Statistics released by the DOE on Thursday show that 3.9 million borrowers have enrolled in income-based repayment programs, with $200 billion of the total $1.2 trillion of outstanding student debt in some kind of payment modification program. The number of enrollees is 56 percent higher than in the year prior. The DOE also estimates that outstanding federal student debt will double to nearly $2.5 trillion by 2025.
April’s collapse of the for-profit Corinthian Colleges system, along with its May bankruptcy, has handed the U.S. Department of Education (DOE) an unprecedented challenge along with a precedent-setting dilemma. The DOE has set up a process in which the 16,000 students who were attending Corinthian schools during the collapse, along with as many as 350,000 other students to use the little-known “borrower defense to repayment” statute to forgive as much as $3.5 billion in debt. The collapsed economy in the late 2000s, along with skyrocketing tuition costs has led to a dramatic increase for student loan borrowers using modified repayment plans, largely leading to a reduced payment based on income. Statistics released by the DOE on Thursday show that 3.9 million borrowers have enrolled in income-based repayment programs, with $200 billion of the total $1.2 trillion of outstanding student debt in some kind of payment modification program. The number of enrollees is 56 percent higher than in the year prior. The DOE also estimates that outstanding federal student debt will double to nearly $2.5 trillion by 2025.
For for-profit college students, the debt crisis is even worse. The average for-profit student debt is $39,950, compared to $25,550 for students who attended public institutions. At the same time, the DOE fined Corinthian $30 million in April on the eve of its collapse for falsifying job placement data. The SEC, as well as the Consumer Financial Protection Bureau, has also gone after another leading for-profit institution, ITT Technical Institute, for misleading the government about the default rates of two federal loan programs, including fraud charges filed against two top executives. These events have led many to question whether or not the entire for-profit education industry will collapse on itself, and whether or not the demise of for-profit institutions would make the education system better in the long-run. Currently, students of for-profit institutions make up 12 percent of all higher-education enrollment, yet account for 50 percent of all student loan defaults.
A federal judge upheld the Obama administration’s more stringent regulation of for-profit colleges in June, which began last month. For-profit colleges must now demonstrate the student debt-repayment levels are no higher than 8 percent. Despite being labeled as “for-profit,” these institutions derive close to 90 percent of its revenue through federal funding, which doesn’t include veterans and their G.I. Bill education benefits. The criteria involving the 90/10 rule, as it is known, have been a matter of debate in Congress. Senate Democrats are floating legislation to include the G.I. Bill education benefits as part of the 90/10 rule as well as scale-back the maximum to 85 percent instead of 90. The legislation has nearly zero Republican support, although a compromise is possible. Whether the regulations help to reduce student loan defaults or drive the for-profit sector out of business, it should help to mitigate the financial burden these institutions place on taxpayers to some degree.
Still, any relief of taxpayer burden from the new regulations will likely be quickly swallowed up in December, when another federal program goes into effect dramatically expanding the pool of eligible borrowers to pay 10 percent of their incomes after expenses towards federal loans, a change from the previous threshold of 15. The Congressional Budget Office (CBO) estimates that loan modification programs in general will cost the taxpayers an additional $39 billion over the next decade. It also remains to be seen how many unanticipated loan forgiveness requests will be granted in the future given the shaky nature of the for-profit education industry. Still, Ben Miller, the Secondary Education Director at the nonprofit Center for American Progress, believes that any sort of loan forgiveness and loan modification programs miss the bigger point. Miller said “We cannot rely just on student loans to fix college affordability. We have to keep the price of college reasonable to what borrowers can expect to earn.” Given the historical trend, as well as the recent upward trajectory, controlling tuition costs may be an even more difficult fight that lies ahead.
Bloomberg – Janet Lorin
Consumerist – Ashlee Kieler
International Business Times – Julia Glum