cards for financial aid disbursement, student identification cards and other service. Higher One dominates that market, the report found, with agreements on more than 500 campuses. The company has drawn complaints from students and consumer advocates about some of its business practices. And last year it paid $11 million in restitution to students as part of a settlement with the Federal Deposit Insurance Corporation, which said the company had violated federal law in the way it charged overdraft fees. The company did not admit any liability in the settlement.
The CFPB’s fact-finding about the arrangements comes as the deals are receiving increased scrutiny from policy makers.
The Education Department intends to convene a negotiated rule making panel to draft new rules about how federal student aid money can be disbursed to students through debit cards and prepaid cards.
Last week, a handful of Democratic lawmakers in the House and Senate sent a letter to nine major banks asking them to explain the terms of their financial arrangements with colleges and the amount of fees they are collecting from students on these accounts. The lawmakers said they were concerned that the arrangements are lucrative for banks and colleges but harm students by charging them exorbitant fees.
The lawmakers cited an ABC News investigation last month that found that TCF Bank was paying the University of Minnesota more than $1 million each year to help it recruit students as customers, paying as much as $34 for each student that signs up for an account.
In response to some of the scrutiny, the National Association of College and University Business Officers earlier this year issued guidance for colleges using debit cards for financial aid refunds. The association encourages colleges and universities to use a competitive bidding process to select a debit card provider and to negotiate for no-fee or low-fee options for the account.
Anne Gross, vice president for regulatory affairs at NACUBO, defended the use of third-party vendors to provide financial aid disbursement on debit cards as more efficient and cost-effective for many institutions. She said that not all debit card arrangements are set up the same way and that much of the public criticism over some of the practices as conflating different types of financial products on campuses and relying on “poorly constructed research.”
About one in seven borrowers defaulted on their federal student loans, showing how former students are buckling under higher-education costs in a weak economy.
The default rate, for the first three years that students are required to make payments, was 14.7 percent, up from 13.4 percent the year before, the U.S. Education Department said today. Based on a related measure, defaults are at the highest level since 1995.
The fresh data follows the announcement by Barack Obama’s administration that it would seek to restrain skyrocketing college expenses by tying federal financial aid to a new government rating of costs and educational outcomes. The rising number of defaults shows the pain of borrowers, said Rory O’Sullivan, policy and research director at Young Invincibles, a Washington nonprofit group.
“Our generation is behind in the economic recovery and not recovering as fast as we need to,” said O’Sullivan, whose group represents the interests of people ages 18 to 34. “It’s financial disaster for borrowers. Defaults can dramatically affect their credit rating and make it harder to borrow in the future.”270 Days
Today’s report covers the three years through Sept. 30, 2012. The default rate, which includes graduates and those who dropped out, shows the share of borrowers who haven’t made required payments for at least 270 consecutive days.
The rate doesn’t include those who are putting off payments, through deferral or economic hardship called forbearance, or borrowers who are on federal income-based repayment programs, meaning it understates their hardship, O’Sullivan said.
U.S. borrowers owe $1.2 trillion in student-loan debt — including government loans and those from private lenders such as SLM Corp. (SLM:US), commonly called Sallie Mae. That sum surpasses all other kinds of consumer borrowing except for mortgages.
Last year, the Education Department revamped the way it reports student-loan defaults after Congress demanded a more comprehensive measure because of concern that colleges counsel students to defer payments to make default rates seem low. Previously, the agency reported the rate only for the first two years that payments are required.Worst Performers
Public colleges reported a 13 percent default rate while nonprofit private schools had a rate of 8.2 percent. For-profit colleges fared the worst, at almost 22 percent.
Under the older two-year measure, the rate for all colleges was 10 percent, up from 9.1 percent the year before — and the highest since 1995.
“The growing number of students who have defaulted on their federal student loans is troubling,” U.S. Education SecretaryArne Duncan said in a statement. “The Department will continue to work with institutions and borrowers to ensure that student debt is affordable.”
Under the federal bankruptcy code, consumers almost never can get rid of student loans—unlike credit-card, medical and many other types of debt. The rule is meant to prevent people from filing for bankruptcy soon after they leave college in an attempt to renege on their school loans.
Shawn McKendry filed for Chapter 13 bankruptcy to keep his West Hills, Calif., house, but his student-loan balance rose as a result. David McNew for The Wall Street Journal
On top of that, the process under Chapter 13 of the code generally restricts these borrowers from making full payments on student loans during the three-to-five-year bankruptcy period. That allows lenders to add interest, late fees and other penalties to the student-loan balances during that time.
The upshot: Aside from rare cases, student loans are the only consumer debt that ends up larger after bankruptcy.
The rules have come under fire from some federal lawmakers, bankruptcy attorneys and consumer advocates.
“This provision takes a bad situation and makes it worse—forcing people in financial trouble to divide their meager resources so that they can’t stay current on their student loans,” said Sen. Elizabeth Warren (D., Mass.), a consumer-protection advocate. “This is fundamentally the wrong approach.”
It isn’t clear how many of the roughly 1.2 million Chapter 13 bankruptcy cases filed overall by individuals in 2010, 2011 and 2012 included student loans. But lawyers across the country say their bankruptcy clients have ever-larger education debts.
Some bankruptcy experts say the problem shows the U.S. Bankruptcy Code is ill-equipped to handle student-loan debt, which, at about $1 trillion, has outgrown credit cards as the largest source of consumer debt, excluding mortgages.
Pennsylvania resident Daisy Ellerbee, 38 years old, has two years of payments left on her Chapter 13 bankruptcy plan and now owes more than $30,000 on a loan that she co-signed for one year of her daughter’s education at West Virginia University. The original loan amount was $24,700, she said.
“They kill you with the interest rate,” said Ms. Ellerbee, who said she and her husband filed for Chapter 13 after a series of setbacks, including the 2006 flooding of their home.
Pennsylvania bankruptcy attorney Patricia Mayer said that situation isn’t uncommon. “At the end of the day, I’m going to have clients coming out after five years owing more than when they went in [on student loans], and that’s not fair, and that’s certainly not a fresh start,” she said.
Deeply indebted consumers use Chapter 13 when they make too much money to qualify for Chapter 7 bankruptcy, which is reserved for people with little or no disposable income.
Unlike Chapter 7, which starts a court-supervised sale of a debtor’s assets, Chapter 13 allows a borrower to try to save major assets such as a house.
Ending up with a higher student-loan balance “was a lesser of evils at the time,” said Shawn McKendry , who filed for Chapter 13 in 2009 to reduce the amount of debt on his house, located near Malibu, Calif., which was worth $120,000 less than what he owed on his mortgage then.
The 32-year-old telecom finance executive said the $58,000 balance on his student loans has grown by several thousand dollars since he filed. “I’m waiting for that ticking time bomb to get me when I’m out of Chapter 13,” Mr. McKendry said.
Some creditors in personal- bankruptcy cases, such as credit-card issuers, could oppose any move to allow borrowers to make full payments on student loans during bankruptcy, since that could cut into their payments.
The American Financial Services Association, a trade group that represents credit-card issuers, wouldn’t specifically comment on whether bankruptcy-repayment rules should be changed. Executive Vice President Bill Himpler said broadly that “there needs to be certainty and fairness among how creditors are treated” in bankruptcy.
Sen. Richard Durbin (D., Ill.), who has spearheaded student-loan debt-forgiveness legislation, said bankruptcy-repayment plans that cause student-loan balances to rise are “driving borrowers further into debt and denying people the fresh start that bankruptcy promises.”
Mr. Durbin, whose staff wasn’t aware of the issue until contacted by The Wall Street Journal, later sent a letter to the Justice Department’s bankruptcy-court-monitoring division, the U.S. Trustee Program. In it, he urged the division to allow borrowers to keep making full payments on student loans through a loophole already used by a handful of judges and trustees.
A spokeswoman for the U.S. Trustee Program declined to comment on his suggestion.
Democratic lawmakers, including Mr. Durbin, earlier this year floated legislation to allow private student-loan debt to be discharged in bankruptcy. However, the proposal doesn’t address federal loans, the bulk of outstanding student debt, and doesn’t clarify Chapter 13′s repayment rules.
Falling behind on student loans can have other consequences. In 2009, a Florida optometrist told Bankruptcy Judge John K. Olson that she could lose her professional license if state regulators found out she defaulted on her student loans.
Judge Olson allowed the woman to keep making full payments, but lawyers say fighting for such exceptions can be an expensive battle with a high risk of failure.
More recently, Judge Olson blocked a student lender from charging a bankruptcy filer late fees, collection fees “or any other penalties based solely upon its [payments] being less than the minimum monthly payments it would otherwise be contractually entitled to,” according to the court order.
“Allowing [the lender] to assess penalties would impair the fresh start and undermine Congress’ goal” in Chapter 13, Judge Olson wrote.
As the clock runs down on a Monday night deadline for Congress to reach agreement on a funding measure or else force most of government to close, the Obama administration is providing details on how federal agencies would operate during a shutdown.
The new contingency procedures for agencies that most directly affect higher education are largely in line with plans created under the threat of previous government shutdowns. Many observers expect students and colleges and universities to be affected only modestly, at least during a short-term shutdown.
The Education Department said in its updated plan released Friday that a lapse in appropriations this week “would fall at a critical point in the administration of the large student aid program” and would interfere in a range of bureaucratic and administrative tasks that are needed carry out the federal aid system.
However, the largest student aid programs would remain mostly unaffected by a government shutdown.
“As a result of the permanent and multiyear appropriations, Pell Grants and [federal] student loans could continue as normal,” the Education Department said. “Staff and contractors associated with these areas will continue to work.”
Students would continue to have access to Pell Grants and federal loans, and most customer service centers would remain open. Education Department websites would remain available, as would student loan servicer sites. (The department’s Federal Student Aid office also provided Friday more detailed technical guidance for financial aid professionals on the impact of a government shutdown.)
A host of other, smaller financial aid programs that require Education Department personnel to operate would be harder-hit by a shutdown. The department plans to furlough employees who support campus-based aid programs such as Federal Work-Study and Supplemental Educational Opportunity Grants.
The department would also not award new grants to institutions since as much as 90 percent of its workforce will be told to stay at home.
The flow of new federal scientific research money would come to halt during a shutdown.
The Department of Health and Human Services confirmed in its contingency plans that the National Institutes of Health would not accept new patients on its campus or begin any new research experiments. Although scientists currently working on NIH grants would continue their work, the agency would “not take any actions on grant applications or awards.”
The National Science Foundation was set to follow a similar procedure. Individuals may continue work on all current awards “to the extent that doing so will not require federal staff intervention and that funds are available,” the agency said. “No payments will be made during the funding hiatus.”
Unless Congress passes a measure to fund the government on Monday — a prospect that seems increasingly unlikely — the shutdown will begin at midnight on Tuesday.