Biden’s college loan forgiveness misses the point

It’s possible that President Biden’s badly misguided attempt to forgive student debt has poked a hornet’s nest and will focus enough attention on the deep flaws in the U.S. educational system that just may result in greater accountability throughout the education complex.

After the president completed his magical mystery forgiveness tour, we received a lot of feedback on our article on the subject. We were contacted by a man who had been paying his children’s educational loans for 20 years and was, of course, happy to receive the government’s gift. But he was also incredulous that any rational authority would take such an action and not try to cure the root cause of the problem — escalating college and university tuitions subsidized by the taxpayers. 

The United States has the best higher educational system in the world. Why else would 1 million foreign-born students come here each year to learn? Some 45 million students currently have loans to finance their educations. That would seem to be a good thing. 

But these loans now have a balance of $1.6 trillion, with 15 percent in default. It is a difficult but manageable national problem, except perhaps for the students and parents who have been sucked into this vortex of incomprehensible federal policies and unaccountable universities and struggle to pay the freight.

The president’s recent actions have crystallized the improvements that are needed.   For example, the total of U.S. college and university endowments have reached a stunning $700 billion, or more than twice the size of any state budget. A single university – Harvard – has an endowment of more than $53 billion, eclipsing the annual budgets of 40 states. It saw a 33.6 percent return on that endowment in 2020 alone.

This is not to suggest that endowments are not necessary and do not play an important role. How they operate and where the money goes is generally summarized in an informative 2021 report issued by the American Council on Education. The problem is that as endowments grow, so do tuitions and related housing and student living fees.

Tuitions at the 45 top colleges in America are now approximately $80,000, triple what they were in 1980, and rapidly running away from the reach of middle- and lower-income Americans.

At the same time that the government takeover of student lending programs was occurring, there has been an explosion in the number of education administrators.  

At Yale, between 2003 and 2019, the student population reportedly increased by 11 percent, while the number of administrators increased by nearly 45 percent.

This trend has been emulated by most universities in America, where there are now more administrators than faculty, and the office of the president of one university was reported to employ 2,000 employees — none of whom taught a student. Notably, during this period, the lion’s share (over 70 percent) of political contributions from higher education employees and administrators went to Biden’s party.

Even before considering the impact of the time-worn concept of tenure, it is obvious that this is not an industry that is tethered to a strong sense of fiscal accountability. No business would care about its expense side if it could increase prices and have them financed by taxpayers.

As one student recently pointed out, it is hard to understand why his prestigious university needs to increase its tuition by 5.7 percent, to $77,354, in a year when it also celebrated a record-breaking 38 percent growth in its endowment.

Parents caught up in this educational meat grinder just want the problem fixed, rather than the imposition of politically motivated actions that ensure that the student debt forgiveness merry-go-round gets repeated again and again.

Some universities, such as Ohio State, are working on solutions, such as a 10-year plan to educate all students debt-free. Much more must happen when it comes to student lending, however.

The first step is for student loans to be handled in a commercially reasonable manner. In our experience, when any loan defaults, the lender attempts to restructure or refinance it and bring the loan current to protect its investment. That may include varying the length of time a borrower has to pay, changing the interest rate, requiring collateral, or correlating repayment to some percentage of future income. President Biden chose political expediency and skipped this step entirely. 

Step two, students who want their loans forgiven should be required to commit to repayment alternatives such as serving in the government or supporting non-profit efforts to better their community and country. Unfortunately, in the past 60 years, politicians have flipped President Kennedy’s script from what asking what you can do for your country to asking what your country can do for you.

Step three, educational institutions should have skin in the game and, for example, be required to guarantee some percentage of the repayment of a student loan. That would force them to underwrite the abilities of students they accept and maintain financial reserves corresponding to the risk of future defaults, creating a much-needed sense of market discipline.

Step four, educational institutions that receive the federal subsidies represented by federal student loans should have performance goals that determine their continued involvement in the program. For example, measuring the employability of graduates – how many of them get the job they studied for – would encourage schools to enrich their curriculums and produce graduates that can benefit society.

As with any difficult problem, there are many potential solutions — more than can be listed here. The sad part, of course, is that the government ignored every single one of them and took the easy, political way out.

But perhaps President Biden’s actions have caught the attention of enough voters and parents to put both the politicians and the universities on the spot and force them to serve the real needs of middle- and lower-income Americans.

Thomas P. Vartanian is executive director of the Financial Technology & Cybersecurity Center and a former general counsel of the FSLIC. He is a former professor of law at George Mason University and is the author of “200 Years of American Financial Panics: Crashes, Recessions, Depressions and the Technology that Will Change it All.” William M. Isaac, former chairman of the FDIC and Fifth Third Bancorp, is chairman of financial consultancies Secura/Isaac Consulting, Blue SaaS Solutions and Secura/Isaac Talent Advisors. He is on the foundation boards of Miami University and Ohio State University.