Lately we have seen a lot of commotion about the Biden Administration deciding to forgive money owed by student borrowers in large part based on their current incomes, or lack thereof. Social media is on fire with opinions, most of which lack a full understanding of the complexities of the issues surrounding student loans, college costs, who borrows, or why.
The Wall Street Journal recently ran an op-ed by Purdue University President Mitch Daniels that left out many details. For a politician, any ink is good ink, but good policy should require much more. Daniels revealed that Purdue’s tuition and fees have been flat since 2012; that room, board, and book costs have been lowered, that 60% of graduates are debt free, and those who owe average only $3,000.
Little known or discussed is that about half of Florida university graduates also owe zero loans. Daniels brags about flat tuition. His is a publicly tax supported university. But costs are costs. If students pay the same for ten years then the citizens of Indiana are paying more of the costs each year. If you’re upset about taxpayers paying for loan forgiveness, remember that taxpayers already pay the majority of costs for attendance at a public institution. Purdue’s in-state tuition is $9,992 annually and out-of-state tuition is $28,794. By contrast, the University of Florida in-state tuition is $6,381 and out-of-state is $28,659. Note Purdue’s is 57% higher than Florida. In both cases, taxpayers in both states are paying for most of the degrees – not the students.
Students borrow for more than tuition and fees. They borrow to live. Examine the annual difference in debts for Florida graduates of public and private institutions. Student borrowers from private institutions only owed, on average, a little over $2,000 per year more than graduates of public institutions did in 2018-19. Furthermore, in Florida, 63% of public graduates held no debt, the same for 45% of private graduates. Add in Florida’s Bright Futures program recipients, and in many cases students are not paying anything for tuition, fees or books. At the University of Florida, 93% of students receive full or partial Bright Futures scholarships.
These debt issues largely began with the deal cut between Congress and President Obama to pass the Affordable Care Act. And there are many problems that have added to the problems:
Problem 1: Under Obama, the feds basically took over the student loan market in 2013. There used to be a robust private loan market as well as people using home equity lines to pay for college costs. Now, with essentially one vendor, the total borrowed became calculable. This takeover was sold as a money-saver, although as we now know the losses are into the billions.
Problem 2: Income-based payment plans were incorporated into the deal, which meant it was known that a huge portion of the debt would not be repaid from the beginning. Based on income level a borrower was required to pay only 10% of the “discretionary income.” About a quarter of borrowers entered into this deal.
Problem 3: If a borrower went to work in a public service or nonprofit position, they could agree to pay for only 10 years and their remaining balance was to be forgiven with no tax penalty. We are now seeing some tax hungry states insisting that state taxes will be due on the “Biden Gift” to each borrower.
Let’s look at one example: Two students go to medical school, each borrowing to pay tuition and living expenses. They graduate with the same degree. One went to a junior college, then to a public institution so he had no debts upon graduation, and then on to medical school. He graduates with $200,000 in debt. He then goes to work as a private physician or at a for-profit hospital. The other went to a private college and borrowed to pay tuition. She then went after a master’s in biology, again borrowing, and then entered med school. Upon graduation, this student owed $400,000.
The first student pays back the entire amount over time and is still paying at 43 years of age. The big borrower pays back only a fraction of what was borrowed due to the Obama agreement, because that student went to work for a non-profit hospital. Again, it was known from the start that a portion of the amount loaned would never be paid.
Problem 4: Also under the Obama deal, interest was calculated from the day of borrowing so the amounts owed grew quickly. Yet the borrower can only deduct $2,500 a year from tax calculations.
Problem 5: Initially the rates charged for these loans was usurious, anywhere from 6% to 7.5%. This has changed a bit, but not before those daily interest calculations at 7% already grew the amounts owed. In 2019, undergrads’ rates were 4.53%, dropping in 2020 to 2.75%. Graduate school rates were 6.08% dropping to 4.3%, and Plus loans, where both students and families can also borrow, went from 7.08% down to 5.3%.
Problem 6: There was a very large cap on amounts borrowed: Undergrads were at $12,500 or a total of $31,000, for a master’s degree at $20,500 annually or a total of $138,500, and professional schools like medical school it was the same as the master’s level. These totals are only for the guaranteed student loan programs.
Problem 7: Defaults on loans. Who borrows and how much and how much gets defaulted? The largest default rates come from students at for-profit colleges, and at community colleges for students not finishing.
Problem 8: As mentioned above, undergrad students in large part borrow to maintain lifestyles – not to pay tuition, fees and books. This is especially true in public institutions where tuitions are suppressed and artificially low, but the difference between a public student and a private one comes out around $2,000 a year, even as tuitions are drastically different.
Florida has done a lot for holding student costs down, although as mentioned above, costs are costs and in the end, someone is paying for them. One thing is clear, and that is the things we do in life are driven by the choices we make. We’re all responsible for our own decisions, and if students borrowed too much money for a degree now found to be lacking, that’s on them. It’s time for Americans to graduate from the nanny state.
Dr. Ed H. Moore is a principal partner in All Things Florida Consulting, LLC. He previously served for 17 years as president of the Independent Colleges and Universities of Florida, the "collective voice of Florida’s private non-profit colleges and universities."