This month we speak to Tim Ranzetta, founder and president of Student Lending Analytics (SLA), about student loan reform and student debt. In the news and on the Senate chamber’s floor, the topic of student loan reform and mounting student loan debt has been front and center. The future of higher education and careers in higher education depends greatly on how institutions and Congress handle student loans in the coming years.
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Andrew Hibel, HigherEdJobs: There is a lot of concern by higher education professionals and graduating students regarding the increase in student indebtedness. Through your work at Student Lending Analytics (SLA), what can you tell us about this student debt crisis?
Tim Ranzetta, Student Lending Analytics: Here are a few facts to consider: two-thirds of students today graduate with an average of roughly $24,000 worth of student debt. Student loan default rates are about 7 percent, based on Department of Education calculations. Those facts don’t appear to represent a crisis, since that $24,000 in loans translates into a little over $200/month payment for 10 years (for a federal Stafford loan).
However, beneath these averages lurk what is a crisis for many. There are $50 billion of federal loans in default where students have not made payments for almost a year. This grew about 16 percent last year. An SLA analysis found that over one-third of borrowers were showing some signs of distress in either being late with their payments or requesting that payments be postponed through a process called forbearance or deferment. Recall also that student loans are generally not dischargeable in bankruptcy and they continue to accrue interest and penalties that often lead to loan balances that are multiples of what the student originally borrowed. A student who has defaulted on their federal student loan has a black mark on their credit that persists and will make it difficult for them to rent an apartment, get a credit card, or even find a job since many employers are reviewing credit reports prior to hiring.
Income-based repayment (IBR), which ties a borrower’s monthly student loan payment to their incomes, is a step in the right direction in helping borrowers more effectively manage their federal student debt levels (IBR does not apply to private student loans). On the good news front, young workers with college degrees have unemployment rates about one-half of those that don’t have degrees. The bad news is that the job market has been particularly difficult for recent grads since 2008 and lender data shows that 80 percent of defaults typically occur within the first year of repayment so their inability to find a job puts them on that track, unless they take the necessary steps to sign up for IBR (income based repayment) or seek a forbearance or deferment.
Hibel: What does SLA consider as its most crucial mission at this time?
Ranzetta: Our principal mission is to help students and families make better decisions about financing their college education. How do we do this? SLA provides independent analysis of the private student loan market to help students and their families make better borrowing decisions. Private student loans are those “gap” loans that help students pay for school after they have maximized other financial aid and federal loan sources first. SLA provides ratings on each lender, based on in-depth research that includes student surveys, mystery loan shopping, and review of all publicly available information that lenders release (such as SEC filings or conference call transcripts). This site is available at [link removed no longer active]. Importantly, SLA does not receive any compensation from any financial service firm, which provides us with the independence to “call ’em as we see ’em.”
SLA analyzes how student loans are marketed, to highlight potential pitfalls, such as lenders who advertise “rates as low as 3.5 percent.” Only a very small percentage of borrowers achieve these low rates, so it can be more productive to focus on the lender’s maximum rates. SLA’s research also highlights the importance of shopping around for a student loan. When I shopped for loans earlier this year (as a cosigner for a nephew who attends an east coast university), I received rate quotes varying from 6 percent to 12.25 percent. This experience clearly demonstrates how a wise consumer can save thousands of dollars by shopping around.
Finally, my experience over the last three years in analyzing the student loan markets has demonstrated to me the importance of improving financial literacy. SLA has gradually moved in the direction of providing more research in this area. I publish a blog that often covers topics such as credit cards, student loans, and the importance of credit scores, and I also do an annual survey on college financial literacy programs. There is no shortage of financial literacy programs out there (some popular websites have hundreds of links and every financial institution seems to offer a program) — what is missing is a service that highlights those programs that are most effective at improving the link between financial education and financial decision-making. I look forward to playing a role in separating the wheat from the chaff when it comes to these financial literacy programs.
Hibel: The 1990s saw a large number of reforms and policy changes at the federal level. One change that stands out is elimination of PLUS loan limits (1992). This was initially thought to help lower-income students access more expensive private education. What do you think the impact of this change has been?
Ranzetta: Even after this change, PLUS loans taken out by parents constitute only about 10 percent of federal student loans with Stafford loans (taken out by students), constituting almost 85 percent of loans, with the remainder being GradPLUS loans which came into existence in 2006. The most recent significant change on loan limits has been increases in Stafford loan limits that went into effect in 2008. Those limits currently range from $5,500 to $9,500 for a dependent student, depending on their year of study. This increase in loan limits occurred at the same time that the private loan market declined by 50 percent, or about $10 billion, and thereby helped to fill that financing gap left behind following the credit crunch. In effect, the federal government stepped up its lending while the private sector contracted. A recent federal aid report showed that federal loans grew by $12 billion in 2008 and $21 billion in 2009, driven by these higher loan limits, as well as increasing enrollments.
The federal loan market shifted in July to a “direct-only” model, which means that federal student loans are originated and serviced by private sector firms under contract with the Department of Education. One consequence of this change has been an increase in the approval rates for PLUS loans. Research from FinAid found that reject rates for PLUS loans originated under Direct Lending are about half of what they were for FFELP loans, so as the model has moved to 100 percent Direct, parents are more likely to qualify for PLUS loans. This had led to some concerns that the minimal credit requirements of these loans will lead to problems in the future for these parents.
Hibel: One can easily say that as a result of the scandals surrounding for-profit colleges and student loan lenders, the public has become skeptical of the promise higher education offers, especially at the current cost. What can the higher education industry do to regain the trust of the American public and elected officials? What would ideal student loan and financial aid reforms look like?
Ranzetta: I am a big believer in the need for greater transparency when it comes to student outcome metrics. Shouldn’t a student interested in nursing careers be able to access a user-friendly site where they could enter their zip code and get a list of schools offering nursing programs with the metrics that matter to students, like cost of attendance, persistence rates, graduation rates, and more importantly, what happens post-graduation in terms of job placement and salary levels? You cannot have an efficient market where students flock to the best-performing schools when that information isn’t easily accessible. Why should accreditors have access to information such as job placements while students do not? The good news is that the transparency wave is coming and the new regulations put out by the Department of Education last week improve the situation. Minnesota provides a great example of a state higher education system that has put student outcome metrics out in the public domain.
In terms of student loan reforms, I would like to see more of an emphasis placed on planning for college finances. I think the FAFSA creates a year-to-year mentality of, “How am I going to pay for college this year?” rather than encouraging a more methodical, long-term view, what I am calling a Higher Education Financing Plan (HEFP). This plan would encourage students and families to plan over a two-year or four-year time horizon to both understand the total costs, how much they will need to borrow, and whether their course of study and future career plans will support their debt levels. It seems basic, but unfortunately isn’t done nearly as frequently as it should be.
Hibel: Higher education as an industry has seen job growth over the past few years.1 If the student loan crisis continues to mount and career colleges start to retract in size, do you think community colleges are in a position to absorb the students and jobs shed by the career colleges?
Ranzetta: It is interesting to see the disconnect today between the increasing number of borrowers under stress at the same time that federal student loans have jumped over 50 percent from $65 billion to $98 billion in just the last two years, from 2007 to 2009. Pell Grants grew by over $10 billion in 2009. It is safe to say that education finance is the only consumer credit category that has grown during this Great Recession, and that has been funded principally by the federal government, as private student loans have dropped from $23 billion at the peak to about $8 billion today. Given the deficits we are facing as a nation, I don’t see this continued federal largesse continuing, which means change ahead for higher education. As one example, let’s look at for-profits. With all the negative media attention and heightened regulatory scrutiny, many of the largest for-profit colleges had slower enrollments last quarter and anticipate that trend to accelerate into the future. This slower growth will pressure these schools to more aggressively manage their costs, which means faculty jobs will not see the same increases they saw previously and may even contract.
The key question next year that will determine the longer-term outlook for the for-profit industry relates to how gainful employment regulations are implemented. From the Center on Budget and Policy Priorities: “To balance their 2011 budgets, states had to address fiscal year 2011 gaps totaling $125 billion, or 19 percent of budgets in 46 states. Most did so with spending cuts and revenue increases.” California, which has the largest community college system in the country, actually enrolled fewer students last year due to budget constraints. Many community colleges actually have articulation agreements with for-profit institutions to handle their overflow of students. Without significant federal support or significant increases in tuition, it is hard to envision a situation where community colleges could manage sharp increases in their enrollment to meet this demand.
Hibel: What should professors, often considered the face of an institution, be thinking about in regards to their own careers in light of the changing dynamics in financial aid regulation and delivery?
Ranzetta: All the economic indicators seem to point toward a societal shift where consumers will be continuing to deleverage (reducing their overall debt levels) over the next several years to get back to living within their means. The longer the unemployment rate remains elevated, the longer this trend will continue. It is hard for consumers to confidently spend when almost one in five workers is under- or unemployed. Higher education has largely been insulated from this phenomenon up to this point as federal loans and grants have increased by almost 60 percent (or $48 billion over the last two years) to compensate for shrinking income, investment and home equity values. This is not a sustainable long-term trend however, so I think there will be increased strains to “fill seats.” As a professor, I would want to be certain that my institution can clearly demonstrate how it adds value to the students who enroll there. I know that ROI (return on investment) is not a concept that academia takes to kindly, but as college costs continue to spiral upwards (recent College Board showed sharp increases at public schools in 2009), it is one that students and families will be analyzing more closely.