Home > Student Loans > The Big Things Missing from Hillary Clinton’s Student Loan Plan

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Hillary Clinton unveiled her new and improved plan for making higher education more affordable. A few of her policy ideas are refreshed retreads, some others break new ground, and a few don’t do anything at all. For example:

1. “Students should never have to borrow to pay for tuition, books, and fees to attend a 4-year public college in their state…”

Secretary Clinton proposes that the federal government support this goal with additional funding, the states maintain their own contribution at current levels, and students forfeit their earnings from working 10 hours per week.

In other words, this really isn’t “free tuition,” as the Clinton plan suggests when it talks about “never having to borrow,” is it? Not when students are required to cover part of the cost. And the scope of it is rather broad, in that Clinton proposes to also cover fees, books and some living expenses.

Frankly, I would sooner replicate the simpler approach that’s being taken by other countries that value higher education: Cover the price of tuition and leave everything else to the student. After all, we’re talking about attendance at in-state schools, presumably that could be within a reasonable commuting distance from home.

2. “The Federal government…will never again profit off student loans for college students.”

This apparently pertains to existing debts if tuition does indeed become free for in-state college attendees, and, I suppose, for the financing of private-school tuition. Either way, I can argue this point from two different angles.

First, the reason why the government is reporting outsize profits on its student loan programs is because the feds are, in effect, borrowing short and lending long. In plain English, that means the government is taking advantage of historically low, short-term rates by issuing one to three-month Treasury Notes to fund loans that are expected to span 10 or more years in duration.

Unhedged, this borrowing scheme is a disaster waiting to happen in a rising-rate environment. Instead, governmental borrowing should coincide with the average (half-) life of the loans it makes, no different from the way that private-sector lenders fund their own loan portfolios. Adopting this methodology will diminish profitability in the short-run, while ensuring longer-term viability.

Of course, this idea will probably go over like a lead balloon in Washington, D.C., because profits from the federal student loan program are being used to offset the national debt.

You didn’t know that? Join the club. Cash is fungible, which in this context means that all revenues dollars are treated equally — as a means for offsetting expenses.

As to the other side of the argument, there is no mathematical basis for the rates and fees that Congress concocted for the federal student loan program. Why do these increase between plans? What is the foundational support for the base rate?

Funding the program with the appropriate debt instrument is a good start. Thereafter, the costs to originate and administer these loans, and to provide for payment delinquencies and defaults, must be quantified and, consequently, translated into a defensible fee structure.

3. “Colleges and universities will be accountable to improve their outcomes and control their costs…”

Graduating more students is one thing. Graduating more students who are in a position to earn what they should is another. “Improving outcomes” is a meaningless platitude without this stipulation.

On that note, what about holding schools responsible for those whose diplomas don’t lead to subsistence-level earnings? I’m talking about charging-back schools for the federally guaranteed loan money they accepted from students who later defaulted on their obligations because they were unable to make ends meet.

Is there no shared responsibility in this regard?

As for controlling costs, why isn’t the higher education industry being pushed to consolidate? The level of operational redundancy that exists between schools in close, geographical proximity is breathtaking. How many presidents, provosts, chief financial officers, deans, purchasing managers, payroll supervisors and IT executives are needed within a 100- or 200-mile radius?

And what about the tax-free treatment of endowment income? At the very least, shouldn’t schools be required to use that income to offset the price of tuition? Raise as much money as you like for the facilities you need, but use the interest, dividends and capital appreciation your endowments generate for the benefit of your students.

4. “If you have student debt, you will be able to refinance your loans at current rates…”

This is more sound bite than it is substance. I say that because halving the rate on a 10-year loan for $30,000 that charges 6% interest will reduce the monthly payment by $43.38 to $289.68 from $333.06.

It’s hard to get excited about saving $43 per month when a family that’s teetering on the edge could save $169 per month if their loan’s repayment term was also extended to 20 years from the current 10. In fact, if the standard repayment term for all student loans is set at 20 years, there would be no need for income-based repayment plans in the first place.

Finally, with regard to the proposed three-month payment moratorium to give borrowers the time they need to affect the refinancing or restructuring of their debts, this is, at best, a bone. At worst, this move will add to their costs if the interest-rate clock on these loans continues to tick away during that time.

It’s so frustrating to continue reading about college affordability plans that hinge on jerry-rigged debt repayment schemes and increased governmental spending without also addressing the reason why the problem exists in the first place: The outrageously high price of higher education.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.

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  • http://www.edvisors.com/ Mark Kantrowitz

    Point #2 isn’t entirely correct. Interest rates on federal education loans are based on the 10-year Treasury, no longer on the 91-day T-bill. The 10-year Treasury comes closest to the actual average life of a loan dollar. The source of the profits is in the choice of a discount rate when calculating the net present value of the future cash flows from the federal education loans. Choose too low a discount rate, and there are significant profits. Choose too high a discount rate, as proponents of Fair Value Accounting recommend, and the profits swing to a loss. The reality is somewhere in between. And those profits — they were already spent on improvements in other forms of student aid.

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